Odfjell SE

OSE:ODF

Earnings Call Transcript 2021-Q4

[Kristian Verner Morch, Chief Executive Officer]

All right. Good morning, everyone, and thank you for attending today's presentation. Welcome to the presentation of the fourth quarter results for Odfjell SE and the preliminary results for 2021. Today, we are broadcasting this on a, let's say, a standard, a Team's call and we're unable to broadcast from the -- our studio because of some COVID incidences on our team, but I'm sure that we will define in the last 2 years, I think everyone has learned how to live with these team meetings. I will, as usual, present the highlights then Terje Iversen will come on and talk about the financials, and then I will come back with our operational review and an update on prospects and markets, and then we are happy to answer any questions that you have at the end. [Operator Instructions]But let's just get started with the presentation. The highlights for the fourth quarter is that it was an encouraging finish to a difficult year. We use the word encouraging because, first of all, it's encouraging to see that the markets reacted positively, which is an indication that the fundamentals are strong. And the second reason why we use the word encouraging is that we are encouraged by our ability to capture such an upturn in a fairly short time. But it was an encouraging finish to a difficult year. The time charter earnings for the fourth quarter for Odfjell Tankers came in at $136 million, which is up $11 million compared to the last quarter. Net result from Odfjell Tankers -- from Terminals, sorry, was $3 million, which is up $2 million compared to the last quarter. Our EBIT was $35 million, so that's up $42 million compared to the last quarter. But if you adjust all these figures for one-offs, in the fourth quarter, our net result was $10 million, and that's up $14 million compared to an adjusted net profit the last quarter of minus $4 million. Also during the fourth quarter, that was our -- the peak of our COA renewal season. We renewed a large part of our portfolio with an average rate increase of 2% and the average for the year is also 2%. I'll dig more into those details a little bit later to give you a little bit more granularity on that number. But our COA rates continue to be on an upward trend. And also during the quarter, we made -- we took the final investment decision for Bay 13 at our terminal in Houston, which will increase the capacity for that terminal by 9% to a total of 412,000 cubic meters. The highlights for the full year of '21 was that it was a disappointing net result of minus $33 million, mainly due to a very weak chemical tanker markets in the West. And of course, also a year that was still impacted by various COVID challenges and so on. But otherwise, we continue to operate well both in terminals and as we did in tankers. And finally, in highlights of the 21, we concluded the exit from our short sea trade in Asia, and we also concluded our exit from the Gas Carrier segment by selling our 2 last ethylene carriers. So under the quote on the right-hand side, you can see that we're saying that 2021 was another challenging and unpredictable year for Odfjell, impacted by weak CPP market and a weak market in the West and by the COVID-19 pandemic, but we continue to operate well despite these challenges, and we are also ahead of our ambitious plan to reduce emissions. And while we are not satisfied reporting negative results, we are encouraged by the quick recovery seen in our markets during the fourth quarter. In terms of guidance, we are saying in line with seasonality. The chemical tanker market has seen a slightly reduced activity over the holiday period into the first quarter, and we therefore expect to report slightly lower results in the first quarter. At this point, I will hand it over to Terje Iversen, and then I will come back during the operational review and the market forecast.

[Terje Iversen, Chief Financial Officer]

Thank you, Kristian, and good morning to all of you. I will, as usual, start with the P&L for this quarter. Starting with the time charter earnings. We see that increase from $125 million in the third quarter to $135.9 million. The increase is kind of easily explained with higher contract volumes and also stronger spot rates across all tradelanes. Time charter expenses ended at $7.5 million, a slight increase since the third quarter, reason being that we have more vessels on shorter-term charters being less than 12 months tenure. Operating expenses ended at $47.7 million, very much unchanged since the previous quarters. While we see that the share of net results from associates and joint ventures being our terminal business increased from USD 1.1 million to USD 2.6 million in this quarter, main reason being insurance proceeds related to the fire we had at the terminal in Houston last year and also the Texas freeze, but we also saw some result improvements throughout the various terminals in the quarter. G&A ended at $12.2 million compared to $16 million in the previous quarter, main reason being that we reversed some provisions in the fourth quarter, ending a bit lower than average for this year. Under operating -- other operating income, we booked USD 6.2 million as income related to the distribution received from the Norwegian war insurance, which we also flagged in the third quarter reporting. That leads to an EBITDA of $77.3 million compared to $58.2 million in the third quarter. We see that depreciation and at very much the same level as the previous quarter. And then we got a capital gain of USD 1.7 million in the fourth quarter related to sale of the last gas vessel that was there in the fourth quarter. That leaves an EBIT at $35.3 million compared to negative $6.8 billion in the third quarter. Net interest expenses continued to be decreasing due to a reduced level of debt under that $17.3 million. And then we had other financial items being negative mark-to-market development of some of our derivatives of negative $2.7 million, and then we are the total net result of $15.4 million compared to $25.3 million negative in the third quarter. Of course, we have to mention that the third quarter also included an impairment on the 3 regional vessels that we divested under a sales agreement in the third quarter. If you adjust the results for one-offs being the distribution from the Norwegian war insurance, the capital gain from the sale of the gas wells and also the other financial items with USD 2 million, we are at an adjusted net result of USD 10 million compared to negative $ 4 million adjusted net result in the third quarter. Next, please, the balance sheet. Most notable is that we see that ships and newbuilding contracts are very much unchanged due to no new CapEx, only limited CapEx related to dockings and the smaller CapEx project on the vessels and reduced that due to the depreciation that we enter each quarter. We see that cash and cash equivalents increased from $54.6 million to $73.5 million due to improved results and also the one-offs that I just mentioned. And if we include undrawn commitments on the RCF, we have cash -- available cash at around USD 109 million end of fourth quarter. Other current assets decreased from $213.7 million to $193.3 million. And main reason being the gas vessel that we delivered in the fourth quarter. And we still have the 3 regional vessels included in the $193 million assets held for sale end of fourth quarter, and we expect all the 3 vessels to be delivered in the first quarter of this year to the new owners. Equity. We are at $548.6 million compared to $531.9 million end of the third quarter, and we have an equity percentage adjusted for right of use of assets around 30% compared to 29.4% at the end of third quarter. On the debt side, we see that we continue to reduce debt. And as you also have noticed in November, we did -- last year, we also did a tap issue on the September '23 maturity, and use that to repay buy back a large part of the bond that is maturing in June this year. I'll come back to that in a few slides. Next slide, please. Cash flow statement. We see that due to the increased results, also operating cash flow is increasing from $35 million in the third quarter to USD 62 million in this quarter. That is, as I mentioned, driven, of course, by the improved results, but we also saw a positive development in the working capital, leading to increased cash flow from operations in this quarter. Cash from investing activities, most notable is that we enter into a sale of delivery of the last gas vessel, increasing the liquidity or getting positive investment -- cash flow for investment around USD 10 million and then we had the investment in noncurrent assets being docking expenses and a smaller CapEx project of $7.9 million. So in total, we had cash flow from investing activities at $3.9 million this quarter. On the financing side, I just mentioned the buyback and the tap issue that we did, that is why we have new interest-bearing debt that is the tap issue. And we use that, as I said, to increase the repayment of interest-bearing debt in this quarter, increasing from $33.8 million to $62.7 million in this -- in the fourth quarter. And that leaves us with the financing activities. Total cash flow of negative $46.8 million. And for the total quarter, we had done a positive cash flow of USD 18.8 million. Next slide, please. This is more showing how has the free cash flow developed through the last 8 quarters. And as you can see, we have had a quite positive development, at least throughout 2021, due to the fact that we have very limited CapEx project for the group. So in the fourth quarter, we had a free cash flow from operating activities and investing activities at USD 66 million compared to $37 million in the third quarter. And if you also then exclude debt repayments related to right of use of assets actually being done time charter payments on the kind of long-term time charter agreements, we are a free cash flow about USD 50 million. However, I should remember that, that is a bit inflated by the fact that we had the cash distribution from the Norwegian war insurance with USD 6 million and also the sale of the gas vessel contributing the USD 10 million. So the normalized free cash flow is a bit lower than the $50 million, but even though we see a positive development, excluding those factors in this quarter. And in line with our financial strategy, we will use the free cash flow to continue to reserve debt to deliver and to be ensure that we are delivering positive cash flow to the equity throughout the cycle in the long term, and hopefully not too far into the future to be able to also to establish and communicate a predictable and sustainable dividend policy. Next slide, please. This is showing how has the time charter earnings developed compared to the free cash flow. The free cash flow in this regard is the cash used for OpEx, G&A, debt service, smaller CapEx and so on. And if we are able to deliver time charter earnings above the cash breakeven then we should be able to distribute cash to equity. So in this quarter, we ended with a time charter earnings of $20,868 per day compared to $19,654 in the third quarter, and the time chart only being slightly below the cash breakeven 2020-'21 average at $21,192 per day. Going forward, we expect the cash breakeven for 2022 to be a bit higher than for 2021, reason being that we have divested some vessels, divested the short sea vessels and also divested the gas vessels. On the other side, we should expect to see a higher average time charter earnings because we have divested smaller vessels, and we have a fleet of larger-sized vessels in our fleet going forward. And we continue to be stating that our long-term target is to have the cash breakeven in the area of $18,000 to $19,500 per day to be able to deliver positive cash flow to the equity throughout the various cycles. Next, please. As you -- most of you have seen, the bunker cost has increased the bunker expenses, oil price and also fuel price has increased, continue to increase throughout 2021. And we also saw that in the fourth quarter. We saw that the total gross bunker cost for Odfjell increased from USD 63.4 million to USD 70.5 million in this quarter. However, we continue to see that we have hedging, too, of our bunker adjustment clauses. And so we have financial hedging positively contributing to a lower cost for us as a group. So even though the total bunker cost about $70.5 million, we got a positive effect from the banker hedges that we have done with USD 3.2 million, and we also got positive effect from the contract portfolio, with the bunker adjustment clauses USD 9.4 million. And if we then exclude third-party vessels from the equation, we're left with net bunker cost of $44.9 million, only being USD 1 million higher than we saw in the third quarter. Next, please. This is the usual picture we show on the debt side. On the upper part of this slide, you see for the next 2 years, the quarterly repayments, both installments and maturing balloons on our debt side. You see we have some balloons maturing in the first quarter this year. That is related to the vessels that we have divested, the 3 regional vessels that, that has more or less been taken care of. Then we had the bond maturing in June due to the buyback we did in November. We only have USD 39 million outstanding of that debt bond. We are considering various options how to take care of that. That could be a combination of several initiatives, using cash from our balance sheet, we could refinance some vessels and we can also do a possible tap issue. But we will look at how the market is developing and also our cash flow before we finally decide to do that. But we think the USD 39 million is absolutely manageable for us as a company. Lower part of this is the more kind of illustration on how our debt can develop in the coming years. If all loans that are maturing are just repaid and also only to a smaller extent are refinancing some loans with lower leverage. But of course, whether that will materialize or not, will depend on the markets and the results and the cash flow that we are generating in the coming years. That was my part of the agenda -- of the presentation, and I will lead back to you again, Kristian.

[Kristian Verner Morch, Chief Executive Officer]

Thank you, Terje. So if we start with the operational review. On the first slide, we are taking a look at our COA and volume development. As you can see on the bottom left-hand corner, our COA coverage during the fourth quarter was up to 55%, which is in the middle of the sweet spot, we have defined between 50% and 60%. It's a combination of more COAs being renewed, but it's also an effect of having more nominations under the existing contracts. As you can see in the middle, we -- the contract that we have renewed in the fourth quarter were up by 2%, so continuing a firming trend, but it's lower than it was in the preceding quarters. It is though -- we've cautioned about this before, if you only look at this percentage in isolation, you might not get the full picture because the revenues from the contract is a function of both whether it's a front haul or backhaul contract, how big a volume it is and so on. But if you just measure the rates, we are up by 2%, and we see that, that continues the positive trend in our COA rate development. On the right-hand side, you can see that the volumes carried also in the fourth quarter was up 4.4 million tonnes were 3.3 million tonnes was related to Odfjell's own tonnage. And as I said, we have seen an increase in nomination under the existing COA. So that's a good activity. Next slide, please, Bjørn. And if you look at the ODFIX compared to the Clarksons Chemical Tanker Spot Index, the ODFIX was up 6.5% this quarter compared to Clarksons Spot Index of 1.1%. The difference in those numbers, it will vary a little bit over time. But in general, we're seeing more exports out of the Asia, as I'll show you on the next slide, which means little bit easier to combine and get the ships back into the front haul businesses, although it's slightly more difficult to get the ships out -- filling the ships out on the front haul. But in total, we have been able to combine the spot and the contract coverage quite well and the current level of COA coverage fits nicely into that. If you look at the different markets, it is on specialties and easy chemicals, we are seeing activity picking up and a fairly good positive picture, whereas the veg oils and the CPP are, of course, heavily influenced by the very depressed product tanker market, and this swing tonnage continues to be a factor that's teasing us. But if you look at the fundamentals for the chemicals, we see fairly good activity levels. On the next slide, on tank terminals, fourth quarter EBITDA was $10 million compared to $8 million in the third quarter. The improved result was mainly reflects insurance proceeds that Terje mentioned in OTH but -- and the -- that came after the Texas freeze. But in general, we also saw an increase in commercial occupancy, which was 96.1% compared to 93.9% in the previous quarter, driven mainly by terminals in Houston and in Antwerp.The U.S. terminals had a good quarter with a strong uplift in commercial occupancy and a pickup in healthy -- pickup in activity levels. In Europe, we were full and was 100% full and continued higher activity levels. And in Asia, our terminal in Ulsan had a moderate increase in occupancy, but had a significant uplift in activity levels. So all-in-all, a good picture. We are close to being full across, and we are seeing activity levels and throughput to the terminals picking up. Next slide, Bjørn. And then just 1 slide on the expansion project in OTH Bay 13, as we mentioned earlier. If you look at the picture on the right-hand side, you can see some low buildings with some -- with the white roof, which is in the middle of -- right in the middle of the terminal. That's what we call Bay 13. The buildings you're looking at there, they are now gone that used to be the old control rooms, and we have moved that outside of the middle of the terminal, and that's why we intend to build 9 new tanks. And as you can see, when you build tanks in the middle of a terminal, you can use the infrastructure in general in the terminal. So even though that the construction price and the material price for those tanks has gone up in the recent time, we think it's a good investment and it will add positively to the returns by the time that these tanks become operational. And as I also mentioned in the beginning, this will increase the capacity of the OTH Houston terminal by around 9%. Next slide, Bjørn. So turning to prospects and market updates. The first slide, as you can see here, we are saying that the market is still driven by soft U.S. exports, whereas the exports out of Asia to the West remain strong. We do see, however, if you look at the graph on the left-hand side, which is exports by U.S. by tradelane, you are seeing exports to South America and exports to Europe picking up towards the end of 2021, whereas the exports from the U.S. to Asia is still not -- has still not recovered. Whereas on the right-hand side, you are seeing that as a counterbalance to the lack in U.S. exports to the Far East, you're seeing that those volumes being replaced by exports out of Asia, East of Suez. And as you can see, that has gone up quite dramatically more than doubled in '21 compared to the previous year. On the next slide, you can see that same picture reflected in the rates. These are rates reported by Clarksons trade by trade. On the left-hand side, you can see that the picture during '21, the rates West of Suez has been on a declining trend in the beginning of the year and they started picking up in the fourth quarter. Of course, there's a bunker element here, but there's no doubt that, that market is picking up, and we are seeing that also in the activity level. Whereas on the right-hand side, you're seeing the rates East of Suez and they have been on a firming trends throughout the year, and that trend also continues. So there is a firming rate environment, both in the Western and the Eastern Hemisphere, which is helping us. And the fundamental demand story, there's actually no change in our view on that. We have mentioned this a number of times, so I'm afraid that I'm sounding like a broken record, but we do have a fairly positive view on the long-haul transportation of chemicals. The tonne mile demand, we expect to grow around 4% per year compounded, that's driven by a strong GDP growth, it's still driven by new capacity being added in the Middle East and in the U.S., it's driven by record margins by our customers returning record profits and they have a very good demand, fundamental demand for their products. So there is a general positive picture. And in terms of demand, and we -- I'm repeating myself with this, but we do see that demand growing by around 4% per year compounded in the next couple of years. On the next slide, when you're comparing that, those 4% with the supply growth, also not a lot of changes to this picture. We have record low order books with the 6.7% of the current fleet. We have an aging fleet with 15% of the fleet being -- becoming recycling candidates within the next couple of years, and you have owners hesitating to order new ships because what decision we make today about new technology. The swing tonnage, as I mentioned earlier, continues to be a factor, but -- so we are dependent on the product tanker markets to pick up. What we are not factoring into this picture is the effects of the EEXI regulations that's going to start coming in from 2023. When you start slow steaming, you will naturally take some capacity out of the market and that may come in addition to this picture. The picture as it stands is at 0.7% increase in supply of ships. And depending on how much effect will come from the EEXI, that may even be flat or maybe even a contraction in supply. So 4% increase in demand and a flat supply picture in the foreseeable future. And that's what we mean when we refer to the strong fundamentals. So if we try to translate that fundamental picture into an average fleet utilization of the chemical tanker fleet, you're getting to a point where we, in 2022, believe we will cross through the 90% utilization rate going up to 91%, and that will increase further in 2023 with the picture we're looking at today. And on this picture, you can see going back to 1998 that the last time we were above 90% fleet utilization for the global chemical tanker fleet that was in the beginning of 2002 and 2003, and that was the beginning of an upturn. We're not saying we are heading into a super cycle, we're just stating the fact that last time historically, when you are above 90% utilization, you are in a high cycle or in a tight market, and it has all the right components for our markets to start a firming trend. Then you, of course, can ask yourself, okay, so what stands in the way of that upturn to come? And we've tried to do a little bit of math on this picture. The slide is a little bit busy, but what we have tried to do is when you look at what happened in 2021 to both the bulk carriers and to container ships, you saw those markets skyrocketing with the transportation cost for iron ore for bulk going up from $21 to $56, which means an increase of 172% in transportation costs. And then we have tried to calculate, okay, so what does that transportation cost due to the finished cost to the customer, finished steel plates? And that freight element has only a 2% increase in price and cost for that steel plate. Then we did the same math for containership that carries Nike shoes and saying that if an average container cost in January '19 was $2,000 from East to West and that today is $7,300, it's actually much higher, but if you just take that, then it's a 270% increase in freight cost. But what does that do to the final delivered cost of those pair of sneakers to the consumer and that effect is only 1.1%. So there's quite a lot of elasticity in the value chain, quite a lot of room to capture the increase in freight rates, both for those 2 segments. So what we did on all the way to the right here is we try to use the same logic for a chemical tanker saying that some of the chemicals we transport that's used in the final polyester -- in production of polyester that goes into those Nike shoes, if our markets go up by 10% or 25% from, let's say, $60 a day -- $60 per tonne to $76, which is a 25% increase in our markets, well, that only has an impact of around 0.5% on the cost of that polyester. So we're seeing pretty much the same picture as you've seen from the other commodities that the value chains and the value in that chain for those finished products has quite enough padding for -- to carry an increase in our markets. So when you see that and you will see that our customers have record high margins, and you're seeing the tightening market, then we think that just adds to the story that we have a positive view for the markets going forward. So I think now is the last slide. I want to repeat the headline that it was an encouraging finish to a difficult year. It was encouraging because the markets picked up, and it was encouraging because we were able to capture it in the short term, which means that the efficiency of Odfjell and the fact that we have the most efficient fleet in the world that quickly translate into a bottom line result that's measurable. So it was a satisfying quarter in the fourth quarter, TCE increased by $11 million compared to the previous quarter and a net profit of $15 million driven by those improved markets. Our COA nominations improved. Our renewals of our rates on our COAs improved. And the, let's say, interaction between the spot market and our COA portfolio worked quite well throughout the quarter. On terminals, they had another good quarter. The terminals are full. The activity levels are picking up, throughput levels are picking up. So that's a good sign. And we are adding capacity, both in Antwerp and in Houston. And in terms of the market outlook, as I just spoke about, we have a positive view on the market. In terms of guiding, we did see, of course, normally during the holiday season, there will be a slowdown of activity, and we have seen that this year as well. So that has affected our markets slightly reduced activity in the beginning of 2022, and therefore, we expect to post slightly lower results in the first quarter. But all-in-all, a very positive picture, I would say, and we're happy with the way that the fourth quarter panned out in the way that a difficult year ended. So I think that was the end of the presentation. And I'm not sure if we had any question, you should be looking at the questions. If there's questions that Terje and myself can answer?

[Bjørn Kristian Røed, Manager Investor Relations & Research]

Yes. There's currently 2 questions. Starting with one for you, Kristian. With regards to taxes on carbon, how do you see this impacting Odfjell and the chemical tanker markets? And will this be a cost you will succeed to pass on to customers?

[Kristian Verner Morch, Chief Executive Officer]

Yes. The tax of carbon and emissions trading schemes and so on, I -- the last part of the question, whether we can pass that on to our customers? I think history has shown also when we went from heavy fuel oil to low-sulfur fuel oil, that's just the way our industry works that, that will be filtered through to our customers. So we think that, that would be a pass-through. It will impact Odfjell in a way that if you have to -- the less you burn and unless you emit the less carbon credits and the less carbon tax, of course, you have to pay. And our fleet is proven to be the most energy-efficient fleet in the world. So our customers shipping with us once you have to start buying carbon credits, they will just have to buy less of those credits when they ship with Odfjell compared to the rest of the industry. So this will really be the first time that you can quantify the effects of having a more energy-efficient fleet. So I think it will improve the competitiveness of our fleet in a very visible way once that starts coming into effect from 2023.

[Bjørn Kristian Røed, Manager Investor Relations & Research]

And then 1 question for Terje. Could you give some details on the financials involved related to your FID on Bay 13 in Houston?

[Terje Iversen, Chief Financial Officer]

Yes, sure. The final investment decision has been made, but the final outfitting of the tanks has not been decided yet, but we are talking about an investment around USD 60 million on a 100% basis. Of course, our share will then be 51% of that amount. We are talking about an EBITDA of around $7 million to $8 million, depending on what kind of products we are going to store in those tanks. And if you're looking at the returns, we're talking about unlevered returns between 12% to 14%, again, based on what will be the final investment cost and what will be the kind of product we are storing in the tanks in the end.

[Bjørn Kristian Røed, Manager Investor Relations & Research]

And then 1 question. Congratulations on strong cash flow and results. When will you consider starting with dividend payments?

[Kristian Verner Morch, Chief Executive Officer]

Terje will you do want to -- we can answer the same thing. So it doesn't matter.

[Terje Iversen, Chief Financial Officer]

It's a really good question. As we have shown here, we have increased our results during the end of 2022. And even though we are signalizing a bit slower start to this year compared to last year, we expect that we should see improved results in 2022 compared to last year and that will also lead to increased cash flow. And as we also have shown, we are quite close to a scenario where we have a positive cash breakeven. And if that happens, and we have kind of some visibility about the future and expectations. We should get closer to that stage. But whether that is this year or is next year, that is a bit early to answer now. But hopefully, we can communicate more about that in the Capital Market Day in June. But again, it's, of course, dependent on the market and the earnings that we will deliver in the coming quarters.

[Bjørn Kristian Røed, Manager Investor Relations & Research]

Yes, there's 1 question here, but that has already been answered. So other than that, there's no further questions at the moment. So I'll hand it back to you, Kristian for some final remarks.

[Kristian Verner Morch, Chief Executive Officer]

Okay. As I mentioned to begin with, if you have questions that you didn't feel was answered correctly or that you didn't get the chance to ask or you're watching this off-line, please never hesitate to contact us, we'll be happy to take any questions that you have about the industry, Odfjell or the results. But in the meantime, I just want to thank everybody for listening. I hope that you can stay safe. Thank you.