Odfjell SE

OSE:ODF

Earnings Call Transcript 2022-Q4

[Harald Fotland, executive]

Good morning, everybody, and welcome to Odfjell's presentation of our fourth quarter results and our preliminary result for 2022. Today's agenda follows traditional pattern. I will present the highlights.

My colleague, Terje Iversen, CFO, will present the financials, and then I will take over and give you an operational review, and I will conclude this presentation with a market update and prospects going forward.

If we look at the highlights for the fourth quarter, we are happy to inform that the firming chemical tanker market that we saw in the third quarter continued through the fourth quarter and concluded a very strong year for Odfjell.

Our time charter earnings increased to USD 187 million, up from USD 171 million in the previous quarter. We delivered an EBIT of USD 73 million compared to USD 71 million in the third quarter. The net result was USD 50 million, same as previous quarter. But if we adjust for one-offs, then the USD 50 million compares to USD 46 million in the third quarter.

We also saw contract rates increasing by 26% through the quarter. And the net result contribution from Odfjell Terminals was USD 0.2 million. This compares to USD 8 million in the third quarter. But then we have to remember that the third quarter was heavily impacted by insurance proceeds in that quarter.

We refinanced 5 vessels during fourth quarter and this refinancing reduced the cash breakeven for those vessels with approximately $3,100 per day. And finally, I'm very happy to inform that the Board approved a dividend of $0.61 per share based on the adjusted second half of '22 results.

If we look at the 2022 in full, then we delivered a net result of USD 142 million. And I'm also very happy to inform that despite the significant increase in commercial activity, we still delivered safety, environmental and operational performance well within our set targets.

We also see that our strong focus on cost efficiency and quality has positioned us to fully utilize the firming markets that we now see. The total dividend for the full year of '22 was USD 66 million.

This concludes the highlights, and then I give the word to Terje Iversen.

[Terje Iversen, executive]

Thank you, Harald, and good morning to all of you. I will, as normal, start with the income statement for the group for this quarter. And as Harald just mentioned, we saw an increase in the time charter earnings this quarter from USD 171 million to USD 187 million. That was despite of actually a decrease in the gross revenue because we had fewer pool vessels in this quarter compared to the third quarter.

And we also had less bunker surcharges in the fourth quarter due to lower bunker expenses. So seeing that the time charter earnings increased with USD 50 million is then primarily due to the improved spot market, but also due to the improved contract affreightments during the year so far.

Looking at the expense side, we see that we had an increase in the operating expenses from $45.9 million to $49.6 million this quarter, main reason being that we had extraordinary year-end bonus to all seafarers with around USD 2 million in the fourth quarter, and we also had some inventories that were adjusted towards the year-end that impacted the operating expenses.

On the G&A side, we also saw an increase from $16.6 million to $19.7 million. Also there, we had a extraordinary year-end bonus to onshore employees. Adding to that G&A, we are around USD 2 million, and we also had quite high activity level in the fourth quarter, also leading to increased G&A.

Then we have an EBITDA of $112.8 million compared to $111.6 million in the third quarter. Depreciation, very much the same level as in the third quarter. And then we're left with an EBIT of $73.4 million compared to $71.1 million in the third quarter.

Net interest expenses increased in this quarter, reason being increase in LIBOR. As you have all noticed, that increased interest expenses were around USD 2 million. In addition, we also had amortization of some financing costs in relation to the refinancing of the 5 vessels that we just mentioned on the highlights. So that took our net interest expenses from $18.8 million to $22.4 million in this quarter.

After other financial items and taxes, we are down left with $50.4 million in net result, leading to earnings per share of $0.64 this quarter. If you adjust for nonrecurring events, we have the same results, USD 50 million compared to adjusted results for the third quarter of USD 46 million.

Also mentioning that for the terminal side, we had revenue this time according to the equity method, included here with USD 0.2 million compared to USD 7.6 million in the third quarter, reason being that we had this insurance proceeds that impacted results in the third quarter with around USD 5.6 million and positively.

And also this quarter, we had some challenges in the U.S. due to the freeze and then that to a decrease in the earnings and also some extraordinary cost items were there related to repair and maintenance in the third quarter -- in the fourth quarter, leading to a slightly reduced results adjusting also for the insurance proceed in the third quarter.

If we go on to the time charter earnings, we saw that, that increased this quarter from around $29,600 in the third quarter to $31,700 in this quarter. And as you can see, that is well above our annual cash breakeven, which now is around USD 22,600 per day, which also is the expected level going forward into 2023.

Cash breakeven this quarter was around $23,800 compared to $22,700 in the third quarter. And the main reason for the increase was mainly related to the increase in the interest rates and also the year-end bonus payments for seafarers and onshore employees, which I just mentioned.

Looking at the balance sheet, we see that ships in our balance sheet is now just above USD 1.3 billion. We saw that right-of-use assets increased slightly this quarter compared to the third quarter, reason being delivery of one time charter vessels end of third quarter and also one into the fourth quarter, which is increasing then the right-of-use of assets to USD 208.7 million.

Investments in associates and JVs being mainly our terminal assets, increased from around $160 million to $167.8 million in this quarter. Despite the low result, the increase then is due to the currency effects from our terminal assets that are valued in euros and also in Korean won, giving a positive effect on the balance sheet for the asset.

Looking at the cash position that increased from around USD 100 million to USD 117.7 million this quarter. And if we include undrawn loan facilities, we have a cash position of around USD 186 million available and that should be more than sufficient to cover the dividend that we just mentioned of around USD 48 million to be paid in the next week or the week thereafter.

The equity increased to around close to $700 million now, up from $630 million. That is, of course, due to the strong results this quarter, but we also had other comprehensive income that also improved our equity position year-end compared to the end of the third quarter.

On the debt side, we have been active. We have done some refinancing, as mentioned. We had scheduled installments of around USD 20 million. We had done extraordinary debt repayments of USD 50 million, and we are now below -- we're just below USD 1 billion in interest-bearing debt, which is actually the lowest level that we have seen in many years now.

On the balance sheet also worth noticing that the bond, which is maturing in September 2023, is now classified as a short-term debt on our balance sheet, around USD 950 million, which is due then, as I said, in September this year.

Looking at the cash flow, we saw a slight decrease in operational cash flow this quarter despite the improved earnings, main reason being an increase in working capital, where we had a very positive development in the third quarter. I would say we are more at normalized levels end of fourth quarter. In addition, we have some unrealized exchange differences that is also impacting the operational cash flow and also the increase in interest rate this quarter also impacted the operational cash flow. Even though we are at a quite strong levels when we look at the operational cash flow.

Looking at the investments, we had close to negative USD 10 million, mainly being investment in our vessels, dry dockings and also some energy-saving devices that we continue to invest in our fleet. On the debt side, I said we have been quite active. We had done USD 35 million in debt installments and extraordinary debt reductions. And we also, when we did the refinancing of the 5 vessels that we just mentioned, reduced the leverage on those vessels with around USD 10 million. So then net cash flow from financing activities of around $58.7 million, and we saw an increase in cash this quarter of USD 18 million.

If you look a bit longer term on the free cash flow, looking here at 12 months rolling basis per quarter, we saw that the free cash flow this quarter ended at USD 77 million. And if you adjust for debt repayments related to right-of-use of assets, it reached $62 million, which is up from $49 million in the preceding quarter. We used the free cash flow this quarter to reduce our debt and strengthen our balance sheet and also, of course, to prepare for the dividend to be paid in February this year.

As I mentioned, we saw an increase in working capital in the quarter, but we have seen quite a good improvement even though in working capital on a longer-term basis. Going forward, as we have indicated earlier, we have limited CapEx plans, meaning that if we continue to deliver good and solid operational cash flow, there are expectations that also then the free cash flow should be quite strong going forward based on the fact that we have very limited investments and CapEx for the coming quarters.

Here's a slide showing how our debt has developed actually the last 2 years. We have reduced our debt by around USD 257 million in the last 8 quarters. And we have, out of that, USD 174 million is scheduled installments. And we have done extraordinary debt repayments due to a strong cash flow of USD 83 million during the same period. And we used a lot of debt cash also to reduce our kind of the volume that we have launched through the revolving credit facility that we have available today.

Over the same period, if you include the dividend to be paid in February next year -- this year, the total dividend is $74 million compared to the $257 million that we have reduced our debt with. Also worth noticing that all our new debt since December 2020 is sustainability linked and is based on the sustainability linked framework that we established early 2020 with a new bond issue we did at that stage.

As I said, we are close to just shy of USD 1 billion in interest-bearing debt. If you analyze and look at the EBITDA, we are then at 3.2x EBITDA and debt levels. And if you look at the debt compared to the value of our vessels using indicative market values from brokers, we have a long-term value for our total balance sheet of around 63%.

Going forward, we have not that much of debt maturing in the coming quarters. I would say, into third quarter 2024, we have a large balloon maturing. Except for that, we have the bond that is maturing in September. As I mentioned, we have a very strong free cash flow this time around. And going forward, we will have to evaluate whether we are going to do a new issue or we are just going to redeem the loan at maturity without issuing a new bond or doing a debt. But that is something that we are considering. And of course, we will follow the market and try to time that in case we should do a new issue.

We have done a lot in the last few quarters to reduce the cash breakeven. And as I mentioned, the refinancing we did, that took down our leverage with around USD 10 million and also reduced the cash breakeven for those 5 vessels with around $3,100 per day.

And at the bottom of this page, you see what is the expected debt going forward. And as we have flagged early, we have an ambition to be around in the interval of USD 750 million to USD 900 million in interest-bearing debt end of 2023. And I think we are on a good track to do that based on the scheduled installments going forward and also based on a situation where we just redeem the bond that is maturing in September.

That was the end of my slides, so then I leave over to you again, Harald.

[Harald Fotland, executive]

Thank you very much, Terje. Then I will continue with the operational review. If we look at the Clarksons spot tanker -- tanker spot rate, then that index is up 12% during the quarter. The Odfix, which is an expression for Odfjell's time charter earnings, was in the same period up 5.8%. If we look at the 4 main product groups that we carry, we have seen healthy renewals on specialty contracts, and those contracts are the backbone of many of our trades.

Easy Chemicals also saw steady volumes. We saw renewals between 10% and up to 100% on the contract rates. And as I said, the volumes were stable. We only do vegoils on spot basis and the typical vegoils that we carry are palm oil distillates, soybean oil and UCO or used cooking oil.

CPP is a marginal cargo group within our segment that we occasionally carry CPP on our backhaul trades. Our largest vessels are adapted to amount size packages and the typical cargoes that we carry on the CPP side are unleaded gasoline, diesel and ultra-low sulfur diesel.

If we look at the contract renewals, then, as I said, our rates were up 26% during the quarter. We saw stable volumes and our contract coverage was slightly below 50%, 46%. We also see that demand from our charters continue to be high, and we see that the available space for contracts in the market continues to be limited.

And on that basis, we say that the fundamental outlook for the tanker market on the contract side remains solid. We have no further vessels scheduled for redelivery in the near future. There has been a strong focus on contract renewals during the past 2 quarters. And for that reason, we decided to include some additional information on our contracts.

We have a portfolio of approximately 100 contracts, and fully utilized those 100 contracts will include approximately 9 million tonnes. It's also important to observe that these 100 contracts include more than 2,000 contract obligations.

If we look at the contracts themselves, there are 2 types of contracts. We have the contracts where there are renewal options, and we have the contracts where there are no renewal options. The contracts typically include customers' obligations. They include the owner's obligations and there are plenty of details related to volumes, to ports, to types of products and so on.

If a contract that has no contract options is renewed, then all terms in the contracts are subject for renegotiation. This is a very thorough and time-consuming process where we go through all the obligations, both on the customer and on the owner side obligation by obligation. It's also important to notice that when we change the obligations, then we have to make sure that these new obligations are in line with obligations that we have for other customers in the same trade line.

Once we have agreed on the contract terms, then these contract terms are subject for approval by our insurers and they are subject for legal review. There has been high interest in contract renewals this quarter. And due to these circumstances, we have seen that the contract negotiations have taken significantly longer time than what we have seen in previous quarter.

To avoid doing this process over and over again, we occasionally, when the renewal process is completed, then we include options for the following year. By that, we are not going through the obligations in detail. We are only adjusting the freight rates, the volumes and occasionally, the loading or discharge ports.

This implies that when we are referring to the average contract renewal rate, which this quarter was 26%, then that figure only includes those contracts where the terms are comparable to the previous quarter. If there are significant changes when it comes to volumes or when it comes to ports or when it comes to products, then that contract cannot be included in the average contract renewal rate simply because the terms are no longer comparable.

When it comes to Odfjell's energy efficiency, then I'm also very happy to once again confirm that we have an all-time low when it comes to our AER. The AER -- the average AER in 2022 was 7.59, and that is the lowest AER in Odfield's history, and it's 49.5% below the 2008 baseline for Odfjell.

We have initiated several novel technology projects that are now ongoing, and we expect to see full effect of -- full implementation of those projects from 2024 and onwards. And none of those projects will imply extensive dry docking or substantial CapEx. And this implies that we have a clear ambition to further reduce our AER going forward.

On the terminal side, when we compare the fourth quarter to the previous quarter, then the EBITDA declined by approximately USD 5.7 million. This is mainly due to insurance proceeds received in the third quarter.

Adjusted for corporate nonrecurring items, then the net income of the underlying business was marginally weaker in the fourth quarter. If we compare 2022 to 2021, then the EBITDA increased by approximately USD 6.9 million and the performance of the underlying business in '22 adjusted for corporate and nonrecurring items came out $2.6 million higher than 2021.

We saw good activity levels at our terminals. But in December, the activity at our U.S. terminals was negatively impacted by the December freeze in the U.S. All in all, 2022 was a strong year with continued occupancy -- higher occupancy and robust activity levels, particularly in the first 3 quarters of the year. The average commercial occupancy reached 96.7%, this is up from 95.2% in 2021.

We have 2 ongoing expansion projects. The funding is done locally in the joint ventures. At our Antwerp terminal, we are building a new tank pit that consists of 6 tanks, 36,000 cubic meters. And at the terminal in Houston, then we are building Bay 13, which is 6 carbon steel tanks and 3 stainless steel tanks and the total capacity is around 32,000 cubic meters. Both these expansions are funded locally. They are on schedule, and we expect them to be operational in the fourth quarter of '23.

We see some uncertainties when it comes to macroeconomics and political instability. And for that reason, we -- this -- and those factors may impact the activity levels at our terminals. When it comes to the expected commercial occupancy, then we expect this occupancy to be high also in 2023.

And then I will continue with a market update and the prospects going forward. As we have said, we saw firming spot rates in -- also in the fourth quarter and in all trades. East of Suez, we saw rates -- sorry, West of Suez, we saw rates going up with approximately 17%. And despite some initial challenges in Europe, we now see that also the Europe to U.S. trade, which is normally a backhaul trade for us, is also picking up pace. So we have a positive outlook for the trades West of Suez.

East of Suez, we saw that at the end of the last quarter, there was some excess tonnage being built up, and that put some pressure on the rates. We nevertheless saw an average increase East of Suez of approximately 3% through the quarter.

If we look at the total fleet trading in chemicals, then over the past year, we have seen a reduction of approximately 10%. And the trend that we reported last quarter that was less capacity available for the transportation of chemicals seem to have continued also through the fourth quarter.

If we look at the outlook, then there are some bullish and then some bearish factors that will impact trade flows within chemicals. We see that the fare of higher inflation and interest rates has eased and now seem to be flattening. We have been faring slow economic growth, but we also noticed that IMF has adjusted their prospects up during the last months. And on the positive side, we will see an effect of the relaxation of the COVID restrictions in China.

We saw signals of -- there was a tight energy supply in Europe, but this also seems to be easing up, partly thanks to warmer-than-average winter in Europe. The political instability remains high, and we do believe that the import -- the EU import then of Russian products will have an effect.

So the effects that this will have on the chemical tanker markets, after the third quarter, we reported that we saw some reduction when it comes to the production of chemical products, we are not that pessimistic now. We see signs that the production is picking up, partly due to reduced energy prices.

And we see that the trend that we reported in the third quarter -- after the third quarter, with longer trade hauls, that trend is continuing. So we believe that on the demand side, there will be sufficient production, and we believe that the trend of increased distances will continue.

On the supply side, we also see a positive picture. There are no new orders of chemical tankers, and we see a continued stagnation of the fleet. We do see that swing tonnage is remaining outside chemicals and in CPP. We continue to see a trend that older chemical tankers are being sold to -- for regional trade, particularly in the Far East. And we do see that -- we do not see that the average fleet speed is increasing. So all in all, we believe, particularly on the supply side that we will see a positive trend in 2023.

To summarize this presentation, we saw that the good trend in the third quarter continued into the fourth quarter, and that concluded a strong year for Odfjell. These strong market conditions support us during contract renegotiations, and we have a positive view on the contract renewals ahead of us.

If we adjust for nonrecurring items on the terminal side, the net income was slightly weaker in the fourth quarter compared to the third quarter. We have a positive outlook when it comes to the supply and demand situation and partly due to a somewhat slow start in the spot market in January, then we believe that our first quarter results will be similar or maybe slightly lower than the fourth quarter.

So that concludes our presentation, and we are now on to the Q&A session, if there are any questions.

[Johannes Tang Hystad, executive]

We have a few questions from our listeners. So the first one comes from Lars Bastian Østereng. How are COA renewals going so far in the first quarter? Is 26% on rates realistic for the next quarters as well?

[Harald Fotland, executive]

Well, I think that, that question has been partly covered by the presentation, but yes, 26% increase is clearly realistic for that part of the contract portfolio that has not yet been renewed after we saw the increase in rates, which started in March last year. So I think we will continue to see increases in the first quarter. And then, of course, we are on to renewing contracts that have already been through a significant increase. So I'm more uncertain about the second half of the third quarter -- of 2023. The first half, yes, we will see similar increases.

[Johannes Tang Hystad, executive]

Thank you. And perhaps you can answer this one, Terje, also from Lars Bastian. Is it possible to provide a rough split between spot rates and COA rates in the fourth quarter?

[Terje Iversen, executive]

That's a good question, and it's not that easy to be precise on that, often do you have different products that you are transporting under the contracts and you are transporting from the spot market. But of course, spot rates are substantially -- still substantially above contract rates, whether it's 100% more or plus-minus that, I don't know, but substantially above, I would expect.

[Johannes Tang Hystad, executive]

And an anonymous question. How do you view the outlook for swing tonnage?

[Harald Fotland, executive]

Well, I noticed that the analysts, they have a very positive view on the market in -- after the 5 February ban. If we take that into consideration, my anticipation is that the swing tonnage will remain in CPP and that the chemical tech market will continue to be stretched on tonnage.

[Johannes Tang Hystad, executive]

So for the next 3 years, how should we think about Odfjell's COA coverage and duration of the contracts?

[Terje Iversen, executive]

I think, all in all, our contract coverage will more or less remain the same. We've seen that pattern over maybe the past 10 years that we've been swinging around contract coverage of 50%. And I think that trend will continue also in the years to come.

[Johannes Tang Hystad, executive]

Thank you. Next question was from Paul Haldadal. And then we have one from Evan Carlsgal. Order book for chemical tankers remain low. How do you see fleet renewal and the pricing of new build these days?

[Harald Fotland, executive]

Well, it's correct that the order book is historically low these days. It's also a fact that there are hardly any yards available to build stainless steel chemical tankers. The third fact is that there are -- the price of tankers today is high. So it's a challenge to justify that investment. So my anticipation is that it will take time before new chemical tankers are being built.

[Johannes Tang Hystad, executive]

Thank you. There are a lot of interest about COA. So another question on the 26% increase. How much of the COA volumes were renewed in the fourth quarter?

[Harald Fotland, executive]

We had a full and final renewal of approximately 15% of our total portfolio. And then we have another 15% that -- where we are agreed on the terms, but we are still waiting for insurance and legal reviews for subjects to be lifted. So we are trading on new conditions, but the contract is not yet signed. So we have renegotiated approximately 30% of the total volumes during the fourth quarter and 50% are fully signed off, and we expect to sign off the remaining 50% within weeks, I believe.

[Johannes Tang Hystad, executive]

Thank you. And then the second part of the question is, if we could share some comments on how much of the COA volumes that are for renewal in the first quarter '23 and in '23 as a whole?

[Harald Fotland, executive]

I didn't bring that figure. So I think I have to be careful when answering it. And it's -- you also have to distinguish between a number of contracts and volumes. So I don't think that I should go into any speculations.

[Johannes Tang Hystad, executive]

And how long is the time lag from COA renewals until earnings? When should we start to see the effect of the 26%?

[Harald Fotland, executive]

I think when it comes to the 26%, most of those contracts were renewed from 1st of January. So those contracts are already in force.

[Johannes Tang Hystad, executive]

And a question from Kristian Falnes. Will consolidation of A and B shares be on the agenda in 2023?

[Harald Fotland, executive]

That is a subject that we are discussing from time-to-time. But I can say that at the time being, we are not planning to propose that for the General Meeting in May. That's not on the agenda, so far, but things can change, of course.

[Johannes Tang Hystad, executive]

Perfect. Thank you. That was the final question that came in. So I'll leave it to you for some final remarks, Harald.

[Harald Fotland, executive]

Yes. Thank you very much. And to all of you listening in, thank you so much for attending and see you next time in approximately 3 months. Thank you.