Odfjell SE

OSE:ODF

Earnings Call Analysis

Odfjell Expects Continued Strong Market

Odfjell reported a solid fourth quarter, marking its best year on record. The company benefited from increased contract nominations and strong spot rates, outweighing fewer revenue days from higher docking activity. Terminal occupancies improved, notably in Houston and Ulsan, where new capacity is also set to come online. With limited new vessel supply and stable chemical tanker fleet growth, the market conditions are anticipated to remain strong. Furthermore, tight market balance and inefficiencies in the Panama and Suez canals are set to enhance fleet utilization. Odfjell predicts a slight earnings increase for the first quarter.

A Record-Breaking Quarter Caps a Strong Financial Year

Odfjell had a quarter that not only demonstrated robust financial performance but also marked the end of its best year to date. The strong operating cash flow of $101 million, after accounting for investments, resulted in a free cash flow of $64 million this quarter, which has been consistent with previous quarters. With a 12-month rolling cash flow of $60 million after adjustments for repayments related to right-of-use assets, free cash flow is expected to remain strong in subsequent quarters due to minimal large capital expenditures, especially as no significant new building or secondhand vessel investments are on the horizon.

Managing Debt and Financing with Strategic Refinancing and Sustainability in Mind

Debt management seems well in hand, with the company effectively refinancing and repaying loans to lower interest costs. With a bond maturing in January 2025, various options are being considered, including refinancing during the year or repaying at maturity with cash on hand. In addition, notable strides have been made on the sustainability front, with a substantial portion of the interest-bearing debt now sustainability-linked. Odfjell has also established a finance framework to support large and small decarbonization initiatives aimed at significantly reducing greenhouse gas emissions and achieving a climate neutral fleet by the end of 2050.

Operational Excellence and a Continued Focus on Environmental Responsibility

Odfjell's commitment to environmental sustainability is reflected in the 5.4% reduction in the carbon intensity of its controlled fleet compared to the previous year. Furthermore, the company has been implementing technology such as air lubrication systems and suction sails on its vessels, aiming to roll out these energy-efficient initiatives fleet-wide pending success in their trials. These efforts, along with the high occupancy rates in terminals such as Antwerp and Charleston and new capacity coming online, underscore the company's emphasis on operational efficiency and environmental stewardship.

A Positive Market Outlook and Expected Growth

Odfjell foresees a growth in GDP of approximately 3% in 2024 which is expected to drive an increase in volumes and demand. The outlook for the chemical tanker fleet suggests a stable and low growth, with regulations capping fleet speed and utility increases. The positive developments in contract nominations and spot rates, aligned with increasing occupancies in terminals, bode well for continued favorable market conditions and other growth incentives such as limited new supply and a lack of swing tonnage negatively impacting the current quarter.

Guidance Suggests an Uptick in Earnings Amidst Market Challenges

Despite the challenges faced, including rerouting costs stemming from increased Red Sea tensions, Odfjell has managed to adjust rates to compensate for these higher costs, resulting in steady earnings. Further, they expect a slight increase in earnings for the upcoming quarter, a testament to the company's resilience in navigating difficult market conditions and maintaining its profitable momentum.

Earnings Call Transcript 2023-Q4

[Harald Fotland, executive]

Good morning, everybody, and welcome to the presentation of Odfjell's Fourth Quarter and Preliminary Full Year Results for 2023. Before I continue, please observe that you have the opportunity to ask questions during the presentation and these questions will be answered after the presentation.

Today's agenda follow usual pattern, I will present the highlights. My colleague, Terje Iversen, will present the financials, and then I will continue with an operational review and our prospects for the future.

If we then turn to the highlights. The fourth quarter was another solid quarter for Odfjell and it concluded a record year for the company. Actually, these are the best full year results that Odfjell has ever presented. The time charter earnings in Odfjell Tankers ended at USD 182 million, and this compares to $184 million in the third quarter. The EBIT was $71 million, and this compares to $76 million in the third quarter. We delivered a very strong net result of USD 52 million. And adjusted for one-offs, then the result was $50 million and this compares to $49 million in the third quarter.

The rates on our renewed contracts during the quarter were up 5% and this covered approximately 29% of the full annual contract volume. The net result contribution from Odfjell Tankers was slightly up at $2.4 million, and this compares to $2.1 million in the third quarter. I'm also happy to say that our carbon intensity, the AER for the fourth quarter came in at 7.2, and this is in line with the average -- with the third quarter.

The Board also approved a dividend of $0.63 per share, and this is based on our second half of '23 net adjusted results.

If we look at the full year, then we delivered, as I said, a strong net result of USD 203 million, and the total dividend for the full year is USD 99 million.

Our contract portfolio was further strengthened, and this provides a very solid foundation for all our trades, and it will reduce earnings volatility going forward. We have seen geopolitic tension, and we've also seen restrictions in the Panama Canal due to drought. And this has led to inefficiencies that will increase vessel utilization, which again will support higher freight rates going forward.

We continue to renew our fleet. And presently, we have 12 vessels on order, all Japanese long-term leases, and the size segment is between 25,000 and 40,000 deadweight tonnes. These vessels will be delivered during the period '24 to '27.

So to summarize, we saw a solid performance in the fourth quarter, and this rounded off record year for Odfjell. Our main concern is the safety of our colleagues. And since early December, we have not been sailing through the Red Sea. The market balance is presently tight and added inefficiencies from the restrictions, both in the Panama and the Suez canals, will likely contribute to even higher freight -- fleet utilization going forward. In sum, we therefore expect our earnings to increase slightly in the first quarter.

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

[Terje Iversen, executive]

Thank you very much, Harald, and good morning to all of you. I will, as usual, start with the P&L for this quarter. And as also Harald mentioned, we saw where we ended at 181.7 million compared to $183.9 million in the third quarter. Main reason for the slight decrease is that we had fewer sailing days this quarter due to increased docking activity.

We saw quite -- we saw a slight increase in the time charter earnings per day. But at the same time, we had some additional costs also related to rerouting of some of the vessels in the Red Sea, which negatively impacted the time charter earnings this quarter with around USD 2 million.

Looking at expenses this quarter, we saw time charter expenses at $5.3 million, slightly down from last quarter, where we saw operating expenses increased from $48.0 million to $50.6 million in this quarter. Main reason for that is the increased docking activity and project related to that and also some insurance cases in the fourth quarter.

Share of net result from associates and joint ventures being our terminals increased from $2.1 million to $2.4 million. Main driver behind that is increased result from our terminals in the U.S., but also stable and strong results from the other terminals.

G&A increased from $17.0 million to $19.4 million this quarter. Main reason was quite high activity with regard to traveling and other activities this quarter. And we also had provisions for year-end bonuses increasing the G&A expenses this quarter. That leads to an EBITDA of $108.7 million, after depreciation with $37.8 million, we had an EBIT of $70.9 million in the fourth quarter compared to $76.1 million in the third quarter.

In the interest side, we see that net interest expenses decreased quite substantially from $24.8 million to $20.0 million this quarter. Two main reasons for that. One is that we had some fees -- kind of borrowing fees that we expensed in the third quarter of around USD 2.7 million related to refinancing of some leases. But the most important thing is to see that we are decreasing the interest expenses with around USD 2 million compared to last quarter due to lower debt and also based on that we repaid a bond around USD 112 million in the third quarter, effectively reducing our debt and also reducing the interest expenses going forward.

After other financial items with $2.5 million, which includes USD 1.1 million gain from the sale of the BW Epic Kosan shares. And after taxes of $1.3 million, we have a net result of $52.1 million compared to $51.9 million in the third quarter. If you adjust for nonrecurring items, including gains, we have adjusted result of USD 50 million versus USD 49 million in the third quarter. And we are then left with an EPS, earnings per share, of $0.66, same as in the third quarter.

Looking into the details with the time charter earnings. As I mentioned, we saw a slight increase in the time charter earnings per day ended at $31,079 per day compared to $30,035 per day in the third quarter, well above the cash breakeven, which in this quarter was around $24,000, which is somewhat up compared to the third quarter and the main reason being the increased activity on the docking side in this quarter, effectively reducing the number of days and also, of course, some CapEx related to the dry-docking, increasing or decreasing our time charter cash breakeven.

Going forward, the picture is very much the same that we have limited CapEx, but we have some docking activities. And we would expect to see a slight decrease in the cash breakeven going forward, but still we are well above our long-term targets being below USD 20,000 per day.

Looking into the balance sheet. We saw an increase in the ships and newbuilding contracts, $1,279.4 million, increased mainly due to the buyback or the acquisition of 1 vessel that was previously on bareboat, where we paid USD 38.6 million for that vessel, which we think is quite attractive compared to secondhand values due to the option that we had and exercised. We see that we had a strong improvement in cash and cash equivalents, USD 112 million, including undrawn facilities at USD 157 million and positive improvement compared to last quarter.

Other current assets decreased somewhat due to the fact that we sold the shares in BW Epic Kosan for around USD 15.5 million, but we also saw a positive development in the working capital where we reduced outstanding receivables with around USD 20 million.

Equity is continuing to strengthen. We are now at the IFRS 16 adjusted equity ratio of 46%, which is up 2% compared to end of third quarter. On the debt side, we are -- in total, we are reducing the total outstanding debt, but we saw a slight increase in noncurrent interest-bearing debt this quarter due to the fact that we bought back this vessel, Bow Capricorn, and drew a loan of USD 32.5 million related to that vessel. But at the same time, we also did extraordinary repayments under the revolving credit facility of USD 25 million, which then in total reduced the total outstanding debt in the company this quarter.

Cash flow statement. We saw a very strong operating cash flow this quarter, Of course, due to the fact that we had strong financial results, but we also saw the decrease in the working capital. Last quarter, we had a negative development in working capital $18.9 million compared to a positive of USD 14.4 million this quarter, effectively then increasing our operating activities cash flow up to USD 101.4 million.

Investing activities, USD 52.4 million investments. Main driver, of course, Bow Capricorn with USD 38.6 million in addition to the dry-docking this quarter and also some investment in energy-saving devices that has been capitalized. Then we sold BW Epic Kosan shares as I mentioned. And in total, we had cash flow from investing activities, negatively USD 37.3 million this quarter.

On the debt side, I already mentioned the new interest-bearing debt of $32.5 million. We had some extraordinary repayments in addition to the ordinary installments and also repayment of operational lease debt. So net cash flow from financing activities ended at $26.2 million negative. And in total, we then saw a net change in cash and cash equivalents this quarter of USD 38 million positive.

Looking at more long term when the cash -- free cash flow after debt has developed. This quarter, as I said, we had operating cash flow of $101 million. If we done -- deduct the investments negative $37 million, we ended at USD 64 million in positive cash flow this quarter, being very strong and continued strong comparing to the previous quarters. 12 months rolling cash flow on a quarterly basis was down $76.5 million. And if you adjust that for repayments related to right-of-use assets, it reached USD 60 million.

Going forward, limited CapEx. We have dry-docking activities, but we don't have any larger capital commitments related to new buildings or secondhand values. So we should expect to see a continued strong free cash flow for the coming quarters.

On the debt side, not that much to report on, on kind of maturities going forward. We have a balloon that is maturing in the third quarter this year. That's a facility that covers 6 vessels, average age of 18 years. We are well on our way to refinance debt. And we see strong appetite from the bank market, and we expect to improve the terms on that loan quite substantially compared to the previous terms. We will also consider to refinance early some other facilities during this year to further reduce our debt and lower the cost of capital or the interest on the loans.

Then we have a bond maturing in January '25. We are kind of quite open what to do with that. We could refinance that during the course of the year, but we could also potentially just repay that at maturity with cash from balance sheet when we are entering beginning of next year. So we think we have ample time to plan for that, and of course, also consider the cash flow and the result development during the year.

Looking at the projected interest-bearing debt, we see that end of this year, we ended at $850 million, which is below our target of $900 million that we communicated some time back, very happy with that. We had done some additional repayments this quarter, as mentioned. And if we -- going forward, we expect for the coming year to have installments of around USD 85 million and to be around USD 830 million in outstanding debt end of 2024.

But then we haven't included any extraordinary debt repayments in that target. And also going into '25 and '26, we should be able to see a debt going below $700 million and potentially also closer to $600 million end of 2026. But of course, that will depend on how the market develop and the cash flow we could expect to see.

Included a slide here on what we are doing on the sustainability side. We have been -- I would say I'm very much a front runner on that area in many aspects. And as we -- as many of you know, we issued a sustainability-linked bond in the market in 2024 and being the first of its kind in the shipping industry globally and also the first in the Nordic.

End of 2023, we have around 65% of our interest-bearing debt that is sustainability linked on this framework. We are now taking a step further, and we are now issuing position finance framework as was one of the first in the industry. This is according to the framework that has been established and the Climate Transition Finance Handbook in 2023 and this is also supported by the second-party opinion by DNV.

The framework aims to support the funding of our large and small decarbonization initiatives that will make a meaningful contribution to the overall reduction of greenhouse gas emissions and our goal to reach a climate neutral fleet by the end of 2050 and may be used as -- for the first time in connection with the refinancing that we are currently working with. This will be a use of proceeds kind of financing framework, where we could use funding from that framework or for the funding behind it to finance typically energy-saving devices.

We could do vehicle fits. We could do research and development and also potentially use that for investing in lower carbon emission vessels in the future and kind of have that possibility to use that framework and possibly potentially also see lower interest on that part of the financing.

Then I will leave the word to you again, Harald.

[Harald Fotland, executive]

Thank you. I will then continue with our operational review. If we look at the rate development, the market continued to firm in the fourth quarter, and we saw an increase in spot rates as well as a slight increase in contract rates. Our ODFIX was up 3.7%, and that corresponds very well with Clarksons Chemical Tanker Spot Earnings index, that was up 3.8%.

If we look at the product mix, then we remain loyal to chemicals. We had 84% of our volumes were liquid chemicals, and that is very much in line with the previous quarters. The balance is mainly on an opportunity basis and for repositioning purposes.

Our contract coverage increased further and the renewed contracts saw a 5% improvement on rates. We saw a significant improvement in nominated volumes, climbing to 60% in the fourth quarter. And if we adjust that figure for the external relets, then the actual figure was 71%. We renewed approximately 1/3 of our existing contracts in the quarter, as I said, with an average increase of 5%.

In average, contract rates are up approximately 30% since the market upswing started. And also, if you look at the bottom right graph, then the volumes carried on Odfjell ships saw another peak with 3.4 million tonnes during the quarter.

On carbon efficiency, we maintained the carbon intensity within our targets, and we also improved compared to the previous year. In 2023, the Odfjell AER was 5.4% lower than the previous year. And the controlled fleets AER was 52% lower than the IMO benchmark set in 2008. The average for the full year 2023 was also 7.2.

I'm also very happy to see that our 15 years of continued focus on energy efficiency initiatives now seems to confirm that our full fleet was C rated or better during 2023. And more than 50% of the fleet will receive an either A or B rating. I'm very happy to see that we now have tangible results of what we've been focused on for more than 15 years.

As previously announced, we have installed the first air lubrication system on Bow Summer. We have started the testing, and we hope to report on this testing when we do our next quarterly report. We are also well underway with the installation of suction sails on board one of our Hudong class vessels. Engineering is completed, and we are only waiting for the production of the sales to be completed. We expect installation of these sails early autumn this year. If we have successful test results from both air lubrication and the suction sails, then the intention is to roll out those systems on relevant ships in our fleet.

Then switching to tank terminals. Our terminals have maintained robust performance in the fourth quarter, with an EBITDA ending slightly above the previous quarters. Our terminals in Antwerp and Charleston continue to operate at full capacity while we saw an increase in occupancy in Houston and Ulsan. The average occupancy rate ended at 97.0% in the fourth quarter, and this is slightly above the 95.1% that we saw in the third quarter.

We have seen a slowdown in the economy and downstream demand. And this has led to a slight decrease in throughput, but at the same time, we have seen very stable occupancy levels.

When it comes to the outlook, we do believe that the slower end consumer demand will persist also in the short term and this will affect throughput. We do not foresee an increase during your next 4 starts. We have new terminal capacity coming on stream during the first quarter. That is in Houston. And this will contribute positively to our results. We also have a new Tankpit in Antwerp that will be commissioned within this year. And we are looking at an expansion project at our Ulsan terminal in Korea.

And then to the market update and prospects going forward. If we start west of Suez, then we saw that most trade lines, west of Suez continued to increase during the quarter. And we also saw the highest increase in the U.S. Gulf Far East rates. And this is, of course, related to the draft in the Panama Canal and the reduced capacity there.

East of Suez, we -- in the beginning of the quarter, we saw spot rates declining. And then towards the end of the quarter, these rates bounced back, mainly as a result of the closure of the Suez Canal.

Throughout the quarter, Middle East exports were, in average, stable, while we saw, as I said, Far East and Asia exports initially weakening and then rebounding. The rates has continued to increase so far in 2024.

If we look at total volumes, then we continue to see that volumes are stable and slowly increasing. And also, we see that the so-called swing tonnage is remaining out of chemicals, and they remain within CPP.

If we look at the order book, then we would say that the order book remains at low levels despite the recent orders. and the fleet continues to age. There are some orders within the medium segment. We've seen some new orders in the super segregators segment. And in total, the total core chemical order book is now at 6.1%. I think it's important to note is that of this 6%, more than 20% of the order book is for Odfjell account. These are Japanese long-term charters with 0 CapEx and also, they include purchase options.

To summarize, as we've been touching up on a couple of times, we have geopolitical tension, particularly the Red Sea, and this is affecting the market. It's taking out capacity. We foresee growth in GDP of approximately 3% during 2024. We have seen inventories being built up during the pandemic, now being reduced and we believe that the destocking is now coming to an end, and the outlook for production indicate an increase of 3% in volumes. And this means that we see a relatively stable outlook for -- on the demand side when it comes to production, but we see a significant increase when it comes to tonne mile production.

The chemical tanker fleet growth is stable and low. We don't see any immediate impact of swing tonnage and the IMO carbon regulations are effectively putting a cap on the fleets opportunity to increase speed and by that, increase utilization.

So to summarize this presentation, the fourth quarter was another solid quarter for Odfjell, and it included the best year for Odfjell ever. We saw increased nominations on our contracts. We saw firm spot rates. And these counter the effects of fewer revenue days due to the previously announced increase in docking activity during the fourth quarter.

On the terminal side, we see -- saw a positive development compared to the third quarter as we saw increased occupancies in Houston and Ulsan, and we also see -- will see new capacity in Houston coming on stream during the first quarter.

The market outlook, we expect volumes to grow in most of the regions where we are present. There is very limited new supply from new buildings, and we do not expect a swing tonnage to swing back during the quarter. So all in all, we expect current strong market conditions to continue.

The market balance is tight and the inefficiencies that we see from Panama and Suez will contribute to higher fleet utilization. And in sum, we therefore expect our earnings to increase slightly in the first quarter.

That concludes our presentation, and I think we now switch to the question session.

[Nils Selvik, executive]

Thank you, Harald. And good morning to everyone listening in. We've had a few questions come in during the presentation. I think it's safe to say that they generally revolve around similar topics on contracts in Red Sea, but I think we will just go through them as they have come in.

So first one is on your Q1 guidance of earnings slightly up, can you comment on the dynamics here? Spot rates are meaningfully up quarter-to-date, COA rates renewed are up 5%. Will this be somewhat offset by increased costs from the Red Sea rerouting?

[Harald Fotland, executive]

Well, I would say that if you look at the Red Sea, then initial rerouting of voyages, they came at a loss for Odfjell. Those were voyages that were already concluded. They were already started. And of course, when we deviate then the cost is for our own book. Since then, we have seen rates increase and they are more or less adjusting for the increase in distance. So today, we see the same earnings on those voyages that we saw before the rerouting. And the expectation for future voyages is that we will see a further increase in earnings or time charter earnings. But of course, this started in mid-December. So we will only, I think, partially see the effects of this during the first quarter.

[Nils Selvik, executive]

Thank you. The next question is on [indiscernible] and in terms of both volume and rates for the coming -- or the first quarter, how should we think about COA rate renewals in Q1? How much of annual volumes are you expecting to renew next quarter?

[Harald Fotland, executive]

Well, what I can say is that we have already renewed approximately 10% of the contract renewals in the first quarter. And my expectation would be that we will see a further slight upswing in average renewals also in the first quarter.

[Nils Selvik, executive]

Yes. Thank you. Then there is a question on Stolt-Nielsen's recent stock purchase in Odfjell. And it is, what is your view on Stolt-Nielsen buying a big stake in Odfjell? What is your views on a potential consolidation?

[Harald Fotland, executive]

Okay. Well, I think we will have to look at this in a historical perspective. Back in 2016, Stolt-Nielsen bought Jo Tankers. And as a consequence of that merger, Jo Tankers and Stolt-Nielsen have jointly owned 8 super-segregators. And then in March '22, Stork Nielsen flagged the 5% shareholding in Odfjell. And since then, we have seen the 2 groups as 1 group due to the cooperation on those super-segregators. So the fact that shares are shifting side within that group doesn't mean much to us.

When it comes to the merger, then Odfjell do not want a merger. Our customers do not want the merger and also the legal advice that we received back in '22 clearly stated that a merger would not be possible for -- from competition reasons. And since then, we've seen Jo Tankers disappear. We've seen Team Tankers disappear. We've seen Campbell disappear. We've seen Nordic Tankers disappear, and we've seen -- now we see Fairfield disappearing. So there has been a strong consolidation in the market already.

[Nils Selvik, executive]

Thank you. The next question, I think, was very similar to the first question, and that's already been answered, and that was on the Red Sea situation and impact on earnings in Q1.

And then the final question here, it appears to be. It's also on the Red Sea situation, but it's -- I guess it's more in terms of our dialogue with our customers. And the question is, are you seeing any progress in adding surcharges to customers in the Red Sea -- on the Red Sea reroutings?

[Harald Fotland, executive]

First of all, we will not jeopardize the safety of our colleagues, so we will remain out of Suez and the Red Sea as long as this situation persists. We have a good dialogue with our customers, and we perceive that they understand the situation and they also understand that they have to contribute to find suitable solutions. So all in all, we will stay out of the Red Sea and our customers are constructive in finding solutions.

[Nils Selvik, executive]

Thank you. That was the final question for the Q&A. So Harald please.

[Harald Fotland, executive]

Okay. Then I thank all of you for listening. I wish you a great day and a good weekend when that time comes. Thank you.