Stolt-Nielsen Ltd

OSE:SNI

Earnings Call Transcript 2023-Q1

[Niels Stolt-Nielsen, CEO]

Good afternoon. Good morning. Thank you for joining us for the Stolt-Nielsen Limited First Quarter 2023 Earnings Presentation. Together with me here in London is Jens Gruner-Hegge. We will go through the normal agenda where I talk about Stolt-Nielsen go through each of the divisions. Jens will take you through the financials, and then we will open up for question and answers. And the questions can be posted on the -- through this chat function, like last time.

The highlights for the first quarter, all the arrows are pointing upwards except for the operating revenue slightly down primarily driven by SDC, although otherwise, every other business unit delivered in increased operating revenue. The net profit for the quarter came in just $200,000 short of $100 million at 99.8, which is up from 95 point three in the previous quarter. Very much driven by the improved trading results that we see in Stolt Tankers.

EBITDA came in at $213 million, and that is up from 196 million, again driven by the strong results due to higher spot volumes and higher COA rates in Stolt Tankers. The terminal division also high results, primarily driven by strong demand in the US Gulf and in Brazil. Stolt Tanker containers, higher number of shipments, but at lower margins. Again, I will talk about each go through each of the businesses later. Stolt Sea Farm also had a strong result for the quarter. The highest season is of course, December for Christmas sale, and that is reflected in our results from Stolt Sea Farm.

Free cash flow came in at 133.1 million that is up from 123.7 million in previous quarter. The board recommended the final dividend for 2022 of $1.25, making it a total dividend per share of $2.25 for 2022.

[indiscernible] secured that our company has a robust liquidated position, we're at 479 million, and that is slightly up from previous quarter. If we then move to the net profit variance analysis very quickly, higher operating profit from Stolt Tankers and also from Stolt Haven, low operating profit from SDC, a high operating profit from Sea Farm, slightly lower operating loss or higher operating loss from installation gas, our investment in gas. Lower corporate costs of 1.2 and lower interest. As a result, interest expenses as a result of lower debt, but also some benefits from foreign exchange. And when you make more money, you'll pay more tax. So the income tax, uh, is the almost $11 million higher than previous quarter. Bring in that profit again for the first quarter 99.8 million.

Then moving to Stolt Tankers, the increased trading results are due to the co rate rates that we fixed or booked during the quarter was up 16.3%. Well, the spot rates fell 6.2%. The spot volumes were up by 16.1% and the COA volumes were down by 11.3%. We'll go more into detail, but we have less contracts, therefore less contract volume, and it's been replaced by spot volume. That's again why the spot volume is up, even though the spot rates went down in the first quarter reflecting the slight dip we saw in the MR market in the first quarter.

We had lower net market costs and that was driven by that was partially offset by also lower bunker surcharge, lower owning expenses. And that was mainly driven by a recording of the Stolt [indiscernible] loan insurance claim that we received. But even if you take away that proceed, the operating expense, the owning expenses were slightly down from previous quarter. The highest tier prices has increased the residual value of our fleet, which has led to lower depreciation.

Higher joint equity income and that is of course in line with our fleet. The more -- that is also reflected in our joint ventures are also making more money. And then we have the lower gain on sale of assets. We sold one shift to stole share water in the fourth quarter. And also, we recycled the sold good loan and therefore we have a lower gain on sale assets in the quarter, bringing the operating profit to 87.1 million for the quarter and that is up from 78.2 in the previous quarter.

The bunker prices -- lower net bunker cost. So, 99% of the contracts that we currently have are has a bunker clause. The total volume covered by the bunker clauses are now at 56.5%. Again, that reflects why that because we have less COS than previously. That number used to be at around 65%. So but the spot market is strong, so we are able to kind of get compensated for increasing bunker costs can be charged through the spot rates.

The bunker surcharge revenue was done, but 9.2 as prices dropped and our COA volumes decrease, bunker consumed down by 10.3 resulting in a net decrease in bunker cost by of $1.1 million.

Moving then to sale in revenue chart, and as you can see here, we end the quarter at 29,000 just slightly above $29,000 per day. We gave a guidance the previous quarter between 5% and 7% increase. As we tried to explained last time, it's very difficult to kind of give for you to understand the COA is renewed, the COA loss, the replacement because each COA is different in volume and rates. So we decided to give you guidance per quarter and last quarter we gave you a guidance of five to seven and it came in at seven. So it was within the guidance that we gave.

The spot rates, the spot versus COA. We are now at 43% spot, 57% COA, 55% of the contracts are being renewed in fourth quarter and in first quarter. To date, we have concluded 26 COA, during quarter and we have added one new COA in the first quarter. So in the fourth quarter, 26 COA and in the first quarter, we added new contract. We have 21 series that are still in negotiations. So as we told you last time, we're pushing very hard to get the contract rates up. And that means that these negotiations can be dragged out in time. Some of the contract customer decided to go to the spot market, but are coming back, some are remaining in the spot market, the 21 are still in negotiation. But I also, and you can also see that off the contracts that we renewed in the first quarter, we got a 50% increase on average, but we didn't renew 22 contracts.

So that 22 contracts have not been renewed during the fourth and first quarter. So we're being very aggressive. We feel comfortable with that. But it results in a lot of contracts volume are now not being renewed. And we are now more dependent upon the spot market, which I feel comfortable with.

The positive effects for these renewals, this 50% increase that we have achieved in the first quarter, we reported 30% in the fourth quarter, 50% on average, in the first quarter. Again, a lot of contracts not renewed, but the positive impact of these renewals, you will see that over the next four quarter.

So to continue to give it an indication of what to expect and what we believe is going to happen, we are living from flat to 2% increase in the sales in for the second quarter. So we were spot on in our previous indication. So I think you should also put in your model that we will be within that flat to 2% increase. And why not higher than flat 2%. It is because we saw a dip in the first quarter in the MR market, which improves the spot rates. And we have a higher spot rate, you know spot exposure now. And also in the second quarter and this is just the natural cycle of the business we have more return legs than out on leg. So we have this is just, it's just the way it is. So some quarters you have a more returned basis which earns less than they have on the Xs and so we will have more return next in the second quarter. So again, guidance around a flat 2% increase.

We remind you that $1,000 change in selling will have an impact off net income of $6 million per quarter. And I apologize, previous we showed 7 million but that was adjusted because we accounted for pool partners and took the full account of that. So it's SEC 6 million for each $1,000 increase in sales there.

Market highlights, so on the right-hand side, you have the broker reports and you can see the dip.

We saw a dip and again that was partly driven by the end March. But we are now seeing that the end March market is picking up again and we're seeing the spot rates are also coming up again. So I do feel comfortable with the spot exposure that we have. And the increased bond exposure that we have in this upper going market will actually give us access to a higher degree of spot and also higher rates faster than what we will get through the COX. All of the regional fee continued to deliver a strong results like the DC. And the bottom left, the order book has not really changed and that is the fundamental thing that is driving this market. And that's why we are so comfortable with it, is that as long as we don't see a total collapse in global economy, we are feel comfortable to say that we think that the market is going to remain strong for the next two, three years. Especially taking into consideration that if you order a ship today, you will be lucky to get it delivered by 26.

Now this slide is a new one and it's really not towards the shareholders or the investors. It's more driven or more targeted towards our customers. Because I know customers listen in, and we are asking for 50% to 100% increase in some contracts. We are an industrial shipping company. We make our living by providing a logistical service to our customers. We don't buy and sell sales, we build them. We operate them for 25 to 30 years and then we recycle them.

Being an industrial shipping company means that we provide a reliable service. We are providing, we are the pipeline for our customers to deliver it on time, uh, to their specs that they require. And they can rely on us in good times and in bad times, and we have delivered that service to them. But the historical returns in our industry has not been on -- it's been unsustainable. If you look at the chart the last 10 years, it's been 4.9%. The last 20 years return on capital employed is 5.8%. That's lower than the cost of capital. So, the new investments, if we are going to continue to build the ships that you require to deliver your service, it is in your interest that this market is as strong as it is now because we cannot justify towards our stakeholders to continue to build ships. And that that gives us a return lower than the cost of capital. Just indicatively 20% return on capital employed for the next few years is required for us to achieve an 8% return on capital employed. And we're not even there yet. I mean, if you look at $30,000, we are approaching $30,000 per day on the ship that cost between 60 million and 70 million.

So this is in your interest because unless we can get these types of rates and these types of return, there is a reason why there's a shortage of ships because nobody's been making money on it. So our time has come, the market owes us, and somebody told me this set this quota. I love it. Our time has come. The market owes us a lot of money. And for us to be able to go to our stakeholders to build new ships, these are the rates that we require. We're not being arrogant. We should never be arrogant. We never say take it or leave it. We are always willing, but we've been over backwards to provide you the service and the reliability that we are known for, but we need higher rates.

Moving on to stall table. Now, this is a beautiful picture of our terminal in Houston. It really is -- it is difficult to see the size of the land, but if you look on the left-hand side, you can see the east property land. And this is the area for expansion, including all the way up. The closest part of the picture. And you can see our jetty number 11 where stole ship is. Then you move 1, 2, 3, 4 jetties is to the right, is our other two jetty. And this is the land where we are expanding our terminal. So we have ample land to do this organic growth that we're planning on doing.

The improved results is driven by higher rates. So we have the particular higher rates in the U.S. and in Brazil we have slightly lower operating expenses, but that was primarily due to one-offs, and we had higher A&G costs. And you can also see that we have a higher A&G cost in each of our divisions, and that is driven by the salary adjustment that we did at the beginning of year. But we also did give a one-off payment to the, what we called band the lower bands in our organization to help them manage the cost of living. That brings the operating profit for the first quarter up to 25.1, and that's up from 20.8 in the previous quarter.

Stable demand, but lower throughput volumes. Now, we are seeing a very strong demand in the U.S. Gulf. There's a shortage of space in the U.S. Gulf. We are building -- I think, we announced previous quarter, we are building additional capacity, and the board has approved that we are building additional capacity both in Houston, New Orleans. If we wanted to, we could have already filled those tanks up already. So that's in the process. We are achieving a double digit increase on the renewals that we see in Houston and New Orleans.

The European terminals, the demand is actually recovering, utilization is stable, but lower seasonal throughput in volumes, the amount is recovering is because the European market is becoming an import market. The energy cost in Europe makes the manufacturing uncompetitive. So, some of it is more competitive import. So the local market, the European market, instead of being supplied by European manufacturers, they're being supplied by imports.

So we are seeing a pickup in inquiries for additional storage in our terminal in Europe. The Asia terminals are varied, utilization throughput volumes stable, but signs are picking up. And especially in China, we are seeing an increased inquiry. So we do expect the pick-up as China continues to -- well they have opened up. But as the economy picks up pace, we do expect an increased activity in our terminals in Asia.

Steady as always, but at the improving trend, moving to store tank containers, transportation revenue decreased by 14.8%. That's driven by lower transportation rates, so the container lines and trucks. And we had a lowered merge revenue that decreased by 12% as customers are returning the tanks quicker. So during the pandemic, during the logistical market, they kept the tanks for a long period of time. They used their storage, they wanted to build up an additional kind of inventory because of unreliability of the logistical is bottlenecks. In the later stage, it's been a slowdown in demand. So that has caused them to hang onto the tanks longer, because they used the product --took a longer time to use the product.

Now they're starting to reeve those tanks quicker that while the [Indiscernible] revenue is down, when you have lower transportation level, you also have a lower and move expenses. High repositioning expense slightly up. And lower other operating expenses are 1.6, 39.3 operating profit and that down from 44.9. I stayed in the earnings release there; it's holding up surprisingly well. I would say that as I said in the previous earnings call, we're going back to a normalized scenario in that industry.

I'm actually, we're actually not going to move to next slide. But we are actually seeing east of service. So that's Middle East, India, Asia, very strong volumes and margin improvements is picking up significantly. We are also seeing a pickup in the Europe. The only place we're not seeing any pickup is in the U.S., but we are seeing a pickup from Europe from very low levels.

Demand level decrease our supply chain, demand in food grade sector remains strong. So guidance for going forward and what is normal, I can remind you a normal quarter for STC was between what $40 million, $45 million EBITDA per quarter. So that's what normal. I'm hoping that we're going to be able to hold on to the current market and that's going to slow down the decrease the normal but do just to give you an indication what normal is 40 million to 45 million EBITDA.

Moving to Stolt Sea Farm, a good quarter again this Christmas season higher target sales, the volume was up by 13.3%. However, the price decreased slightly by 1.8%. And the same was sold so prices, so volume was up by 5.7%, but the price is also went up by 3.2%. Now, operating expenses increases as a result of high volume. Our tax per kilo was down by 7.5%, because we had a fantastic growth during the quarter. The team at Sea Farm this level, about land-based recirculation agriculture. Got to remind you that we've been in this business for 30 years recirculation we've developed over the last 20 years. It's up and running, it is working and these guys are really in control of their operation control costs.

The fair value adjustment of biomass was 2.4 million loss compared to with a loss of 1.8 million in previous quarter. We're expecting volume and price impact on inventory levels. I remind you also what we now call the Stolt-Nielsen investments. The strategy here is to use stock Nexus platform knowledge in each of our respective industries. To make investments where we think we have a good knowledge, we can create value. And we see opportunistic investments that we can take.

And hopefully one day also find that an additional leg for just opening listen to stand up. So this is our portfolio. It's currently at 202 million and it is that's why we're presenting it's significant over $200 million. We participated in the IPO of Cool Company; we made a $10 million investment. We have sold that investment and book it a gain of $2.5 million profit. So we don't no longer have a Cool Company position.

We also have what we call store venture, which is what's established in the last year with the aim of investing in sustainable technologies that will contribute to the decarbonization and support our core business. We have made some small investments. These are just products that we are being presented for our business. And if we see that those things are working or those new technologies can be a benefit for us in the industry, we take the opportunity to see if we can invest in it too. We continue to maintain our old field shares. It's been a good investment. 8.3% stake.

So yeah, then moving on to the financial there, laptop to Jens Gruner-Hegge to take you through financials.

[Jens Gruner-Hegge, CFO]

Thank you very much, Neils. As always, I will remind you that our fiscal quarter is skewed and the first quarter runs from December 1, ‘ 22 through February 28, ‘ 23. Also, we have hosted the materials that the earnings release, the interim financials, as well as this presentation on the company's website. So you'll find that at wwwhyphenni.com under Investors.

Moving on to the net profit, Niels has already covered really the operating revenue and two great examples of the operating expense. Did the only thing to add on the A&G is also about it's impacted by about $2.5 million FX. Depreciation mills mentioned is related to the increase in residual values and that $2 million differential will carry through will go with -- carry with us through the year. So $2 million a quarter impact on that.

Then you'll see that the loss and gain of loss on sale of assets versus, again, in the prior quarter had a swing impact of 4.4 million, and that was related to really gain on the two ships sold in the prior quarter. That gives us an operating profit of 142.1 million versus 132 last year.

And then moving to below that line, you can see the net interest expense was downed slightly. That is driven by somewhat higher interest rates in current environment, but also tied to reduction in our overall debt levels. And hence an $800,000 reduction, we had a slight FX loss down marginally from the previous quarter. And then the income tax expense is tied to the higher profits at Stole Haven, Stolt Sea and Stolt Sea Farm. And also there was a $3 million tax credit in the fourth quarter that contributed to that swing.

That gives us a net profit of 99.8 million, up from 95.3 and an EBITDA of 213 million up from 196. So we've now breached the quarterly $200 million market.

Moving on to capital expenditures. So far in the 2023, we have spent $47 million. We have a remaining $249 million for 2023. And what we mentioned last time was that we, it is an ambitious program. The difference from the last time that we spoke was the expansions at Houston and New Orleans that Niels mentioned, and you see that in the stalled Haven terminals. Capital expenditures having increased 201 million remaining this year and bulky coming in 2024. And this expansion will also possibly tie drag on into slightly 2025.

Still tank containers reflects new tanks ordered that are currently being delivered into the fleet. And then Still Sea Farm here from his ongoing expansions and preparations for expansions including land purchases. For Still tankers 71 million, that reflects progress payments on barge that's to be delivered, but also to ships the 15,000 tons that were announced about a week ago in the press that we are acquiring to secondhand ships that are each 15,000 gateway tons and scheduled to go into our Caribbean service.

Moving on to the cash flow you'll see the operating cash flow. The cash generated by operating activities is down this quarter. And that is driven by changes in working capital. And it's really tied to the profit-sharing payments that were made in this quarter, but accrued in the prior quarter. So therefore, we're slightly down due to that swing, but if you were to exclude it, we would've been slightly up. Interest payments are down. Again, we do tend to pay we are certain loans that are on six-month interest payments, whereas the bulk is on quarterly. And those that are on six are typically paid in the fourth quarter and the second quarter. So they tend to be slightly higher.

It brings us to net cash January by our operating activities of almost 150 million in this quarter compared to 164 last quarter. Capital expenditures that includes the CapEx that you saw on the previous slide, plus money spent on dry docking of ships. So that's 54.4 million down from 68 million in the prior quarter. Also, Niels mentioned, we have sold the coal company shares and you see that 11.7 million in the sale of shares, and in prior quarters we have actually been buying shares. So, it's a nice turn. So net cash used in investing activities was down to 43.7 million stand from 78 million in prior quarter.

And if you look at the invest, the financing activities, you see we have repaid about $46 million of debt and capital leases. And you have the dividend that was paid out in December of 53.6 million. We expect if the AGM signs off on the dividend that was recommended on February 23rd, then that will be a payment in May, and that will be about $67 million cash outflow during May.

But for first quarter, it means we use 99 million in or in financing activities, it gives us next total policy cashflow before the quarter of 6.3 million, and that brings our cash and cash equivalence up to 158 million for at the end of the quarter. And if you look at the bottom right, you'll see that comes on top down of our available revolving credit facilities of 321 million. So, for a total of 479 million in available liquidity.

Our debt has been reducing steadily, even though we have been investing as well. And that's really credit to the cashflow generation capability of the businesses. You see that in the top left quadrant. Average cost of the debt is as one would expect in today's interest rate environment creeping up slightly. We're at 5.13% average for the first quarter. But if you keep in mind, we have been fixed almost 80%. And that's why we've been well shielded from the increase in rates that we have seen.

At the bottom part, you will see our debt maturity profile, the first quarter has been 33.7 million has already been repaid. The next significant one we have is the June maturity of a bond $132 million. With that, that was a bond that we did back in June of 2020 during the pandemic, interest rates were low, and we have a fixed dollar rate on that, or 5.19. And also, then six months later, we have the SNI or $141.5 million to be repaid. And that has a fixed coupon of about 5.4%.

So to the extent that we need to draw on the revolving credit line to pay those off, that will see our borrowing cost or average cost of debt increase further as it stands today. The Singapore loan that is either 101.7 million that is currently in the process of being refinance, we expect to conclude that probably during the third quarter, and that will also most likely include an increase in the facility amount to about $200 million.

And in addition to that, with the delivery of the 15,000 deadweight tons we have secured are in the process of securing financing, about 38 million for those and for the barge. To be delivered during the second quarter we also have are in the process of securing financing for that. So combined, those would add about $50 million in debt.

Moving to the next, as you see the financial covenants are improving. Both that two times my net worth on the top left at about 1.07 EBITDA to interest expense at 5.85 on both improving the limits are 2.25 for the digitizer network and minimum two for the EBITDA to interest expense. This under net debt to EBITDA, which is now down close to 2.5 are driven by this steadily improving editor that you're seeing on the bottom right-hand side.

For next quarter, the second quarter, you will see that the first quarter of 22 of 159 will drop off and we will add a quarter at a higher level so that we'll see our last 12 months run rate improved significantly, there's our expectation.

Moving over to ESG on the top half of the screen and you have ADR ratio that will show you every quarter. At the end of '22, we were at 10.9 to 1 which constituted a 30.4% saving. We have not moved much away from that with a stronger market there is a tendency to speed up slightly. So we are maintaining that level, we still are very confident of reaching our goal of a 50% emissions intensity reduction by 2030. Between now and then a number of ownerships will be recycled and that will be replaced by newer targets presumably and that will help drive down the ratio.

Very happy to also state that Stolt Tankers earned a gold medal for e EcoVadis, that's Sustainability Rating Agency, which is a first for Stolt Tankers. And that's something we are very proud of. And to that you installed Haven Terminals and Stolt Tankers containers have both maintained their silver rating, and improved on that. So, it's a good performance by all the three logistics businesses.

In Stolt Sea Farm, there is ongoing improvements targeting zero waste to landfill, as well as the reduction of the fish contents in our feed, which they are continuously working on developing.

And with that, I would like to pass it back to you.

[Niels Stolt-Nielsen, CEO]

Thank you, Jens. So we are cutting the strength across all of our businesses. Taking into consideration the first quarter usually is a slow quarter. We are pleased with the performance in the first quarter.

Stolt Tankers the improved COA terms are now starting to show in the financials, but when we show you 50% increase on average on the contract that we renewed there is this, of course, a risk to our strategy being market leaders. We need to push and we are as a result, we are losing our some contracts, which we wish we hadn't lost. But that's part of it. So yes, we're pushing and we believe we will be able to replace the lost contracts with other business. And I feel, again, comfortable with the supply side of the equation, but there is of course risk to it if something should happen with the global economy, but I think we have to do it.

Stolt table terminal will continue to see steady in higher utilization and we are achieving higher rates on the renewals. So Tankers container results are still resilient as capacity opens up and margins come on the pressure. So even though we have a phenomenal fantastic year in 2022, I think that 2023 and beyond, it's still going to be a healthy performance from SDC. Sea Farm, we're expanding our in new markets as we produce more fish, we are pushing, really focusing on the marketing side of the business. Jens showed you the strong balance sheet and liquid position, which has allowed us to pay higher dividends for this year of two and a quarter. And hopefully that will -- that trend will continue going forward.

That completes our presentation. We will now open up for any questions that you may have. And I see that we have received two questions.

[Niels Stolt-Nielsen, CEO]

And the answer is yes. I mean, we have historically, sailed our ships actually, some have actually be gone beyond 30 years. And depending on the new building capacity, we most likely have to sail them until 30 years. We are at least maintaining our ships, as if they're going to sail until they're 30 years old.

Then last, thank you again for another stellar quarter and your honest and happy outlook. How many of the COA renewals in the Q1 were fixed price option that were declared? And how many of your COA have fixed price option attached. I'm not going to go through. I can say that very few have an option period. And they even less in the future. Already several years ago, we saw the order book and we were expecting, we were just waiting for that balance to happen, which is started in 2022, and is continuing in ‘23. So we started already a couple years ago only extending our contracts by one year and not giving additional optional years and that we are benefiting from now so that we are not locked into the pre older rates. So very few have an additional option period and less so going forward.

Somebody called anonymous, when do you expect a new CEO will be selected? We are continuing to search. We have some very good canvas that are being interviewed and hopefully we will be in a position to announce the relatively soon. But as I stated earlier, this -- it's better to use the time necessary to find the right candidate. Peter Hagen from our biggest local -- if treating non-renewed COA as spot. What is your spot exposure for Q1 and Q2, if treating non-renewed?

We'll come back to you on that one. Can you find out or subject, so if we assume that all of the ones that haven't been renewed that we don't renew them, what these are spot exposure, but I think we will be coming to 50% spot, but we'll come back with a number shortly.

Can you comment around recent news about vessel purchases, and if there are any changes to your communicated fleet renewal strategy and consolidation slash spinoff?

So over the last two, three years, we have been active in the secondhand market, and been able to pick up two night ships, and we just recently announced another two ships still at a discount to the new building equivalent, but today we don't expect to be able to pick up such any further second hand ship because the prices are what we think is too high. So if we're going to pay a high price, that high price will be for new buildings. And with the fleet of 160 plus ships, we need to build ships and we will build order new ships at the right eventually.

Our consolidation and spinoff I think, I said this in the previous quarter, in this strong market, I don't think there's this appetite for consolidation, but we are open and we continue to look, and look at opportunities. And we are still committed to IPO to be able to achieve or be in a better position to achieve further consolidation. The exact timing, we are ready. It's just a matter of when the timing is right. Both the shipping market and the equity market needs to be allowed. We -- our balance sheet is now getting stronger and stronger by the day. So, we are in a position now to do an IPO, and it is something that we discuss at each quarterly board meeting. So when we make a decision we will of course can also COA.

[indiscernible] asked the question about this spot exposure. If we don't renew any of the COAs that are under negotiation, we will come back to you with that answer. Once we have calculated.

[Niels Stolt-Nielsen, CEO]

I don't see any further questions. So that completes our earnings presentation. I thank you for your participation, your support and I hope to be able to present to you good results in the second quarter but I guess it kind of an indication where I think the market so pretty flat force same or slightly off for Stolt Tankers stay slight improvement in terminals, slight improvement in Sea Farm and slight decrease in STC. That's kind of the guidance without stake specific numbers.

That completes our presentation. Thank you very much for participating.