Stolt-Nielsen Ltd

OSE:SNI

Earnings Call Transcript 2023-Q2

[Niels Stolt-Nielsen, Director and Chief Executive Officer]

All right. Good afternoon. Good morning. Thank you for joining us here today in London for our Second Quarter 2023 Earnings Presentation. Together with me, as always, Jens Gruner-Hegge, our CFO. We will go through - as usual, we will go through the overview of Stolt-Nielsen. We will go through each of the businesses. Jens will take you through financials and then we will open up with Q&A at the end. And the Q&A is through this chat function, which you can then submit your questions and we will try to answer all of them at the end of the presentation.

Moving on to the highlights for the quarter. Unfortunately, we had to take a loss provision of $155 million related to the Flaminia net of tax $115 million on the net profit -- impact on the net profit. So, if you look when we include the net profit, our EBITDA came in at just below $80 million, the operating profit at $10.1 million and the net profit of $8.3 million. And it doesn't affect net free cash flow, but net debt to EBITDA at $2.91 million as a multiple of EBITDA.

But I'd like to talk more about the underlying performance. This was an event that happened in 2012. I'd like to talk about the underlying performance of the company for the quarter, because we did have a fantastic second quarter. The EBITDA came in at a record high of -- just shy of $225 million for the quarter, giving us a $113.3 million net profit.

The EBITDA of $224.6 million, that was up from $213 million previous quarter was -- we will go through the business later, but just highlight, higher spot volume and contract freight rates, higher throughput volumes and improved results from our joint venture in terminals. Tank Containers was lower transportation margin, but where they were able to do higher number of shipments. And Stolt Sea Farm, we increased the sales volumes offset by higher operating costs as a result of the higher inflation. Again, I will talk more about that as we go through the presentation.

The free cash flow decreased to $116 million. That's down from $133 million in the previous quarter and that's as a result of the acquisition, we bought two second-hand ships in the quarter. We paid a final dividend for ‘22 of $1.25 per cent and that was paid out in May. And as we stand, it's $423.4 million of available liquidity.

If we then look at the net profit compared to first quarter to the second quarter, you can see that was a higher operating profit from tankers of almost $10 million, higher operating profits in Stolthaven for $2.7 million, slightly higher operating profit in STC, slightly lower operating profit in -- of $1.6 million from Sea Farm, a lower loss from the gas investments, lower corporate, pretty higher FX of $2.6 million and lower income tax of $3.7 million, bringing us to $113.3 million. But then we have the net impact of the Flaminia provision that we took of $105 million, bringing the profit down to $8.3 million for the quarter.

Moving then to Stolt Tankers. Higher spot volumes and COA rates was driving the earnings. The operating profit up, the increased trading results as spot volumes improved by 16.9%, whilst COA volumes were down 9.7%. COA rates were up by 9.4% and the spot rates in the quarter were down 5.5%.

We had a higher net bunker cost driven by lower bunker surcharges as bunker prices decreased, and we had higher owning expenses mainly due to the additional tonnage that we added in the quarter. High depreciation due to dry docking of ships and we have slightly lower joint venture income in line with softening demand in regional Pacific -- sorry, in Asia Pacific, bringing the operating profit to $96.8 million for the quarter.

So this is the same chart we showed last time. The improved sale in revenue per operating day was driven by higher spot volumes and better COA rates, reflecting the contracts that we renewed in the end of last year and the beginning of this year is now starting to come through causing that our -- the COA volume that we lifted, the new rates were included in the sale in this quarter.

The spot to COA volume mix for the second quarter was basically 50-50, 49.8% spot, 50.2% COA. If you ask us, what is our portfolio, I would say that our portfolio of COA is approximately on the normal liftings on the COA nominations. I will say, we're around 55% COAs and 45% spot. But the COA nominations were down, so below normal and that was then replaced by spot volume. I remind you that the $1,000 day change in sale then is approximately $6 million change in net income per quarter.

The second quarter was quite light on COA renewals, but the contracts that we did renew were on average up 55.8%. And then we indicate what we see today and I'll talk a little more about the market after, but what we're seeing today, because of the softening in the -- well, as a result of the slowing global economy, we are seeing a slowdown in COA volumes, we have seen and we're also seeing a softening of the spot rates. So we are giving a guidance of approximately between 5% and 7% reduction or decrease in the sale then for the third quarter. So 5% to 7% down from the current reported level of $30,880.

The total volume covered by a bunker clause was at 53.3% year-to-date and the bunker surcharge revenue was down by $5.3 million as prices for the fuel dropped and our COA ratio decreased. The cost of the bunker we consumed was down by only $4.7 million and a net increase in bunker cost of $0.6 million.

So again, market highlights. Let's talk about where we are and where we think it is going. You can clearly see on the right-hand side here that it has been coming off in most markets. But based on the latest what we're seeing right now, we're actually starting to see a leveling off both on the COA nomination in volume, but also on the rates. To predict what is going to happen going forward is quite difficult, because it's all driven by the global GDP. So I think that you are as well positioned as us in predicting what is going to happen to the global economy.

But we do have around 55% COA coverage and we had -- I'm very proud of what the team has been able to achieve in both the rates that they have secured under that portfolio, but also the terms and condition that has been tightening it. So I feel quite comfortable that 55% COA and the spot market will -- we will always be able to fill up our ship, it's just a matter of at what price we will be able to capture. And we are, again, seeing in recent weeks, it's a bit of leveling off.

The fundamental remains the same. There is no new additional ships coming into this segment for next two years. So I don't think it is necessary for us to, kind of - and sorry, and also the contract renewals, we have a very light contract renewal in the third quarter. The contract renewal process starts in the fourth and the first -- fourth quarter and the first quarter.

So I don't see any reason for us to start chasing any additional contracts at this time. We have a nice contract portfolio as it stands. The fundamentals are in our favor. So as long as we don't have a total global meltdown of the global economy, which I don't think is going to happen, I think that we will position for 2023 and I do expect that we will continue to see the strong earnings and we should be able when the contract renewal season comes due to continue to renew at healthy levels.

Moving on then to Stolthaven Terminals. Steady improvement, which is positive. So the operating profit for the first quarter was $25.1 million. We have slightly higher revenue. We have slightly lower operating expenses, slightly higher depreciation and a better higher contribution from our joint venture bringing the operating profit to $27.8 million. EBITDA up to $43.7 million, that's up from $40.6 million. Utilization steady at around 97%.

So robust utilization and throughput seen across all terminals during the second quarter. Yes, we are also seeing uncertainty seen by chemical producers across all major regions. But we do expect the uptick in the Chinese consumption to eventually come through. Analysts are, kind of, saying towards ‘23 -- end of ‘23 and beginning of ‘24. But the terminal business is steady. The contracts are 12 months minimum, some are much longer.

So the only -- and so the terminals are contracted out there at 97% utilization. The only thing that can really influence the quarter-to-quarter earnings in the short-term is the throughput, but it's a relatively small impact even if the throughput cost below goes down. So I do not expect any big change in the earnings coming from terminals for the next six to 12 months. So steady as she goes and nice performance, nice utilization. And you see that the EBITDA and the margins are improving.

Stolt Tank Containers, okay. So let's talk about before, the provision. Operating profit came in the first quarter was $39.3 million. So we had lower operating revenue decreased by 2.4% and that was driven by lower transportation rates and lower demurrage revenue. Lower move expenses, the lower move expenses as a result of the 21.6% decrease in the ocean freight rates that we pay the container lines, and that was partly offset by the increase in inland freight and higher cleaning costs. We had slightly higher repositioning expense due to more repositionings. And we have improved JV -- joint venture results and higher gain on sale of assets.

So the operating profit before the provision came in slightly higher at $39.7 million and then, unfortunately, of course, we had the provision related to the Flaminia, which brings the operating loss to $115.3 million for the Tank Container division.

Outlook, we've been talking about the softening or the increased competition in this market as the bottlenecks, the logistical chain has eased, more tanks are available. So shipment takes shorter period of time. Containers are coming off demurrage, so there's more Tank Containers. And if you then add on if there is a weakening of -- we don't see actually weakening of shipments, but there is actually more containers coming available. So we are seeing what we call the normalization of the market, which is still at a healthy level, but we are now starting to see it, and it's coming through.

So the second quarter, I saw that we beat market expectations, but we are clearly seeing that it is -- we are able to hold the shipments up, but the margins are under pressure. And I think that, again, I said it last time, but this time I really think it's going to happen that you will see the third quarter and the fourth quarter not as strong as the first quarter and second quarter, but still at healthy levels.

The focus of the organization, of course, we have a platform. We have an advanced digital platform as to push volumes through. So, get the volumes. We have to get the volumes through on the fixed cost and I think that we will seek -- even on the competitive environment, we'll see -- continue to see healthy earnings in a historical perspective. So if you take ‘22 out of the picture or the first -- also first-half of 2023 and you look at historically what we've made, I think we'll be going back to historical earning -- quarterly earnings in STC.

Moving to Stolt Sea Farm. So the operating profit in the first quarter of ‘23 was $3.2 million. We had higher volumes of turbot and higher volumes of sole sales, both the operating expenses increased as a result of higher volume for turbot and higher energy and feed costs during the quarter. So, quite a bit of inflationary pressure. Higher operating expenses also due to the higher electricity. You got to remind you that we are pumping water. These are land-based farms, flow through farms or you pump water up, and so it's quite energy and electricity. The increase in electricity prices also caused a higher operating expense.

Slightly higher depreciation. A&G is also up because we are building up and expanding our sales organization. Higher and lower other income, some fair value adjustment bringing it down to $1.5 million operating profit for the quarter. The outlook, the fundamentals for this segment is actually quite strong. Demand for both species has peaked up after a slow -- has picked up, sorry, after a slow January and February seasonal-wise January, February is slow. We have a pickup in Easter, but then really, we are now going into the summer season, and we're seeing healthy demand and prices for both turbot and sole going forward, especially during the summer season.

So we are actually -- even though there's an inflationary pressure and there's a question about the slowdown we are seeing that the consumers are out there and they're -- they are -- there's no slow in the demand for both sole and Turbot.

Moving to Stolt-Nielsen investments, levering our industry knowledge and expertise. This is just a reminder that we have what we call Stolt-Nielsen investments, and we have our exposure and investments in these various companies, which is the book value of these assets that are -- is at $194 million -- $194.2 million. Not much more to say about that.

That completes my part of the presentation. I'll give it over to Jens to take you through the financials.

[Jens Gruner-Hegge, Chief Financial Officer]

Thank you very much, Niels. I'd like to, as I always do, to remind you that our fiscal year is skewed, starts December 1st every year and ends November 30th every year, which means the second quarter went from March 1st through May 31st. Also, as a reminder, we have posted this presentation, as well as the earnings release and the interim financials on the company's website, www.stolt-nielsen.com under the Investor section.

As Niels has talked through a lot of the numbers, I'll touch just on a few, and I'll focus a little bit more on the cash flow a bit later considering the news earlier in the week. The revenue, as you see was up, reflecting the underlying performance. It's really due to the Tankers, but also an improvement in both Terminals and Stolt Sea Farm. Sea Farm driven by the higher volume, as Niels mentioned, whereas the opening expenses remained relatively flat.

You then have the claims provision of $155 million and under that you see there is a slight increase in depreciation and that's driven by some more calendar days in the second quarter over the first quarter, as well as assets that were acquired that are now being depreciated.

Share of profit of joint ventures and associates were up and that's predominantly in the Stolthaven Terminals and our -- from our Korea terminal. And you will see below that, that administrative and general expenses are down about $11 million. That reduction is related to profit sharing driven by the provision that was taken earlier this week.

That brings us to an operating profit as reported and as Niels mentioned of $10.1 million after taking the provision, down from $142.1 million in the prior quarter. Net interest expense was slightly up and you see that's driven by the continuing increase in interest rates in the world at large. We're now up to 5.26% on average, up from 5.06% in the first quarter.

FX loss was flat, but you see below that there is a tax credit related to the $155 million write-off, we took about a $40 million tax credits and that's why you see a positive tax for the quarter of $28.7 million, and that brings us to a net profit for the quarter of $8.3 million versus the $99.8 million in the first quarter.

Year-to-date, you'll see we're at $108 million slightly down from $110.9 million in the first-half of 2022. So if you adjust -- take back in the provision, you see that the first-half of 2023 has actually been quite a stellar six month period. EBITDA is just shy of $80 million after the provision and that's down from $213 million.

Capital expenditures continue. And I think what is worthwhile noticing that despite the provision that was taken, it has not stopped us from our ambition in implementing our strategy and we still have the balance sheet and the liquidity available to pursue this strategy, and the growth as we have laid out in our plans. During the quarter, we spent $82 million on capital expenditures, and included two ships that we report the Stolt Condor and the Stolt Tucan. It included also the Stolt Ludwigshafen, quite technologically advanced new barge for the inland European service. We also had investments in terminals, including some maintenance projects.

And you will see also remaining for the year, we have still quite a bit in Tankers Terminals and Tank Containers. Tank Containers is the purchase of additional tanks that will come throughout the end of the year whereas Terminals is predominantly capacity expansions at our Houston and Orleans terminals, which will stretch into 2024, and possibly ‘25, which leaves about $194 million remaining for this fiscal year. That's ambitious. And it could be that some of that will be pushed into 2024, but at least this is on the plans and we are pursuing it.

Then going on to our cash flow. You'll see cash generated during the second quarter was up, driven by the improved underlying performance of the businesses, partly offset by an increase in working capital. Interest paid is down slightly and that's really quarterly variances, because some quarters have a half year -- some loans have half-yearly interest, others quarterly interest. And we then have net cash generated by operating activities of $177 million, which is up from $149 million.

Capital expenditures, we saw from the previous page was about $80 million -- just over $80 million. And on top of that, you have dry docking of ships, so that brought it up to $92 million, up from $54 million in the first quarter. And that means the net cash used in investing activities was slightly -- about up -- above $48 million this quarter over the previous quarter. We didn't issue any debt during the quarter itself, I'll come back to what we did subsequently. But we repaid about $50 million on debt and we repaid $13 million under our capital leases.

So that's a reduction of just in excess of $60 million during the quarter, which means year-to-date our debt is down about $110 million including leases. And we also paid $66.7 million in dividends on May 10th, as Niels mentioned. So that brings our total cash flow to a negative $42.8 million. And we ended the quarter with cash and cash equivalents of $115.6 million.

And if you look on the right hand side at the bottom, you can see the development of our liquidity. We have $307 million available under our revolving credit lines, all of which are completely unutilized. And that is $115.6 million in cash and equivalents for a total of $423 million.

Going on to our debt profile. So it's been an active June following the month-end. As June has been very busy in booking and new loans, we -- on June 16th, we renewed the financing that is secured by our Singapore terminal with a new seven year SGD280 million term loan, which after repayments of the previous loan provided us with about $100 million in additional liquidity. And then on -- at the end of June, we received the proceeds from the Stolt Ludwigshafen, the barge refinancing. And we turned around on June 29th and repaid SNI09, which is the second to last bond that was outstanding $132 million using available cash on hand.

So those were really the main liquidity events following the quarter. And then as of June 30th, our liquidity -- readily available liquidity after the bond repayment was $351 million. I just checked at the close of business yesterday, this is now up to over $370 million really reflecting a strong cash generation by the businesses. And I think this is important to bear in mind when you consider the loss provision that we took, the company is in a strong liquidity position and we do have a strong balance sheet to carry this.

You see the maturity profile at the bottom and the three -- third quarter now excludes that bond that we repaid. The next big one is the bond in the first quarter of 2024, SNI08. And thereafter we don't have anything until the second quarter of 2025 wherein our U.S. private placement secured by the Houston terminal matures. This leaves us with only one bond in the market and we have been very happy with the ride we have had in the bond market. And we are contemplating going back to the market with further bond issues, because we like to have our presence in there. So we will possibly come back to that going forward.

Just finally, our covenants. The two EBITDA covenants, net debt to EBITDA and EBITDA to interest expense are both impacted by the loss provision and the low EBITDA in the second quarter. But still, all covenants are at very healthy levels and I would expect this to continue to improve as we go into the third quarter and fourth quarter.

And with that, Niels [Multiple Speakers]

[Niels Stolt-Nielsen, Director and Chief Executive Officer]

Yes. Thank you, Jens. Just the key messages. Before the provision, we had a record quarter, very much driven by the record performance by Stolt Tankers, which are the sale then of close to $31,000 per day. Stolthaven Terminals continue with high utilization and the focus on rates has continued to drive and improve the profitability in the business. Strong push for volumes in STC, Stolt Tank Containers, but it was offset by the reduction in margins. And good sales performance in Sea Farm, but also by higher operating costs.

We do expect that there's going to be a softer second-half of the year, the third quarter and the fourth quarter. But we are well positioned in each of our businesses. The fundamentals are in our favor in each of our businesses. And I think with our contract portfolio in Tankers, with the contracts and the steady long-term contracts in terminals and the excellent platform and a well-position that we have in STC market, I continue to see that we are going to be able to have healthy earnings, but not at the same level as the first-half.

Yes. That completes our presentation and now we will open up for questions, which you then have to send in by chat. And I will try to answer each of the question. The first one, do you still allow on the deck carriers of explosive containers?

It is not us who stall the containerships. So we buy our services. We declare what we -- the content of the container and it's obviously the container line we have to stall that container.

How will Flaminia ruling affect tanker IPO, if any, due to investor sentiment?

This was an event that happened in 2012. As you can see from our balance sheet, I -- the most important part for us is, of course, to learn from it and make certain that we -- yes, learn from it. I don't think that the Flaminia ruling will affect IPO. It's -- we will do an IPO at the right time and we will advise the market when we are at that time.

Can you say anything on the amount of renewals remaining for 2023?

I assume he is referring to the COA. So again, the lightest period, I would say is in the second quarter and the third quarter and the heavy period or if you can call it heavy period is in the fourth quarter and the first quarter. So I would say that maybe it's -- if you look at third quarter and fourth quarter, I would say combined it's between 25% and 30% COAs that are going to be renewed in that period.

Can you talk a bit around your COA coverage and strategy going forward? Is the downward trend in COA strategy to position for rebounding spot market? Or is it more about resistance from counterparties in accepting higher rates? Are you comfortable with around the 50% higher or even lower 50%?

So historically, Stolt Tankers, we've been around 60%, 65%, 70% COAs. But we consciously say that, okay, we need to be the market leaders and we push too hard. I am -- and now we are at around 55% instead of 65% to 75%, I am comfortable with our positioning, even though that's not the historical percentage that we have had, because the fundamentals is in our favor. There are no new ships coming into this segment both I would say, both in the Chemical Tanker, but also in MR segment that carry chemicals, a relatively low order book. So, of course, the only risk that we are -- the main risks that we have with our strategy is, of course, if the global economy totally collapses. But I don't think that the global economy will totally collapse.

I think that we have historically seen that the chemical market is quite resilient. There can be a dip, but it comes. It's pretty darn steady at 2%, 3% growth. It's a multiple -- multiplier of global GDP. So therefore, I am comfortable with the 55%. And I also don't think that it's necessary for us to chase any COAs now during the second-half of the year or aggressively go after new business, because we will be able to fill up the ships with spot volume and I do believe that this market will recover, because of the supply situation. I hope I'm right. Again, it depends on what you believe how the global economy will play out.

I think there is a, you know, have we reached the bottom now and will start going up? We'll see. But again, 55% of our portfolio is now COAs fixed relatively -- quite sole renewals that we've been able to achieve in the fourth, first and second and third -- second and -- first quarter and second quarter of this year. So I think that we are in a pretty good position. So for us, of course, if there is business that comes our way and the COA are at rates that we accept then of course we will look at it, but otherwise, I feel quite good with our current portfolio.

Will Flaminia destroy Q4 dividend? So I don't decide the dividend, but I would think that if the company performs, we have made year-to-date net profit of $108 million and I do expect that we will continue to make healthy profits in the third quarter and the fourth quarter. So I don't see a reason why the company is not in a position to continue to pay dividend. Again, the level, I don't want to comment upon, but I think we are -- we have the liquidity, we have the balance sheet and we have the earnings to justify dividends.

Can you talk about the timing of taking the full loss provision in Q2? What is your view and expected time line on the insurance claim and likelihood now, which has been lowered in the Q2 report?

There is quite a bit of a limit of what I am in a position to say. We took the provision this quarter, so based on the advice that we get from our advisors, so at this time, we have taken $155 million provision. I hope that that's a conservative number. It might be less, but it might be also slightly higher. We don't know yet. It's too many moving parts. There's limits to what I can say. But needless to say, we will do everything possible to reduce and mitigate that number.

The volumes in Tank Containers are holding up very well. Could you share some light on how you see this develop through the next quarters? Do you see any recessionary pressure materializing?

So the volumes are holding up and that's what really the team is working very hard on is making certain that we get the volume. And hence they have been successful and we are seeing the volume is out there, but there is pressure on the margins. And I think that there are certain markets, so we have said that everything East of Suez is very active, Middle East, India, China, very active. And then we have seen very low volume in Europe, actually, that is starting to pick up and we're seeing it, kind of, stable in the United States.

What we have seen recently is that there has been a slowdown in China. There's been a pickup in Europe, but from a low level. So it's too early to say what -- I'm actually optimistic about China going forward. I don't think it will slow down much further. But again, it's very much driven by the global economy and the global trade, what we -- I've given you my comments what we're seeing in STC. The volumes are still there. We're chasing that volume, but at a lower margin.

Is it fair to assume your effective TCE is the same for the COA book and spot now as your volumes are 50-50? Or how would you think the average spot rates versus the average COA rates? Can you quite easily say that the spot rates are still above the COA rates? But I think they're getting closer.

Jens, assuming that the conversation from MSC Flaminia will be $155 million, can you elaborate on the cash flow effects impact from taxes and insurance and expected a time line?

[Jens Gruner-Hegge, Chief Financial Officer]

So the $155 million represents the amount in excess of insurance coverage. We have previously, if you look in the annual report, had a provision for both the claim on the liability side and the recovery from the insurance providers on the asset side. These are pretty balanced. So the $155 million is what we now think will come in excess of the insurance available. The cash flow will be determined by when this becomes payable and again as Niels said, we don't really want to comment too much on that. But we are sitting as you have seen with the liquidity available.

Then subsequently, we will get tax credits -- deferred tax credits that would benefit the cash flow from a cash tax perspective in future periods. So first, you have whatever settlement amount there will be once that quantum has been decided and then later on we will get the tax credits.

[Niels Stolt-Nielsen, Director and Chief Executive Officer]

Okay. How much capacity do you expect to add at the New Orleans and Houston terminal? Are these backed by contracts from existing clients? Should we expect utilization to stay in the high-90s? And the margin does remain as strong as they are?

So we are adding approximately 150,000 cubic meters in combined Houston and New Orleans. I would say that the market is quite strong both in those areas. It takes a while to build them, but yes, you should expect the same, kind of, margins and the same utilization as we deliver and the tanks are ready. We do not have -- we have a lot of leads and have a lot of interest, but we have not contracted out that capacity yet.

Does the ambitious CapEx program and now Flaminia hit reduce your Stolt-Nielsen Venture program? The stakes in Odfjell and Golar, any update there?

No, they do not. As I stated, it does not change our strategy. It does not change our growth ambition. And that is, kind of, it's horrible this ruling. I think I don't understand it, but we are working on it. But it kind of shows our strength that we've been able to take a hit like that and still be able to pursue our original strategy.

What are your thoughts on the spot rates going into the winter? Will the strong MR market have a positive impact? Are there any upside risk to Tanker's fourth quarter earnings compared to the Q3 guidance if spot rates covers the second-half?

Absolutely. I do expect a strong MR market. So I wouldn't be surprised that kind of the spot rates recover. And we have, as you see 45% of our spot exposure. So that kind of is -- will impact. We will be able to capture -- as soon as the market turns, we will be able to capture a bigger part of that quicker when you have more Stolt exposure. But remember, it takes a while for those, you know, you book it and then it takes about a month before -- they book it up to a month before, so it takes a while before you see it in the results. But at least with 45% spot exposure, we are able to take the benefit much quicker than the COAs.

Okay. That was a lot of questions, I think completes the number of questions. Yes, there is no other additional questions. I thank you for participating. I look forward to talking to you again in the third quarter. Again, thank you and I wish you all a good summer. Thank you.