ODJAF - Odfjell SE (ODJAF) Q1 2023 Earnings Call Transcript
2023-05-06 22:10:43 ET
Odfjell SE (ODJAF)
Q1 2023 Earnings Conference Call
May 04, 2023, 03:00 ET
Company Participants
Harald Fotland - CEO
Terje Iversen - CFO
Nils Selvik - VP, IR
Conference Call Participants
Presentation
Harald Fotland
Good morning, everybody, and welcome to the presentation of Odfjell's first quarter results. This presentation follows a traditional pattern. I will present the highlights. My colleague, Terje will present the financials, then I will give an operational review of the quarter behind us, and we will conclude this session with a general market update and prospects going forward.
Then going to the highlights. The firm chemical tanker market that we saw in 2022 continued into the first quarter. Our time charter earnings ended at $181 million, and this compares to $187 million in the fourth quarter 2022. We produced an EBIT of $68 million, which compares to $73 million in the fourth quarter.
Our net result was $47 million. This is slightly lower than the fourth quarter, and net result adjusted for one-off items was $46 million compared to $50 million in the fourth quarter. Our contract rate renewals were up 32% on average, and this covered 35% of our estimated annual contract volumes.
The majority of these contracts were concluded towards the end of the quarter and therefore had limited impact on earnings in the first quarter. The net result contribution from Odfjell Terminals increased to $2 million. This compares to $0.2 million in the fourth quarter. This was primarily due to firmer activity levels, higher tank lease rates, and increased commercial occupancy rates.
During the quarter, Odfjell has taken delivery of one new building. We have on time charter; we have declared two purchase options on chartered in vessels. We have also signed two additional Japanese long-term leases. And we concluded the sale of J19 that will be delivered during the second quarter of 2023.
The proposed deletion of treasury shares was concluded and approved at yesterday's Annual General Meeting. And by that, I conclude the presentation of the highlights and give the word to Terje to present our financials.
Terje Iversen
Thank you, Harald. I would done as usual, start with the income statement this quarter. As you saw and also Harald explained, we saw a time charter earnings decreasing somewhat this quarter and at $181 million compared to $186 million in the fourth quarter.
We saw that the volumes were marginally up, how will we come, more back on that. But the main driver behind the slightly reduced time charter earnings is that we saw a softer spot market, we have 2 days in this quarter compared to the fourth quarter.
Operating expenses, quite stable compared to the fourth quarter in the 49.5%. Even though it was a bit higher than we expected, we had some more cost on technical accounts this quarter than we expected but even though quite comparable to the fourth quarter.
Share of results from joint ventures ended at $2 million, up from $0.2 million. I would say that we are more or less back on track for terminals without the results because we had some one-offs, negative effects in the fourth quarter that impacted the result then and we are more kind of delivering results as expected in this quarter.
G&A ended at $18.6 million, down from $19.7 million in the fourth quarter. Main reason for the decrease is that we had some additional costs in the fourth quarter that did not reoccur in the first quarter.
Then we ended with an EBITDA of $110 million compared to $112.8 million in the fourth quarter. Depreciation, slightly up because of delivery of new vessels under that $41.7 million, and that leaves an EBIT of $68 million compared to $73 million in the fourth quarter.
Net expenses decreased from $22.4 million to $21.6 million. Main reason for the decrease is that we had some additional financing costs in the fourth quarter, did not reach deduct in the first quarter. So we are more on kind of expected level, I would say, in this quarter.
After other financial items and taxes, we are then left with a net result of $46.7 million. And if you adjust for nonrecurring items being the other financial items, we have adjusted net result of $46 million compared to $50 million in the fourth quarter.
Time charter earnings per day, quite stable compared to the fourth quarter ended $30,818 slightly decrease of 3% compared to the fourth quarter. Even though it's well above our annual cash breakeven, which for fourth quarter, $23,673 per day, which also is very much the same level that we expect for the coming quarters.
We saw a slight decrease in the cash breakeven this quarter. But even though we see that we are on a higher level than the last 12 months rolling, which is $23,147. Main reason for that is that we have seen the increase in interest in the market that, of course, is impacting our cash breakeven.
Looking at the balance sheet. Most interesting to note is that we saw an increase in right of use of assets as we took delivery of one vessel on time charter in the first quarter. And we also set a notice of exercise of person option for one charter in vessels that will be delivered later this year. So that increased from $208.7 million to $263.3 million this quarter.
On the cash side, we see a decrease in the cash from $117.7 million to $86.2 million. Main reason is, of course, that we have paid dividend this quarter of $48 million and if you add undrawn loan facilities, we have available cash around $150 million.
Other current assets increased this quarter, main reason being that the working capital had a slightly negative development, and that is, of course, something you see vary from quarter-to-quarter. Equity ended at $688.6 million, slightly down, even though we'll deliver positive results. Of course, we paid a dividend, impacting the equity ratio. But even though we think we have a quite solid balance sheet compared to where we are some years ago.
On the debt side, we saw a lot that deliver of the new vessel on time charter and also the purchase price by the auction has then been classified as short-term debt and has increased both current debts right of use of assets and also a noncurrent right of use of assets this quarter.
Cash flow statement. We saw that the operating cash flow decreased from $86 million in the fourth quarter to $71 million in this quarter. Of course, slightly impacted by the negative development in the net results, but main reason being that we had the increase in working capital this quarter, which is something that could easily kind of very back or fluctuate back in the next quarter. So that depends on the closing date for the balance sheet, what is then receivables and payables at the end of the quarter.
So then we're left with cash from operating activities at $71 million, looking at investing activities. We have then paid for the one vessel that we took from our time charter portfolio and acquired. So that is included in $28.7 million in addition to drydockings and also investments in the quarter. And then after the other, we had a negative cash flow from investing activities of $39 million this quarter compared to $9.8 million in the preceding quarter.
On the debt side, most interesting to note is that we took a loan on a new vessel that was delivered, a time charter vessel of $14.4 million. And if you include the payment of installments on our debt and also repayment on the lease debt and dividend, we had a negative cash flow for financing of $73.4 million.
Leading to the kind of the cash going from $117.7 million to $86.2 million end of this quarter. But as mentioned, if you include under our loan facilities, we have around $150 million in available cash.
If we look at the free cash flow on a longer-term basis, we see that this quarter, we had a positive cash flow of operation, as I said, that $71 million, a negative from investment, and $29 million, and that leaves us with a free cash flow of $42 million this quarter.
And if you look at the 12-months rolling, we are at $66 million. And also if you adjust that for repayments related to right of use assets, it's reached $49 million compared to $51 million end of the fourth quarter.
We used the free cash flow in this quarter to paying a dividend and also scheduled debt repayments on our debt. And as I said, we also had a negative impact from the working capital, which increased with $12 million in this quarter.
Going forward, we have limited CapEx. As I mentioned, we have declared a purchase option for one vessel to be delivered in third quarter, and that will be, of course, financed externally. Besides that, we don't have any material CapEx commitments, meaning that if we continue to deliver strong financial results, that should also lead to a strong continued free cash flow going forward.
Looking at the debt maturities, we have some I would say, a nice portfolio of loans maturing going forward. We have that, of course, on the agenda, and we see that we have a strong interest for banks and leasing market. So we don't see any issue with the refinance those. It's quite opposite. We see an opportunity to continue to get more competitive financing cost for our balance sheet.
Worth noticing the bond that is maturing in September this year. Our game plan is still to repay that based on the cash from our balance sheet. And that is in line with our final strategy to reduce debt and also reduce the average cost of capital. We have also noted here that our refinance may be considered if terms are attractive. But as I said, based on the situation today, we will most likely see with that based on the cash we have available.
Looking at the debt development forecasted going forward. We have nominal interest-bearing debt around $989 million this quarter, including derivatives on our bonds. And that is projected to decrease to around $160 million end of 2023, which is well below our target, which was set to $900 million a few years back.
And I think I will leave it over to you again, Harald.
Harald Fotland
Thank you, Terje, and I will continue with a review of our operational performance during the quarter behind us. If we look at the ODFIX index versus the Clarksons spot index, then we saw that the ODFIX increased by 1.1%, and during the same period, the Clarkson index decreased by 0.8%.
Our core activity is the transportation of specialty chemicals, and we continue to renew these contracts at healthy increases, and we also saw solid contract nominations during the quarter.
Easy Chemicals. Here, we saw a somewhat softer market and particularly in the markets east of Suez. We saw an increase in the share of vegetable oils and the biggest contributors here were soybean oil and UCO or used cooking oil.
CPP is mainly used in Odfjell for repositioning of our vessels, and we saw a further reduction of our involvement in the CPP market during the quarter. As previously mentioned, our contract coverage reached 49% after an increase of contract volumes of approximately 200,000 tonnes. That's an increase of approximately 3% compared to the fourth quarter. Our contract rate renewals increased by 32% in the quarter, and we renewed approximately 35% of the estimated annual contract volume.
The strong demand from our charters, combined with limited new orders, provides a solid outlook for the chemical tanker segment going forward. I'm also very pleased to inform you that for the first time since we started reporting our carbon intensity, we are, this quarter, reporting a reduction in our carbon intensity of more than 50% compared to an Odfjell baseline of 2008 at 15, we had now down to 7.4 in the first quarter.
By that, we have reached our 2030 target to reduce our carbon intensity by 50%. That does not mean that we will not continue to reduce our environmental footprint. We have initiated several products that we believe will further reduce the AER or the carbon intensity, and we hope to roll out these projects either by the end of 2023 or early 2024.
This slide shows the transition of the Odfjell fleet over the past 8 years and what you can see here is that we have divested or exited regional trades. That segment is down to a minimum. We have also sharply reduced our exposure to the 19s. And at the same time, we have seen a similar development on the J25 where we have seen a sharp increase in number of vessels. And that's also where the majority of our future deliveries will be centered.
We've also seen an increase in the large stainless steel tanker segment, and we have seen an increase in the super segregator segment. At the same time, we have discontinued all our coated pools. On the terminal side, first, with our financial performance. Our portfolio experienced a quarter-on-quarter EBITDA increase of $1.2 million. This is mainly related to an increase in commercial occupancy and tariffs and also nonrecurring costs in the fourth quarter that we didn't see in the first quarter.
When it comes to market development, our terminals in Antwerp and Charleston ended the quarter with an average commercial occupancy rate of 100%. This is in line with previous quarters. Our terminals in Houston and Ulsan experienced a quarter-on-quarter increase, and the average commercial occupancy rate for terminals ended at 97.2% in the first quarter, and this compares to 96.1% in the fourth quarter.
The demand for terminal storage remains strong. This is partly due to European and U.S. producers securing storage to improve the security of their supply chains, and we expect the commercial occupancy rates to remain resilient for the remainder of this year.
Compared to the same quarter last year, throughput was moderately -- where throughput was stable compared to the previous quarter, but it was moderately down compared to the first quarter of last year. We do see that the macroeconomic and geopolitical situation for 2023 is uncertain, and we remain vigilant with respect to the activity levels going forward.
I would also like to point out that we have two tank pits under construction, one at our terminal in Houston, and we have on tank bit being constructed at our terminal in Antwerp. Both those terminals are expected to be completed within 2023, and are financed through the local balance sheets.
Then we will continue with a general market update and our prospects for the quarters going forward. The Atlantic, we start with the markets west of Suez. And here, we saw that the Atlantic market continued on a strong trajectory, leading to a sustained growth trans-Atlantic, but we also saw flat rates from the U.S. Gulf down to South America. The trail lanes to Asia weakened and we saw a reduction in the trade from the U.S. Gulf to the Far East and also with vegoils out of Argentina.
We saw a reduction in rates east of Suez. But here, we have to expect to remember that this is a reduction from historically high rates. We saw improved rates in the Far East-U.S. Gulf Lane. This was partly due to stronger chemical demand in the U.S. compared to the Asian markets.
We also saw a spillover effect from reduced CPP earnings east of Suez and that decline spilled in onto the chemical tanker markets. We continue to see that swing tonnage is swinging out of chemicals and into CPP.
Since the end of last year, at that time, the percent of product tankers lifting chemicals was approximately 8%, and it's now down to approximately 3.5%. If we look at the order book, we see that we today have an order book, which is approximately 4.5% of the current fleet. We also see that the average fleet is 13 years and 16% of the total fleet is already 20 years or older. The order book for the larger segment is presently extremely low.
External factors impacting the world's demand for liquid chemicals. We see that the inflation rates and interest rates are still impacting consumption. There is a slow economic growth, but there is still a growth. There is still political instability, and we also see that there is a tightening oil supply. We see that an improvement of the energy markets in Europe. We did see during the first quarter that the EU import ban on Russian CPP and crude oil had an impact. And we now see that a slow reawakening of China.
On that basis, we do expect that the demand outlook will be stable. There will be stable production, and we also believe that the tonne mile production will be stable. On the supply side, we continue to see a negative fleet growth. We continue to see that swing tonnage is swinging out of chemicals. We continue to see that older chemical tankers are being sold and deployed in trades outside our core markets. And we also see that the IMO regulation is effectively introducing a speed cap for vessels trading internationally.
And to summarize this presentation. When it comes to our results, we saw that the firm market seen in 2022 continued into the first quarter despite the fact that we saw slightly weaker spot conditions east of Suez. Odfjell tankers delivered strong earnings at the back of higher contract volumes lifted in the quarter and also continued increases in our contract renewal rates. We expect these two factors to continue to support earnings in the coming quarters.
Odfjell Terminals, here, we had a net income from our terminal business that was back to normalized levels, and these were showing positive developments in the first quarter compared to the fourth quarter, which had a temporary business interruption in the U.S. due to extreme weather.
The market outlook, we believe that supply and demand fundamentals will remain favorable, and that will support the outlook for a firm deep sea chemical tanker market in 2023.
Although we have seen a slightly slower spot market is still at healthy levels, and we continue to renew our contracts with at favorable terms. This should translate into time charter earnings in the second quarter, which are in line with or slightly above the first quarter.
Before we turn to the question session, then I would like to remind you that Odfjell is inviting you to the Capital Markets Day on the 22nd of May in Oslo from 10AM to 1PM at the Hotel Continental. If you want to attend this session, please report back to my colleague, Nils Selvik, not later than the 18th of May. And we sincerely hope to see you there in a couple of weeks' time. And then Nils Selvik.
Nils Selvik
Yes.
Harald Fotland
Are there any questions?
Question-and-Answer Session
A - Nils Selvik
There are a few questions... I think the first question goes to Terje, and it's a question about our TCE breakeven target. We showed a TCE breakeven target of $19,500 per day compared to a range of $18,000 to $19,500 per day last quarter. Is there a reason for this difference?
Terje Iversen
Good question. As I said in the presentation, looking at our cash breakeven, we have seen that has gone up somewhat in 2022 and also in 2023. Main reason being that LIBOR, the interest market -- in the market, LIBOR so far has increased quite substantially. And also we see partly inflation on both OpEx and also partly on G&A.
So I think it's still doable for us to reach that target that we set a couple of years back, but it may take longer time. But what is important, I think, is that we just continue to reduce our debt, and we have done that quite substantially; reduce our debt and also refinance that at more competitive levels. And I also think we have been quite successful in that, and we will continue with that.
And whether we have to reset our cash breakeven target at some stage that may happen because of the, as I said, the inflation and interest levels being higher, but we are still working kind of towards that original target that we set a few years back.
Nils Selvik
So a question to you, Harald. We have reduced our emissions for our fleet significantly over the last couple of years and illustrated well in this quarter by a more than 50% reduction now of our AER compared to 2008 IMO baseline. Is it possible to reduce further without addressing speed?
Harald Fotland
Yes. First, I would like to say that this is a milestone in Odfjell's history. We have reached a target that we set some 8 years ago. The target was supposed to be met in 2030 and now in 2023, we are already touching the limit that we defined. The commitment in Odfjell to improve our environmental footprint is impressive and although we have reached this target, we are still determined to reduce our fuel consumption even more.
We have initiated a couple of very interesting projects. We hope to roll those projects out, hopefully, by the end of 2023, maybe it would be early 2024. I am very positive that we will further reduce our carbon intensity. So the answer to that is yes.
Nils Selvik
Excellent. The next question goes to you, Terje. As we announced in the presentation and in our report, it has been decided that we will delete most of our treasury shares. At the same time, we retain the ability to purchase our own shares up to a maximum of 10%. What is the motivation behind this?
Terje Iversen
I think we were close to 10% of our total shareholding with our own shares, and it has been all the intention for a long time to terminate or delete those shares. But we have kept them for a while for kind of more contingency measures.
Today, we don't see any reason for that. So we have decided to lead them, that was approved by the general assembly yesterday. So it will be factored in 5 or 6 weeks, I think. And then we asked for a new authorization to buy up 10%, as you said.
And the reason for that is we are not planning to start any buybacks out in the market, but we want to have the flexibility if you see any good opportunity at some stage. But as I said today, we don't have any plans to use that authorization.
Nils Selvik
Okay. Good. The next question just came in here. I think this goes to Harald, and it's on our COA portfolio. And the question is; as most of the renewed Q1 contracts where we renewed in the latter part of the quarter, when will we see full effect of these in our TCE rates, second quarter, third quarter?
Harald Fotland
Some of these contracts took effect already from the 1st of April. And then I think we will gradually see that those contracts are kicking in, I would say, through the second quarter. So by 1st of July, I think that all those renewals will be in effect in our fixtures.
Nils Selvik
Yes. Excellent. I think there's one final question here, and it's a bit more general, and I think this also goes to Harald as it sort of touches on our outlook. And as we have presented today, the outlook is solid. But at the same time, what are our biggest concerns these days.
Harald Fotland
I will start with the positive side. We have an extremely favorable supply situation. There are hardly any new buildings coming up and we also see that the time period for a new building to be contracted and to be delivered is probably 2 to 3 years before those vessels come into the market. So we have a favorable supply situation and that supply situation is relatively predictable.
The uncertainties related to the demand situation. But also here, what we have seen during previous recession periods and previous periods with low global activity. We have seen that the chemical tanker market has been, I would say, much more resilient to those changes than what we've seen from other vessel segments.
So our base case is that we will have a stable demand situation. We might not see any big increases, but it will be stable. And that, in combination with the supply situation that we see that turns into, in our view, a positive outlook for the chemical tanker segment.
Nils Selvik
Very good. Thank you.
Harald Fotland
Thank you.
Nils Selvik
I think that concludes the Q&A. Thank you.
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Odfjell SE (ODJAF) Q1 2023 Earnings Call Transcript