ODJAF - Odfjell SE (ODJAF) Q4 2022 Earnings Call Transcript

February, 09 2023 03:26 PM Odfjell SE - Class A

Odfjell SE (ODJAF)

Q4 2022 Earnings Conference Call

February 09, 2023 3:00 AM ET

Company Participants

Harald Fotland – Chief Executive Officer

Terje Iversen – Chief Financial Officer

Conference Call Participants

Presentation

Harald Fotland

Good morning, everybody, and welcome to Odfjell's Presentation of our Fourth Quarter Results and our Preliminary Result for 2022. Today's agenda follows traditional pattern. I will present the highlights. My colleague, Terje Iversen, CFO, will present the financials, and then I will take over and give you an operational review, and I will conclude this presentation with a market update and prospects going forward.

If we look at the highlights for the fourth quarter, we are happy to inform that the firming chemical tanker market that we saw in the third quarter continued through the fourth quarter and concluded a very strong year for Odfjell. Our time charter earnings increased to US$187 million, up from US$171 million in the previous quarter. We delivered an EBIT of US$73 million compared to US$71 million in the third quarter. The net result was US$50 million, same as previous quarter, but if we adjust for one-offs, then the US$50 million compares to US$46 million in the third quarter.

We also saw contract rates increasing by 26% through the quarter and the net result contribution from Odfjell Terminals was US$0.2 million. This compares to US$8 million in the third quarter, but then we have to remember that the third quarter was heavily impacted by insurance proceeds in that quarter. We refinanced five vessels during fourth quarter and this refinancing reduced the cash breakeven for those vessels with approximately $3,100 per day. And finally, I'm very happy to inform that the Board approved a dividend of $0.61 per share based on the adjusted second half of 2022 results.

If we look at the 2022 in full, then we delivered a net result of US$142 million. And I'm also very happy to inform that despite the significant increase in the commercial activity, we still delivered safety, environmental and operational performance well within our set targets. We also see that our strong focus on cost efficiency and quality has positioned us to fully utilize the firming markets that we now see. The total dividend for the full year of 2022 was US$66 million.

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

Terje Iversen

Thank you, Harald, and good morning to all of you. I will, as normal, start with the income statement for the group for this quarter. And as Harald just mentioned, we saw an increase in the time charter earnings this quarter from US$171 million to US$187 million. That was despite of actually a decrease in the gross revenue because we had fewer pool vessels in this quarter compared to the third quarter. And we also had less bunker surcharges in the fourth quarter due to lower bunker expenses. So seeing that the time charter earnings increased US$50 million is down primarily due to the improved spot market, but also due to the improved contract of affreightment during the year so far.

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

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

Then we have an EBITDA of $112.8 million compared to $111.6 million in the third quarter.

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

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

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

Also mentioning that for the terminal side, we had revenue this time according to the equity method, included here with US$0.2 million compared to US$7.6 million in the third quarter, reason being that we had these insurance proceeds that impacted results in the third quarter with around US$5.6 million and positively. And also this quarter, we had some challenges in the U.S. due to the freeze and that led to a decrease in the earnings and also some extraordinary cost items were related to repair and maintenance in the third quarter – in the fourth quarter, leading to a slightly reduced results adjusting also for the insurance proceed in the third quarter.

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

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

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

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

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

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

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

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

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

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

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

Going forward, as we have indicated earlier, we have limited CapEx plans, meaning that if we continue to deliver good and solid operational cash flow, there are expectations that also then the free cash flow should be quite strong going forward based on the fact that we have very limited investments and CapEx for the coming quarters.

Here’s a slide showing how our debt has developed actually the last two years. We have reduced our debt by around US$257 million in the last eight quarters. And we have, out of that, US$174 million is scheduled installments. And we have done extraordinary debt repayments due to a strong cash flow of US$83 million during the same period.

And we used a lot of debt cash also to reduce our kind of the volume that we have launched through the revolving credit facility that we have available today. Over the same period, if you include the dividend to be paid in February next year – this year, the total dividend is $74 million compared to the $257 million that we have reduced our debt with.

Also worth noticing that all our new debt since December 2020 is sustainability linked and is based on the sustainability linked framework that we established early 2020 with a new bond issue we did at that stage. As I said, we are close to just shy of US$1 billion in interest-bearing debt.

If you analyze and look at the EBITDA, we are then at 3.2 times EBITDA and debt levels. And if you look at the debt compared to the value of our vessels using indicative market values from brokers, we have a long-term value for our total balance sheet of around 63%.

Going forward, we have not that much of debt maturing in the coming quarters. I would say, into third quarter 2024, we have a large balloon maturing. Except for that, we have the bond that is maturing in September.

As I mentioned, we have a very strong free cash flow this time around. And going forward, we will have to evaluate whether we are going to do a new issue or we are just going to redeem the loan at maturity without issuing a new bond or doing a debt. But that is something that we are considering.

And of course, we will follow the market and try to time that in case we should do a new issue. We have done a lot in the last few quarters to reduce the cash breakeven. And as I mentioned, the refinancing we did, that took down our leverage with around US$10 million and also reduced the cash breakeven for those five vessels with around $3,100 per day.

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

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

Harald Fotland

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

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

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

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

And on that basis, we say that the fundamental outlook for the tanker market on the contract side remains solid. We have no further vessels scheduled for redelivery in the near future. There has been a strong focus on contract renewals during the past two quarters. And for that reason, we decided to include some additional information on our contracts. We have a portfolio of approximately 100 contracts, and fully utilized those 100 contracts will include approximately 9 million tonnes. It’s also important to observe that these 100 contracts include more than 2,000 contract obligations.

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

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

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

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

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

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

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

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

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

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

We have two ongoing expansion projects. The funding is done locally in the joint ventures. At our Antwerp Terminal, we are building a new tank pit that consists of six tanks, 36,000 cubic meters. And at the terminal in Houston, then we are building Bay 13, which is six carbon steel tanks and three stainless steel tanks and the total capacity is around 32,000 cubic meters. Both these expansions are funded locally. They are on schedule, and we expect them to be operational in the fourth quarter of 2023.

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

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

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

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

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

We saw signals of – there was a tight energy supply in Europe. But this also seems to be easing up partly thanks to Walmart and then average winter in Europe. The political instability remains high, and we do believe that the import – the EU import and of Russian products will have an effect. So the effects that this will have on the chemical tanker market after the third quarter, we reported that we saw some reduction when it comes to the production of chemical products. We are not that pessimistic now. We see signs that the production is picking up partly due to reduced energy prices.

And we see that the trend that we reported in the third quarter – after the third quarter with longer trade hauls that trend is continuing. So we believe that on the demand side, that will be sufficient production, and we believe that the trend of increased distances will continue. On the supply side, we also see a positive picture. There are no new orders of chemical tankers and we see a continued stagnation of the fleet. We do see that swing tonnage is remaining outside chemicals and in CPP. We continue to see a trend that older chemical tankers are being sold to for regional trade, particularly in the far East. And we do see that – we do not see that the average fleet speed is increasing.

So all in all, we believe particularly on the supply side that there are – that we will see a positive trend in 2023. To summarize this presentation, we saw that the good trend in the third quarter continued into the fourth quarter, and that concluded a strong year for Odfjell. These strong market conditions support us during contract renegotiations, and we have a positive view on the contract renewals ahead of us.

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

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

Question-and-Answer Session

A - Unidentified Company Representative

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

Harald Fotland

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