Klaveness Combination Carriers ASA (KCC) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the fourth quarter result presentation. And my name is Engebret Dahm. I'm the CEO of the company. Together with me, I have Liv Dyrnes, the CFO. As normal, we take questions after the presentation. You can put in your questions on the webcast solution. So we are an owner of 16 combination carriers that are both product tankers and dry bulk vessels. And now in tanker mode, they compete against LR1 and MR product tankers, and on dry mode, they compete against Panamax and Kamsarmax dry bulk vessels. So our fleet reduces waste and inefficiencies in our main trades to South America and Australia, where the standard tankers and dry bulk vessels sail long distances without cargo on board. So combining the cargo normally transported by a tanker and the cargo normally transported by dry bulk vessel, with reduced -- with ballast being 1/4 or 1/3 of the standard tankers and vessels, we reduced the carbon footprint by 30% to 40%. KCC has been around now for 5 years, and I can tell you, it's been an exciting, and in the start, a fairly challenging voyage. We took delivery of 8 CLEANBUs, the new generation vessels, partly during in the COVID period, which led to delivery delays, and we had our share of teething problems. It also took some time to convince skeptical customers in the demanding product tanker market. And the market was pretty bad, expect for some blips in the tanker market and until the recovery in the dry market during the spring of 2021. So coming into the end of 2021, we have started to harvest the hard work we have been doing, and we have managed to get a pretty wide acceptance of our CLEANBU fleet into the CPP market. We have improved our CABU trading. We have also got the good support of a strong dry market last year and a very strong tanker market from the spring of last year and which lasts up to today. So the company today stands as a financially strong company, being well positioned for what we believe is exciting shipping markets, and well positioned for taking the lead in the progress to low carbon shipping. We have from the start told you that we will deliver out 80% of our free cash flow as dividends to the shareholders. In 2022, we -- including the dividends for fourth quarter, we have paid out close to $53 million in dividends, which accounts for around 87% of the earnings or the cash flow. So we continue to deliver what we promise. So starting up with the fourth quarter. It's been a very volatile quarter in the markets we trade. Dry market has continued to weaken during the quarter. The pro tanker market boomed in -- from end November and December, falling back again in January. The fuel markets continued to decrease somewhat, but still are at high levels. The time charter earnings for the quarter is the second highest in our history. We ended at an average $31,500 per day, which is at the upper range of the guiding. This is 2x the earnings of standard dry bulk vessels, but 20% lower than standard -- the spot market of standard product tankers. The results are strong, somewhat lower than in the third quarter, mainly due to the temporary lower CLEANBU earnings and slightly higher OpEx and SG&A. The Board has decided to continue the high dividend distribution at $0.30 per share, giving around 15% running yield with yesterday's close share price of SEK 80. We have, as mentioned, ambition to be a leader in low carbon shipping. And over the next years, we'll focus on improving the efficiency throughout our organization. We have a pretty efficient operation here, showing the -- our business into South America, where we go with sugar and grains [ out of shore ] of South America into Middle East and India, and we take CLEANBU petroleum products back again to South America. There are still potential to improve, and we're working together with customers to reach a further excellence in this operation. We are putting a lot of resource into improving the voyage execution, and an important part of that is how we are digitizing our vessels, by putting on board better tools for our crew to run the ships, better data, and will make it possible to get a better follow-up from shore. We have a quite ambitious energy efficiency program where we are investing in several -- and, in fact, up to 15, 16 different energy efficiency measures on our vessels, on our modern ships likely to invest something around $4 million per ship over the coming years. And we're seeing the effects of what we're doing in the emission results we are presenting. The CO2 emission fell by 5% in 2022 compared to 2021, reaching close to our target of 25% production compared to 2018. We also show in total a 7% improvement in the carbon intensity from 2021 to 2022, but still falling short of our 25% target from 2018 to 2022. We are about to complete our revised environmental strategy, where we'll give you more insights. We'll present this the 29th of March. So please stay tuned. We have a diversified earnings base in our company where our earnings are from a tanker market, the dry market, and we also have a positive effect from our efficiency and the benefit from higher fuel prices. If you look historically, we see that these 3 markets move in different directions. And looking here first on the dry market, this is the Kamsarmax spot earnings, peaking in October 2021, falling with some ups and downs, down to $7,600 per day yesterday. We see the opposite direction of the pro tanker market. This is the 11 pro tankers that, from the spring of last year has kept at very high historical levels. And as you see in the end of last year, the boom reaching up to $70,000 per day, falling back again in January, but is now yesterday up again to more than $40,000 per day. And then if you add on the top the fuel prices that peaked last spring, that has kept at high levels, you see the positive diversification effect of having earnings from 3 different markets. Look, starting up with the dry market, the demand -- dry bulk demand measured as deadweight miles has flattened out in the second half of the year, after a very strong growth in the first half of 2022 and 2021. The main reason for the lower and weaker dry market is the release of capacity from port congestion, that has substantially increased the effective fleet growth in the dry market, as you see here from the line. So in fact, over the last 8 months -- 8, 10 months, we have, in fact, around 10 percentage point increase in supply in the market. The dry order book is still at high level -- is low levels, at around 7.6%, and the estimated fleet growth is around 2% for this year. To get the dry market to be more exciting, we need strong economic global growth. We need a higher industrial production. And this graph show you the -- in blue, the Purchasing Manager Index globally adjusted for trade flows in the dry market, measured against the Baltic Dry Index. You see that both has fallen quite a bit. The Purchasing Manager Index has fallen below the inflection point between expansion and contraction, but has flat note, which gives some hope that we could be over the worst. But the dry market, we are dependent on what's happening in China, and the recent opening gives quite a bit of hope for optimism. But we believe that the poor condition of the property market still will be a drag on the demand from China. Here you see the right curve, which is the start of construction projects in the property market, falling down substantially over the last year. It's been starting to flatten out. And what's quite interesting to see in the blue line is -- which is the sale of excavators, which has been a good early indicator of what's happening in the property market in China -- is that there could be some upside potential also in the property market over the coming months. Looking into other parts of the economy in China, we see more clear and solid signs that the Chinese economy is recovering. We see them air travel, and this graph shows again the spectacular rise in metro passenger volume over the recent months. So in totality, we're optimistic for the dry market. There will be a seasonal upturn during the spring, and we are optimistic that we'll see added further [ post-factor ] in the second half. So looking at the tanker market. We believe there still are very strong fundamentals in the market. We are seeing how the demand in blue and the total supply in white, which are recovering back to the pre-COVID levels. There has been some lower demand in the oil markets over the recent months due to low economic activity. We are seeing that -- in the darker line that the stock levels have increased through 2022, and the dot in -- to the left shows you the current position being in the middle of the historical range of pre-COVID. The order book is historically low at around 4%, and we expect fleet growth in the pro tanker market of 2% to 3%, assuming no scrapping in the very strong dry market this year. What's critical for the tanker market is what's happening in Europe and the EU span on Russian crude and oil product imports. So an expectation of the ban on Russian product imports, which kicked in last week, Europe has gone through a frenzy in importing diesel and other oil products. You see it here from the graph, the peaking here in the summer and falling back considerably in early part of this year, which partly explains the downturn in the tanker market seen since New Year. And that has led to increasing stock levels in Europe of oil products, gas oil. And you see the green line to the left showing the increase, which has probably increased further from what the data suggests here. Actually, it has led to that Europe has been becoming a net exporter oil products in February. But fundamental challenge or potential for the dry market -- the pro tanker market, is of course, that the substitution of Russian oil imports, which are [indiscernible] products from the Baltic, with longer haul products import from Middle East, U.S., Gulf and possibly from the Far East, will have an effect once the current high stock levels will fall down, which will have a substantially positive effect on the total demand side through longer ton miles, longer distances, which could have a positive demand effect of close to 10%. So then going over to where we are as KCC, we have -- looking here on the fixed rate tanker coverage in percent of total capacity. In the first quarter, if you add the index-linked contracts and what we are about to fix now over the coming week, we are pretty much fully booked both on the tanker side and the dry bulk side. For the last 3 quarters of the year, we have booked caustic soda contracts for the CABU fleet, accounting around 33% of the total tanker capacity of the KCC. We have deliberately captive fixed rate coverage for the dry bulk market low, and expectations of a stronger dry market. And we have only booked 5% of the capacity on fixed rate contracts. In addition, I would like to mention that we have a number, index-linked contracts where the freight is set to go into market indices. We have the caustic soda contract, CSS, marked here, and clean petroleum contracts, in totality accounting for around 20% of our capacity. Also dry bulk index-linked contracts account for more than 20% of the capacity. So continuing with earnings, we have, over time, shown that we can outperform the standard dry bulk and pro tanker spot markets. In 2022, we had an average earnings of $29,760 which is in total more than $8,000 higher than in 2021, outperforming dry markets with 1.4% and matching the pro tanker spot market and a very high pro tanker market. Looking on the CABUs, we had a very tight schedule towards the end of the year with the high caustic soda volumes and also continued port inefficiencies that led to 2 ballastings of cargos from Australia to the Far East, impacting the days in combination trade and increasing also the ballast. But that also reflects that we have a higher share of the capacity in the tanker market for the CABUs in the fourth quarter. The earnings for the CABUs ended at $25,760 per day, which is 1.7x the dry bulk market, but 30% under the MR pro tanker spot earnings. The difference towards the MR pro tanker market is due to the fact that 70% of our tanker days was fixed on fixed rate contracts concluded before the market upturn back in the fourth quarter of 2021. So the reason for the lower earnings is a lower dry -- lower, weaker dry market, but also partly impacted by lower trading efficiencies. And looking at 2022, the CABUs earned close to $26,800 per day, which is $5,200 higher than in 2021, matching the MR spot market in 1.3x the dry market. We have, as mentioned, booked quite a bit of caustic soda contracts at very high levels before Christmas. Now we are counting for 75% of the total tanker capacity of the CABUs. That is a record high booking and increasing market share in our trades for the CABUs to Australia. The [indiscernible] were fixed at a record high, and how we're trying to illustrate in the blue upward pointing line is the 12-month MR tanker time charter market. And the circles indicate the timing when we booked the contract for 2022 at the end of 2021 and the booking -- timing of bookings for the 2023 contracts at the end of 2022. And we see the very strong development in the 12-month MR tanker -- 12-month time charter market, giving the reason why we have managed to improve the earnings for the booked fixed rate contracts by 2.5% from 2022 to 2023. So this very much higher earnings on our caustic soda contracts will create a very solid base for our CABU business over the coming year. Over to the CLEANBUs. We continue to work to improve our CLEANBU business further. And we were pleased, yesterday to announce a 3-year contract with Hyzon, a Brazilian energy company being a world leader in bioenergy and renewables. So we'll transport sugar from Brazil into -- amongst others, Middle East and India and will transport clean petroleum products back again into Brazil and Argentina. With Hyzon, we have found a partner that shares our connection that we need to be a leader in the transition to low carbon world and a low carbon shipping. We'll work closely with Hyzon to improve the efficiency of our business, matching inbound and outbound shipments for Hyzon, and find any way we can to improve the efficiency of our business. The CLEANBUs have had a pretty good quarter with a high proportion of the Raizen combination, and a much reduced ballast percentage. The share of the capacity in tanker trade fell from 72% in the third quarter to 49% in the fourth quarter, just as we explained when we presented our third quarter results in November. This is a natural variation between the quarters due to the positioning of the fleet, and you should basically look at these 2 quarters in a total context. So looking at the earnings. The earnings ended at $36,800 per day for the CLEANBUs, which is somewhat lower than the third quarter, mainly due to the temporary lower share of tanker trading for the CLEANBU fleet, and also somewhat weaker dry market. We're still outperforming the dry market by 2.2% and are gaining 80% out of the booming LR1 pro tanker market. As a totality for 2022, we had earnings of $32,600 per day for the CLEANBUs, which are matching the very strong LR1 tanker spot market for the year, and also outperforming standard Kamsarmax by 1.5% in the year, which, as a totality was a pretty strong dry bulk year. So we are very pleased with the earnings of the CLEANBU fleet. We continue to work to capture the most we can out of the very strong tanker market. And as mentioned, the average of the first and the second quarter of 2022 ended at 60% share in tanker trading, which is substantially up compared to the first half. And in the first quarter of 2023, we expect 85% of the capacity will be in tanker trading, which again, is what we call the normal variations between the quarter, but also indicates that we are working to increase the triangulation trading and we also increased the trading as a standard tanker, which will have a somewhat negative effect on the ballast performance of our fleet. We will continue to -- still to improve, of course, the efficiency of our combination trading. We are adding contracts. We have -- together with the Hyzon contract and the existing contract with BP, 25% of the tanker days of the CLEANBUs are fixed on index-linked contracts, and we hope to increase that further by 10% to 15% over the year. And these contracts secure that we can keep the ships in combination trading, a trade where we'll create value -- the most value for the company over time. I have to mention also that we are looking into other possibilities to capture value in the tanker market. We are looking into fixing one vessel on a time charter, which will be an exemption from our policy, our combination trading, but which will capture value in a strong tanker market. So Liv, then I'll leave it over to you.

Thank you. Then I will, as I usually do, go through some of the aggregated financials for the quarter, as well as 2022 in total this quarter. Adjusted EBITDA for Q4 ended at $28.1 million, a decrease of 18% Q-on-Q, and that's mainly due to the lower CLEANBU TCE earnings of approximately $8,200 per day in total, amounting to a change of $6 million from last quarter. The fleet utilization was somewhat higher in Q4 compared to Q3, a total positive effect of approximately $1.6 million. Operating expenses increased by $1.6 million. I'll come back to that on the next slide, while administrative expenses increased by $0.3 million, and that's mainly provisions for earlier quarters. Operating expenses per day for the CABU vessels for Q4 ended at approximately $9,000 per day. That's an increase of $1,800 per day from last quarter, and it's mainly due to an incident in Q4 provision for costs related to that incident, 40% of the $1,800 per day, and the remaining effect is timing of crewing and procurement. CLEANBU -- the OpEx per day for Q4, approximately $9,400 for the CLEANBUs, and that's slightly up from last quarter, approximately $350 per day. And as mentioned earlier, that's a volatility between the quarters, mainly related to crewing and procurement. If we have a look at the total numbers for 2022, you will see in the graph to the left that OpEx for the CABUs ended at close to $7,850 per day. That's a 2% increase from last year. The CLEANBUs, 8,790 per day, a 6% increase. The underlying operating expenses for the CABUs was quite in line with 2021, and hence, the change of 2% or the increase of 2%, that's mainly related to one-offs. For the CLEANBUs, the increase of 6% is due to 3 vessels ending their guarantee period as well as some provisions related to a guarantee claim. Unscheduled off-hire, 122 days in 2022. 70% of this relates to 4 specific incidents, where of 40 days related to COVID infection onboard a vessel. And we do not expect this to be relevant for 2023. If we look at the remaining 30%, that's 2.3 days per vessel, which is quite in line with what we expect for normal operations. The full P&L for Q4 shown here. If we look at the depreciation, as we have gone through the other items related to EBITDA, depreciation is up $0.9 million. And as mentioned in the Q3 presentation, this mainly relates to depreciation period for dry docking. Net financial cost down by approximately $0.8 million, which is mainly due to FX. Profit for the quarter, $15.3 million, a decrease of 30% Q-on-Q, but still a very solid quarter with return on capital employed of 12%. The entire profit for the quarter paid out as dividends to the shareholder, as Engebret mentioned, $0.30 per share as last quarter. The adjusted EBITDA for 2022 in total amounted to $107 million. That's an increase of 73% from 2021. CABU TCE earnings increased by $5,200 per day in total amounting to $13.7 million, and the CLEANBU TCE earnings up more than $12,000 per day, in total $30.6 million. We sold 1 old CABU vessel towards the end of 2021, and then we took delivery of 3 CLEANBUs in 2021. The net positive effect of this fleet change, approximately $5 million. Operating expenses increased by $2.4 million from '21 -- 2021 to 2022, as explained on the previous slide, and administrative expenses increased by $1.7 million. The latter is mainly due to bonus provision that is higher in 2022, as we have had a very strong financial result for 2022. It's also related to some less costs capitalized on the balance sheet as well as a higher activity level, and hence, a higher headcount. If we have a look at the table to the right, you will see that depreciation increased by $2.6 million. The net fleet change is quite limited, but the change there is then related mainly to the periodization or the effect of the dry docking period taken down from 4 to 2 -- to 3 years. Net financial items down by $1.1 million. The main change is related to the modification gain in 2022, partly offset by higher interest costs, and we also had some positive effects in 2022. Profit for the year close to $61 million, an increase of 170% from 2021. Return on capital employed, 12% as for Q4, and the payout ratio, including the announced dividends today, 87%, $0.101 per share for the year. Cash ended at close to $65 million at year-end 2022, a slight increase from the end of September. In addition to adjusted EBITDA, we had quite limited working capital effects for the quarter. Dry dock CapEx, $2.5 million, and debt service close to $11 million. Other financial items is mainly interest income, and then we paid dividends of $15.7 million. Available liquidity, close to $110 million, slightly down from last quarter, but this is due to the renewal of the overdraft facility that we renew every year. And we decided to decrease the -- or reduce the credit limit from $20 million to $15 million due to the very solid cash position. If we have a look at the trend over a longer period, you will see that both solidity and liquidity has improved considerably during the year. Equity ratio has increased from 40% at year-end 2021 to 46% at year-end 2022. In addition to a strong profit, we as well had positive other comprehensive income, but this is, of course, partly offset by the high dividend payments. The development in available liquidity is somewhat more limited, but still a very solid cash position to support our business activities. The refinancing of the bank maturity that we have in December 2023 is progressing as planned with favorable terms, but it's still subject to the final term sheet and credit approval. So we'll come back to an update on that later. Thank you. Engebret, then over to you again.

Thank you. So now this exciting part of this show where we look ahead and looking at the historical development of the 3 markets and the how the forward derivative market prices these markets. We are seeing that optimism on the tanker market in the white line, is shared by the forward markets in marked and dotted lines. The same is the case for the energy markets where we're seeing the fuel prices are capped at fairly high levels through the 3 last quarters of the year. While the dry market is fairly pessimistic in terms of the derivative pricing, there's an upturn during the spring, but it's fairly muted levels during the second half. We believe that the dry market -- forward market underestimates potential in dry market. And if we are right, we are facing 3 strong markets in KCC: the dry market, the pro tanker market and the fuel market, that will drive the earnings of our company and ensure that we continue the strong dividend payments and competitive yield to the shareholders. Based on what we already have booked, fell at high proportion, the first quarter of 2023 will be a very strong quarter. We -- the COVID earnings will increase to between $28,000 to $29,000 per day, which is $2,000 to $3,000 above the earnings over the last quarters. It's negatively impacted by the very weak dry bulk market, but supported by the very strong earnings secured on our fixed rate contracts for the year. The CLEANBU is back above $40,000 per day. I hope there are some upside potential here, and it's fueled by the strong tanker market and high tanker trading. So on average, we have earnings between $34,000 and [ $35,000 ] per day, which is $3,500 to $4,000 above the earnings in the fourth quarter. So this is a good start for the year, and we hope also that the coming quarters can show the similar development. So summarizing, we believe that in these periods where we have a very high volatility, as we saw last year, still high risks, both macroeconomic and geopolitical. Our concept proves its value. We deliver the lowest carbon emission shipping service through our efficiency, through the diversification effect of being in 3 markets and the solid contract base. We have lower earnings volatility and our efficiency secures that we deliver higher earnings than the standard markets over time. So that's why we believe that the KCC ASA is among the best investments you can do in the shipping sector and we strive to create value for our shareholders. Thank you.

So we have 2 questions today. So the first one is, when will we see the effects of CSS CABU bookings? It seems the first quarter guiding doesn't fully reflect this with USD 3,000 per day quarter-on-quarter increase for CABU.

That's right. As I commented, the first quarter results are negatively impacted by an extremely poor first dry market in the early part of this year, given that the CABUs only trade to Australia, that's also been, I would call the Pacific market. Dry market has been even weaker than average. So that's the main explanation with dry market. So when -- and also partly, there are somewhat lower caustic soda volumes in the first quarter compared to the average for the next quarters. That's another effect impacting the first quarter results. So that means second quarter, third quarter, first quarter, you can see better results for the CABUs, I am convinced about that.

Will you do more costs or stay in the spot market given the strong product market?

We will maintain a high share of capacity in the spot market. But as I mentioned, we aim to increase the share booked on index-linked contract for the earnings will vary according to the spot market, up to maybe 35%, 40%. But then we get the benefit out of the spot market. And then, as mentioned that we are considering to take one vessel out into the time charter market, but that will be limited to that single ship.

So one more coming in. Regarding your CABU TCE guidance, what specifically have you assumed for the dry bulk days?

The dry bulk days are, in fact, not much days left. So it's actually a high proportion of fixed voyages, but it is reflecting the forward market for the coming months, which I think, is pretty bad still. It's doing at the $7,000, $8,000 per day for Kamsarmax.

That's it.

That's it. So thank you all for joining, and state tuned. Thank you.