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

[Audio Gap] Klaveness Combination Carriers ASA Q2 2026 Financial Results Presentation. So first up on the agenda today will be CEO, Engebret Dahm, who will walk you through an overview of the results, followed by CFO and Deputy CEO, Liv Dyrnes, who will give you a look into the financials as well as the sustainability performance. And then Engebret Dahm will come back on to give you a look into the market as well as the outlook for KCC in the coming quarters. So as usual, we will have a dedicated Q&A session at the end of the presentation. So feel free to send through your questions on the chat button that you see on your screen. So with that, let's go ahead and get started. Engebret, you're up.

Good morning, and thank you, Haley. So this quarter has been one of the most extraordinary and operationally challenging quarters for KCC. With what's happening in the Middle East, we have really tested the resilience of our business model, our craftsmanship and our commitment to our customers. And [ repos ] to say, I believe we have passed all these tests. And I'd like to thank the KCC team for excellent work done during this quarter. . The quarter has, of course, been influenced needless to say what's happening in the Middle East. The [ main fairs ] we had when we met end of April, was that we would see effects on the caustic soda shipments on cables to Australia. We fair that lack of feedstock to the clodcard industry would limit shipments of caustic soda to Australia. We feel that the loss of the market in the Middle East, the Middle East and aluminum smelters our Australian customers would also have a negative impact on production and caustic soda shipments. None of these concerns materialized during the quarter. And to date, and it has shown the not resilience -- impressive resilience of the Australian alumina industry in the face of these large geopolitical impacts. The concerns are the CLEANBU for more in the fact that we -- due to the change in trade patterns, we had to allocate capacity into standard tanker trades. And we felt, of course, that this would have a negative impact on earnings through suboptimal trading and waiting time. Also, this with one exception, did not materialize. And I think the results we present today bears testimony to this fact. So looking on the second quarter results. We are happy with the performance in light of what has happened around us in the world. We had a strong financial performance and also a strong operational performance. The earnings results are one of the strongest in cases is history. We have maintained the highest standards on safety and operation quality with no accidents, no injuries and no customer complaints. The time charter earnings of the fleet on average ended at $37,782 per day, which is an increase of $4,350 per day. which is in the upper half of the revised guiding of 36,500 to $38,400 per day. The EBITDA ended at $38.5 million and result after tax ended at $20.8 million, which is $9.2 million and $5.2 million increase, respectively, from the first quarter. The first half profit ended at $36.3 million, which is higher than the full year 2025 profit of $33.4 million. The Board has decided to distribute $0.30 dividend per share, which is in total $17.9 million, which is 0.5% and -- sorry, $0.05 and $3 million higher than in the first quarter. When we met last time, we told you about Banastar, the CABU vessel that was directly impacted by the conflict in the Middle East. She was discharging alumina under [indiscernible] was supposed to ship caustic soda back to Australia. In the 4 months since that happened, she was trapped in the Middle East mostly being alongside the [indiscernible] doing planned maintenance. This was among the safest place, we could imagine the ship could be, in the 4 months period, we have had close contact with the crew together with our ship manager. We have taken the safety and well being as our highest priority, and we have repatriated the crew that wanted to go home. After the signing of the U.S.-Iranian framework for peace, the 17th of June, we saw a window of opportunity to get the vessel out. After thorough risk evaluation, including consulting properly with a crew. We booked a slot to take the vessel out to -- with the U.S. and [ AGC ] for a facilitated transit through the Southern route close to the coast of Oman. This happened in the evening, the 25th of June. And over midnight of 26th June, the vessel was safely out of the Gulf. And I would like to extend our thanks to the crew for their commitment and professionalism during the difficult time in the middle, while the vessel stayed in the Middle East and the transit through the Strait of Hormuz. With the closure of Strait of Hormuz and also late increased hostilities in the [ Almande ] straight. The trade flows for both crude and clean petroleum products have changed. And as mentioned, this has also impacted quite a bit the trading of our cleaners. With the CPP expos auto Arabian Gulf being more or less stopped. It has had ripple effects on exports out of India and Northeast Asia, which has been one of our main trading hubs. We have in this situation, used the large flexibility of the cleaner fleet to switch the deployment of the fleet to training as regular tankers and to capture opportunities that we have seen in the tanker market in the quarter. We have -- and we see how on the map, we see the gray lines of the historical trades of the clean moves since the delivery of the ships 7 years ago. And we also show how what we have -- part of the opportunities we have taken in over the second quarter. We kept ships trading in the regular trades from US Gulf south to South America. Normally, we do have done this as part of a [ Triangular ] trading. This time, we have used more like standard tankers going back in ballast. We have made loadings of clean petroleum products in the Red Sea, and we have brought back grains. We have in a run-up to the conflict and in the [ immediate ] start of the conflict, we have shipped NAFTA from U.S. Gulf to Asia. And in June, we took a quite unconventional shipment from Antwerp to Sydney in Australia with gasoline. One of the longest sailings we had, 45 days sailing. So look, so let's look a bit closer on how the business has been doing in the second quarter. Partly due to Middle East crisis, the per tank and drag markets have been strong, which has supported earnings, the tanker markets purged in February. It kept strong through March and April, but held back in May and June, but it's part of recovering during the summer and has been firming lately in into August. I would like to mention that the regional export volumes have fluctuated quite a bit. We had repeated halting and resuming of trade flows at short notice, which has led to extreme regional earnings volatility. For instance, the Atlantic market went from $93,000 per day in April to less than $6,000 in May. So it's been a difficult time to navigate. With the used oil product exports increasing, the loading activity in Atlantic has been has been paramount and drawn increasing pro tank capacity. It has also paid better than alternative trades. The driver market has also strengthened during the summer and spring. The [ PTC ] the average index for [ Camsmaxes ] increased from $16,800 per day in March to more than $20,000 per day in May and has kept stable through the summer. I'd also like to mention that fuel prices for shipping bunkers have increased tremendously, of course, during the outbreak of the hostilities has fallen back, but it's still solidly around 50% higher than the pre-conflict levels, which also supports the earnings of KCC. Looking at the CABUs, it's been another strong quarter for the CABUs, where we got the support from both the strong protank and dry bulk markets. But we have had ripple effects from the Middle East conflict that has offset a little bit of the gains we got from the market. We got a couple of cargoes canceled, which was substituted quickly. But to changes to the shipping program had a negative impact on the scheduling and led to longer waiting days at our customers' terminals in Australia. So the changes to the cargo program, the lung weight, and on the top, the trapping of the Banastar in the Middle East led to a very tight fleet situation for KCC in the second quarter. In order to deliver the service to our customers, we did the 2 ballasting, and we also used cleaners on 2 caustic soda shipments to ensure that our customers had caustic or on the tanks at any time. These challenges resulting in the highest ever share of the carbon capacity in tanker trade and caustic soda trade. It also resulted in the lowest ever share of the capacity in combination trades as we don't count ballast voyages as [ Comitrade ] and also some of the highest balance percentage in the history of the CABUs. The [indiscernible for earnings ended at [ $34.76 ] per day, which is $4,500 a higher than in the first quarter. We got the benefit of the strong tanker [indiscernible] market through the floating rate contracts. Although it should be said that the Pacific [ MR tanker ] market performed quite weaker compared to the strong Atlantic market. We've got good support on a spot dry bulk shipments of the strong Pacific dry book market. And we also had positive fuel effects, especially on the dry bulk markets. Looking over to the CLEANBUs. And with all the challenges that we have had out of the Middle East crisis, we are also pleased with the CLEANBU second quarter results, which is the highest ever fourth highest ever [indiscernible] earnings of our cleaners. As mentioned, we deployed the fleet in tanker trades, after the main commit trades stepped up. As a result, we have, in total, 86% of the capacity trading in oil product trades and vegetable oil trades. The share of Tri-Trading decreased to 4% and the 2 cost order shipments made to Australia accounted for 10% of the capacity. These trading choices are to large effect of the large earnings difference between the dry and the pro tanker market. And as normal, we allocate capacity to the highest paying markets. With the CLEANBUs mainly out of combi, the [ Commi Trading ] was limited to 42%. We had long ballast handing up by 32%, which is one of the longest balance we have had in history. The timeshare earnings ended at $42,243 per day. which is $4,900 per day higher than in the second quarter, which again is a result of the strong tanker market and also our efforts to optimize trading. We have had during the quarter extreme volatility in earnings on the various voyages. We have performed everything from $140,000 per day down to below $5,000 per day. So in totality, we are pleased with the performance of the cleaners in a quarter. So then Liv you take over?

Yes. Thank you. Then over to the aggregated financials. I'll today start with the EBITDA bridge comparing Q2 with Q1 for Q2 ended at $38.5 million, an increase of 31% from last quarter. Anime has already mentioned that the TCE rates were higher for both segments. For the existing CABU fleet, so that is -- does not include the carbon newbuilds. This had a quarter-over-quarter effect of $2.5 million. For the CLEANBU, the effect was $3.1 million. Then we took delivery of 2 new builds during Q1 and Q2 and -- the EBITDA effect Q-on-Q for these 2 vessels were $3.6 million positive. Then we had quite a lot of -- or more off-hire in Q2 compared to Q1 for the existing fleet. That partly relates to a Banastar had in total 109 days off-hire in the first half due to the situation in the Middle East, were of 88 days in Q2. In addition, we had for dry dockings ending in Q2, 2 CABUs and 2 [ climbers ]. For 1 of these dry dockings, we had an extended yard stay due to an issue at the dry docking but this was partly compensated by loss of fire insurance. For the remainder of the year, we will not have any [indiscernible], and we have 2 CABU dry dockings included the life extension of Banastar. You can find detailed information about this in the appendix. But quarter-over-quarter, this had a negative effect of $4.9 million. Other income, that is loss of higher compensation both for Banastar, and that relates to both Q1 and Q2 for this vessel. And then it's also loss of hire compensation for the extended yard stay as mentioned. This amounted to a quarter-over-quarter effect of $5.4 million. Then operating expenses for the existing fleet increased by $1.1 million. Underlying, we saw an increase of approximately $300 per day for the CLEANBUs and $400 per day for the CABUs. But this is mainly one-offs partly related to Banastar in the Middle East and then several other items for both fleets, but mainly one-offs. Administrative expenses came down by $0.5 million. It's partly related to holiday pay in Norway, so lower salary payments and it's also lower other administrative expenses. So if we then look at some of the other P&L items as well. Net revenue from operation of vessels was $52.1 million for Q2, an increase of 11%. And this does not include the off-hire compensation of $5.4 million. Then profit after tax was $20.8 million, an increase of 33% quarter-over-quarter. In addition to the EBITDA effect, profit after tax was also impacted by higher depreciation of $2.1 million. That's related both to the new builds as well as the finalized drydockings. Net finance costs also increased Q-over-Q by $1.8 million, that's approximately 50% related to the refinancing, 40% related to higher interest costs as we have a higher debt burden due to the new builds and a minor negative effect of FX. This resulted in an annualized return on capital employed for Q2 of 14% and return on equity of 22%. Over to the balance sheet. The equity ratio was stable from Q1 to Q2 at 50%. Equity increased by approximately $5 million. It's driven by a very solid profit after tax partly offset by dividends and a small and negative other comprehensive income for the quarter. Net interest-bearing debt to EBITDA was 2.4% on a 12-month rolling basis. This is positively impacted by the increased EBITDA, but the underlying ratio is even lower as this includes full debt burden for the newbuilds, but it does only -- it does not include full EBITDA for the 2 new builds. Cash by the end of Q2, $65 million compared to $59 million last quarter. and long-term available liquidity, $145 million, an increase from last quarter of $18 million. The $18 million is positively impacted by the very strong operating cash flow. We had very limited working capital changes for the quarter, and it's also positively impacted by higher debt or available debt capacity, both due to the refinancing and due to the newbuild deliveries. You might have noticed in Q2 that we released a press release regarding the closing of $200 million senior bank facility. This is refinancing of one facility falling June 2028 and one -- part of one facility following due next year. As you can see in the graph here, in 2027, we still have a small balloon payment of $9 million related to one CLEANBU. This was made on improved overall terms compared to the existing facilities, improved margin, repayment profile, extended tenor as well as removal of 1 financial covenant. So after the refinancing, we have 2 larger bank facilities, 1 for the CABUs and 1 for the CLEANBUs in addition to the $9 million falling due next year. And we have 4 unencumbered vessels built between 2001 and 2005. We have, over the last year, optimized the bank debt portfolio. And I would say there are limited improvement potential going forward now, but I think we have a very strong financing package now. Then lastly, on the financials, dividends. As Engebret mentioned, $0.30 per share for the quarter $17.8 million in total. That equals 100% of the adjusted cash flow to equity, so well above the minimum threshold in the policy. On an EPS basis, it equals 86% and dividend yield based on close yesterday and on an annualized basis, close to 11%. So this increase in dividends is definitely supported by the very solid EBITDA improvement, and it's despite the increase in maintenance CapEx and which was quite high at close to $8 million for the quarter. But we know that this element is volatile between quarters. So this ends our -- or not ends, but this continues our unbroken dividend record that we've had since the listing in 2019. So dividends every quarter and in total, $266 million distributed. Then a brief comment related to the carbon intensity for the quarter. As expected, it increased in Q2. So the EEOI for the fleet was 8, up from 6.5 in Q1. Year-to-date, that was 7.2 and in the graph to the right, you can see the main drivers behind the increase. The 2 main factors were increased ballast and lower cargo weight. And this is heavily impacted by the disruptions from the Middle East situation. Engebret has already been through that we have ballasted more specifically for the CLEANBU and with less trading efficiency or lower trading efficiency. This also impacts the cargo wait as we have transported more wet than dry this quarter. We do expect this to come down when we reestablish the trading patterns that we usually do. So going forward, we definitely will come closer to the [ 5.8 ] target, although that is a very high ambition for 2026 compared to when we see the results for the first half of the year. The positive thing here is that we see a positive impact from energy efficiency as well. So that's it from my side, then over to you again, Engebret.

Thank you, Liv. So looking ahead, let's first quickly dive into the outlook for the product tanker and dry bulk markets and how KCC looks to perform over the coming quarters. With the unpredictable situation in the Middle East, there are large uncertainties on how these markets will develop. But based on our analysis, we believe that we are going to have both a strong dry bulk and per tanker markets in the next quarters and that fuel prices will stay high in these quarters. And this is likely to be a sweet spot for KCC were all the 3 markets that decide the earnings of our company will be posted. So looking first one on product tanker market. The events in the Middle East is likely to continue to shape the dynamics of the tanker markets. The 3 main effects that partly I have mentioned already, Firstly, the [ CBP ] exports out of the Arabian Gulf fell substantially over the last quarter, use exports picked up, Northeast Asia exports produced partly due to export plan in China and also restrictions of Korean exports. We believe that some of this trend will continue. We've seen the is we see -- have improved oil supply and the highest ever refining margins. which looks to end up with increased exports, which in the Pacific, which will strengthen our business. Secondly, we have the pro tanker market had laden selling distances, but the loss of seaborne products have reduced the ton mile in the pro tanker market to date this year. So this illustrates the effect of the trade shortfalls that the market had experienced. Thirdly, the substantial increase in efficiencies in the fleet has to date offset the lower ton mile development. And that comes through longer far longer ballast forces and longer waiting time. So looking ahead, the main question remains, will the limit to supply of oil products, [indiscernible] cap of earnings in the prototank chemistry. Or will the development of the Middle East crisis continue to lead to substantial inefficiencies in the protectanker market. Using a big share of the capacity of the pro tanker market. Our take on this and if there are uncertainties for sure. is that the oil markets has shown a tremendous dynamism and flexibility to deliver the -- more or less the supply that the markets need, their [indiscernible] ways. Unfortunately, on the Middle East situation, it doesn't look that any peaceful solution at site, meaning that the markets will continue to be disrupted by the events in the Middle East continuing to have extensive inefficiencies that, in our mind, in totality will keep the market strong for the next quarters. Looking on the dry bulk markets, the effects of the Middle East situation is less on drybulk markets, but there are still substantial inefficiencies coming in the dry brick markets. We had of course, the Middle East situation with ships waiting outside and in Saudi Gulf. We have had a recent attacks in the Black Sea, limiting grain exports out of the Black Sea strengthening longer-haul dry bulk exports from the Americas. I also seen lately the effects of the El Nino on line restrictions of the Panama Canal increasing congestion leading to [ Triber ] ships passing through, kept good hope and Ken on the way back and forth to Asia. I would like to mention 3 effects for looking ahead for the dry market. One, we continue, as we see on the graph here, to get the Panamax market to get support from the Capsa market. after some weak development in the summer of bauxite shipments out of Guinea. We see an expected long increase in long haul iron ore shipments and bauxite shipments out of Guinea that will be very supportive for the front haul demand and likely to strengthen the Capesize market. which, again, will have the trickle on effect on the Panamax market through a higher market share for Panamax in the long-haul coal shipments. Secondly, coming into the second half of the year, seasonally, the South American grain season starts to soften. And as normal, we the markets are quite dependent on a good activity in U.S. grain and North American grain exports. The good thing is that we have seen substantial increase in Chinese grain purchases, which is the strongest since 2022 that we expect will support the Panamax market through the autumn and into the winter. We see in addition, the thirdly, we've seen addition positive development on coal shipments, which is partly a substitution of expensive gas with cheaper coal given the limit of Qatari LNG exports due to the closure of the streamers. In addition, we see a Nino effects in China where the drought has led to reduction in hydroelectric production, again, favoring consumption of coal. So this development on coal shipments is also expected to support the Panamax and the dry bulk market over the next quarters. So let's turn into the other facts of how we are or how we are delivering value to our shareholders over the next quarters. Starting off with the contract coverage, having a solid contract book is important tool for us to ensure that we keep the ships running in the most efficient combination trades where our ships can create the most value. We do fixed rate and frozen rate contracts, the fixed rate contracts to create a flow of fixed rate coverage reducing volatility. Looking at the fourth quarter 2026. On this graph, we see the dry bulk coverage it's mainly limited to acetate, which are concentrating around 20% of the travel capacity. We -- the rest of capacity is -- the total capacity is mainly upgrading in the spot market, but with repeat customers that we have done business with 4 decades. Looking on the tanker side, we have around 55% contract coverage for the fourth quarter, 32 points -- percent point at fixed rate contracts and 23 percentage point floating rate contracts. And we are comfortable in totality with this contract coverage for the fourth quarter. For 2027, we target over the next quarters to increase the capacity beyond the current 28% contract coverage on tankers and 7% contract coverage for dry bulk. We are entering into the traditional contract from New Seasons. It starts already started. The momentum increases into the fourth quarter, and we normally succeed to complete the contract negotiations before Christmas. The market backdrop for these contract negotiations with both a strong dry bulk and tanker market is positive. And our target is to increase the contract coverage on the tanker side to around 60% for next year with around 50% being fixed rate. and to increase the dry bulk contract coverage up to around 20%. continuing looking at how we are working on the clean blue business. We have, despite the disruptions to the oil markets and to the to the combination trading we have had in the second quarter. We maintain our medium- to long-term strategy for a clean fleet. The key news, I would like to remind you our semi industrial shipping business. We established combination trades where the combined shipments of clean petroleum products, vegetable oils and dry cargoes in the most efficient manner to deliver most value in terms of efficiency to our customers and to deliver superior earnings over the cycle. We have of the as established a number of efficient high pain combination trades, and we systematically work to add a couple of more trades to improve further efficiency and also created the grown work for expanding the clean fleet at the right time. While the combination trades had in the second quarter and first part of the third quarter has been wholly or partly disrupted. We are seeing some positive development in the trade flows out of India and the Far East that has enabled us to put some cleaner ships back into the combination trades. And we do hope and expect that this will continue going forward. But to continue succeeding with our strategy, we need to continue expanding our customer base and we know what the remaining difficult to -- difficult to win over customers. We have -- despite all the political noise, we have succeeded to expand our customer base in 2026. In the second quarter, we added 1 new oil majors to the customer acceptance list, which is posted. Turning over to the CABU business. We had, this year, expanded the business from 8 vessels at the start of the year to currently 11 vessels, which in total strengthened the competitiveness and resilience over CABU business. We took delivery of the Banastar, the sixth of August, the vessel in the picture, which marked the completion of our newbuilding project. which comprise 3 ships. We have had a smooth execution of this project, a strong cooperation with [indiscernible] shipyard. And with the capable management of the project of our project team, we have delivered this project on cost before time. On the new builds, we are pleased with the performance with a higher cargo intake and extensive energy efficiency measures in stool where the ships deliver low carbon footprint and freight cost savings to our customers and higher earnings to KCC. And we're eager to experience the efficiency of the 2 huge suction sales, we installed on Nevaltasa, the first in the KC fleet. We also, this month, took the decision to extend the operational life of Banastar and take us through the 25-year drydock and life extension as we did with her sister ship Barcarena in December last year. The successful launch of the trade in -- between U.S. Gulf and Brazil for Hydro subsidiary [ Alunorte ] has opportunities for KCC to expand the trade. Based on a new 28 to 36 month contract of affreightment, which covers part of the capacity of the Banastar. We will have no 2 ships in the trade to Brazil from early 2027. We will -- the 2 ships will operate together where we changed the operation from our shuttling service we do today on a Barcarena to more combination trading, adding travel customers and also new caustic soda customers over the coming year. We believe these 2 vessels based on a solid fixed rate contract coverage, will deliver solid free cash flow and will also be an important tool for us in our business development in Americas. So at the end, let's turn to the rate guiding and outlook for the third quarter. Starting up with CABUs, we have seen a considerably improved trading performance of the ships in the third quarter. In fact, quite a perfect trading with no ballast and limited waiting days. So we are pleased to guide on a flat time share earnings in the range of $33,500 to $34,500 per day based on that 94% of the capacity is fixed. And this is despite considerably lower Amato tanker rates compared to the to the boom. We experienced in part of the second quarter and also somewhat weaker dry bulk market in Pacific as specific rates normally underperformed the average in the third quarter. Looking on the CLEANBUs. The operational efficiency has also improved for the key moves, but the main effect comes from the lower but still historically strong pro tanker market in the third quarter compared to the second quarter, where we, as mentioned, had months with booming rates. With 84% of the capacity, the guiding is [ 36,500 to 38,500 ] per day, which is 3,700 to 5,700 lower than in the second quarter. This is based on 84% of the capacity booked. So the average of $34,500 to $36,300 per day for the fleet shows that third quarter will be another strong quarter for KCC. It's important to mention that we. In the third quarter, we had 287 days higher -- on higher days, which is due to the fleet expansion and also lower docking. This the real difference in terms of on-hire days is more roughly 160 days as we in the second quarter, had a fire insurance payments for around 120 days, which is recorded in the second quarter results under other earnings. So looking ahead, we had through the second quarter and third quarter, shown that our company is more than the spot market development in the protanker and driver market. is as much a matter of delivering on our business model and on the execution of what we are doing. We are hopeful for the outlook for the next quarters and based on our business model with a higher efficiency, the more flexible fleet and our diversification of earnings, we are optimistic for the results and that we continue to deliver a higher risk-adjusted returns to our shareholders than most on the standard Tribuan tanker companies. This ends the end of our presentation, and we are now ready for questions.

Yes. Great. So we have quite a few questions that have come through. The first questions I'm going to ask now are kind of around Banastar. So now with Banastar out of the Gulf, do you have any remaining direct exposure to the Strait of Hormuz or is the fleet entirely trading outside MEG at this point?

At the moment, the fleet is all vessels are trading outside the [indiscernible]. We have one ship in Red Sea, but we are not intending to restart any operation into [indiscernible] until we see a substantial improvement in the conditions in the region.

And is the repositioning of Banastar included in your CapEx and off-hire guidance?

The docking and life extension program that will take place in October and November is included in our guidance. The positioning of the vessel, which will start up in November, is expected to follow the same pattern as we had on Barcarena, which traded with caustic soda into Australia and with alumina from Australia to South America and the ballast from South America into Brazil or U.S., which so I said, South Africa, meaning that instead, meaning that we which gave a positive earnings beyond the bunker and operating cost. So that is part of the business plan for doing this life extension and -- but it's not recorded as so far. .

Okay. And how does the life extension of the CABUs sector fleet-wide EEOI.