Odfjell SE (O7F.DU) Earnings Call Transcript & Summary

Good morning to all of you, and good morning also to those who follow us live. This presentation is given at western Norway at the stock exchange seminar here at close to Bergen Airport. And I also want to remind those following us online that it's possible to type in questions during the presentation, and we will address them afterwards. Today's agenda is the same as always. I will go through the highlights. And then my colleague, Terje Iversen, he will take you through the financial results. And then I will conclude this presentation with an operational review and a market update and prospects going forward. And if we then turn to the highlights, I'm first and foremost, extremely satisfied to see that we have completed another quarter without any significant incidents in our fleet. And we also, in my opinion, delivered very resilient results in a challenging market. First and foremost, because of the political turmoil that we all observe and then also due to the unresolved trade negotiations that are still ongoing, I will come back to that later. On top of that, the summer season is normally a more quiet season for chemical tankers. So despite all those negative factors, we still managed to deliver a $6 million increase in our time charter earnings. And in the second quarter, we earned $174 million, and this compares to $168 million in the first quarter. Our time charter earnings per day was $30,306, and this is up from $29,556 in the previous quarter. We also saw an increase in our EBIT, $59 million compared to $54 million in the previous quarter. And bottom line, we delivered net results of $40 million and adjusted for one-offs, it's $42 million, and this compares to $33 million in the first quarter. We also saw a net contribution from our terminals division of $1.9 million, and this compares to $2.9 million in the previous quarter, and the reduction is in full due to one-offs on corporate level for the terminals side. I'm also extremely pleased to report another reduction in our carbon intensity. This is the first time that Odfjell is reporting an AER, Annual Efficiency Ratio, below 7%. We are now at 6.8%, and then I also have to add that the summer season is normally the best quarter when we are measuring carbon intensity simply because we see much more calm weather during the summer months. And finally, the Board also approved a dividend of $0.48 per share and this is in line with our established policy of half yearly distributions of net result adjusted for one-off items. And that concludes my quick introduction, and then I give the word to Terje.

Thank you, Harald, and good morning to all of you. I will, as usual, start with the income statement for this quarter. As Harald also mentioned, the time charter earnings this quarter ended at $174 million, $7 million up compared to the first quarter. Main reason for the increase in the time charter was that we had increased volumes and we also had more commercial days in the second quarter compared to the first quarter. Commercial revenue days increased by 77, and we also added 2 time charter vessels on short-term time charter this quarter. Off-hire increased from 380 to 423, mainly due to increased drydocking activities in the quarter. And also, we had short-term time charter vessel being out of operations because it was involved in the collision at the start of the quarter. Time charter expenses ended at $4.1 million, quite comparable to the preceding quarter. Also operating expenses, $52.9 million, very much in line with the previous quarters, where we saw that G&A slightly down compared to second quarter and at $20.6 million, a bit lower than -- higher than normal this quarter because we have the effect from holiday payments, normally reducing the G&A in the second quarter, but we also had increased legal fees in this quarter. So we ended very much in line with the previous quarter in total. After G&A, we delivered an EBITDA of $98.4 million compared to $93.1 million in the second quarter. Depreciation and amortization, very much same level as previous quarter, leading to an EBIT of $58.6 million compared to $54.4 million. Net interest expenses decreased from $19.1 million to $16.4 million. Part of the reason is that we also expensed amortized financing cost in the second quarter of $2.1 million. So the decrease is not as large as it appears like. But even though we are seeing that net interest expenses is coming down because we are reducing our debt and also slightly lower SOFR this quarter and also better priced financing in total for our balance sheet. After other financial items being capital loss this quarter, we ended then with a net result of $40.1 million, up from $34.4 million in the second quarter, leading to earnings per share of $0.51 this quarter. Looking at the time charter compared to our cash breakeven that we measure each quarter. You saw that time charter earnings per day ended at $30,306 in the first -- in the second quarter up from $29,556 in previous quarter. Cash breakeven per day was $23,791, slightly improved since first quarter, bringing 12 months rolling average to $23,578, well below the time charter earnings that we are generating on our vessels. And as you can see, we have been very much cash positive since the fourth quarter of '21 when it comes to comparing time charter earnings per day with the cash breakeven for our vessels. Going forward, we expect cash breakeven to remain at these levels and the same goes with the P&L breakeven going forward. Looking at the balance sheet, main items here is that we took delivery of 2 vessels, Bow Precision and Bow Performer, both vessels that we had on operational or time charter lease before we acquired them according to purchase options that we had in the agreements. So ships and newbuilding contracts increased to $1.3 billion in this quarter, while we see that right-of-use assets decreased because these were included as right-of-use assets with the time charter agreements and the bareboat agreements that we had before we exercised the options. Cash and cash equivalents increased to $131 million or if you include undrawn loan facilities, we are at total available liquidity of $305 million, and that includes the effect from the loan that we issued -- the bond loan that we issued in May this year of $100 million, but we used all that proceeds to repay our revolving credit facilities. We are not increasing the cash at hand, and we are not increasing the debt, but we are increasing available liquidity in case we should need that for various purposes. Also, we see that current receivables was reduced this quarter, reducing our working capital and increasing our operational cash flow. And total equity increased with $49 million compared to being our total comprehensive income for this quarter, and we have now equity percentage around 46% at the total for the group. We also see that noncurrent interest-bearing debt decreased at main reason being that we are reducing our debt, as mentioned, but also that loan was reclassified because they're maturing first half next year and now included as current portion of interest-bearing debt per end of first half. Looking at the cash flow. As I said, we improved the working capital quite substantially this quarter, leading to operating cash flow this quarter of $109 million, an increase of $49 million compared to first quarter. Main reason being, of course, we had improved results, but mostly due to the improvement in our working capital. And actually, I think this $109 million is the second best quarter when it comes to operational cash flow for Odfjell in the history, so we're very satisfied with the cash flow we saw this quarter. On the investment side, we acquired Bow Performer in April. So looking at cash flow from investment activities, that was negative $54.6 million. And on the debt side, we did repay loan amounts under our revolving credit facilities, and we took this new bond loan. So in total, we had negative cash flow from financing of $10 million this quarter. And in total, we then had an improvement in cash and cash equivalents of $44.7 million in the second quarter. Looking at the more long-term free cash flow generation from our business. As I said, we had a strong operating cash flow in this quarter due to the improvement in working capital and improved results. But we have also included here cash flow from investments this quarter, which was then the acquisition of Bow Performer and Bow Precision. Bow Precision actually was refinanced in the first quarter when we acquired it. We exercised the purchase option. So we drew a new loan for that vessel in the second quarter, but the actual delivery took place only 1st April, so that is included here in the second quarter as investments. So free cash flow this quarter was based on operating cash flow of $109 million, minus investments of $98 million, ending at $12 million. But however, looking at the more long term, we see that the 12 months rolling free cash flow is now at around $60 million, and we adjust that for repayments related to right-of-use assets, we are at $49 million on a 12 months rolling basis this quarter. On the debt side, I mentioned that we issued a new bond per end of second quarter, we have debt of $742 million, interest-bearing debt. No significant changes expected for the remainder of the year. And as you can see on the bottom of this slide, we are expecting a slight decrease in interest-bearing debt in the coming 2 years. In June, we issued -- or I think it was in May, actually, we issued this new bond of NOK 1 billion, swapped that to $97 million and that was issued at the price of a margin of 275 basis points above NIBOR, which is the lowest priced shipping bond since 2014. So we're very satisfied with the timing and the pricing that we achieved on that issue. And as I said, we have only used the proceeds to repay loan amounts on our revolving credit facility, not increasing the debt on our balance sheet. And total all-in cost related to that is 2.5% per year to have that facility or cash available in case we should need that for investments or other purposes. Also during the second quarter, we added one vessel to the $242 million bank facility that we managed to have in place in the first quarter. And also in July after the quarter, we have completed the purchase of one additional vessel that we had on operational lease of Germany, which also then has been included in the same loan facility. Going forward, looking at CapEx and time charter commitments, CapEx being newbuildings and also declared purchase options stands now at $158 million in the coming years. That includes 2 vessels that we -- this one Bow Gemini that we acquired already in July this year, and we also exercised purchase option for Bow Hercules, which we will take delivery of in the first quarter '26. So that summarized to $71 million. And I have to add that these purchase options are very favorable comparing to the market values, and that goes also Bow Performer and Bow Precision that we have taken delivery of in the past few months. And then we have 2 newbuildings that are being delivered in '26 and '27 and in total then $158 million in CapEx commitments. Looking at the time charter commitments. No new news in this. We have around $1.1 billion in time charter commitments for vessels to be delivered in the coming years from '26 to '28. These are all -- these are 18 vessels that are on long-term time charters, 18 years -- 8 years per vessel that we are taking commitments to. And the total commitments are, as I said, $1.1 billion. But when these are added to the balance sheet, that will be a smaller amount because we are then excluding the OpEx element of these commitments. And also, it could be that other time charters that we have on vessels that we have on time charters today will be redelivered and the total amount of the debt will maybe not increase with this amount. And these vessels, together with our newbuildings account for 14% of the current order book within our core segment. I can also add that 5 of these vessels that we have on time charters that are going to be delivered have a fixed time charter element and also a variable time charter elements depending on the earnings of these vessels. So what is included there is the guaranteed and fixed element of these time charter agreements. I think that leaves -- I'll leave the floor to you again, Harald.

Thank you. So by that, I will continue with an operational review, and I start with our contract coverage. On the left-hand side of this slide, you will see that we had a slight reduction in our contract coverage, meaning that 51% of the cargo that we carried was contract cargo, while the remaining 49% were spot cargoes. If you, at the same time, look at the graph to the right, you will see that we had a quite substantial increase in volumes during the quarter. We are back to '24 levels of 3.4 and that means that we haven't seen a dramatic reduction in contract volumes, but what we have seen is an increase in spot cargoes. And for that reason, we have seen a reduction in the percentage. But there is no gramercy those figures. Actually, it's -- I will once again say that I'm impressed by our team and the fact that they have managed to increase the total volumes in what we could characterize as a difficult quarter. And that is also reflected in the graph to the left, where we see that we saw an increase in average earnings of 1.2% within the Odfjell fleet. And at the same time, we saw a decrease of 3.8% in the so-called Clarksons spot index. If we look at the various cargo types that we are carrying, we saw a slight decrease when it comes to specialty chemicals. We saw relatively stable volumes on the commodity chemicals, and those are the chemicals that are typically transported in large volumes. We also saw a slight growth in vegoils. Those are cargoes that we normally do not carry because the freight rates are lower than what you see for commodity chemicals and specialty chemicals. And the same goes for clean CPP cargoes, where we also saw an increase in Odfjell volumes, that is also outside our core business. But as a consequence of reduced specialty chemicals, we focused on vegoils and CPP. And by that, we managed to increase our earnings and also our results and volumes. Then turning to sustainability. As mentioned, we are, this quarter, reporting an AER, the annual efficiency ratio, which is the average carbon intensity figure for our fleet of 6.8%, and that is a new record low for Odfjell. It's the first time that we are reporting this figure below 7. There are many reasons for that. One reason is the continuous work that we do to retrofit energy efficiency devices. The sails are also starting to take effect. We installed the first set of sails on Bow Olympus during the first quarter. The immediate results were extremely encouraging. We saw savings up to 40%. And on the first voyage, we saw average savings of 20%. And since then, we have had 48 sailing days, and we all know how the European summer has been. It's been calm and sunny weather. So we have had limited utilization of those sails. But still, we are at the average expected for this type of sails, which is a bit -- which is between 8% and 10%. We are now preparing the vessel for -- she's right now in Houston, and she will -- she is preparing for Transpacific voyage, that is more or less 1 month in open sea in September. So we are both excited and curious about the results that we will experience during that particular voyage. And that is more or less a 1-month voyage before she's reaching Yokohama. And on top of that, we have already -- despite that we don't have a full picture of how those sails are actually working, we have already decided to install sales on 2 more vessels, 2 of the newbuildings that are presently being constructed in Japan, and those vessels will be delivered one in '26 and one in '27. And then on the terminal side, we have relatively stable throughput on all our terminals. We have seen a slight decline in Korea, but then that is compensated for in the U.S. and Europe. We did see stable results. The challenge is that the figure is being impacted by one-offs at the corporate holding level. We also are extremely happy to see that all the expansion projects that we've conducted on basically all our terminals is now starting to pay off. So we are receiving dividends from Korea, from Noord Natie and Antwerp and also a quite substantial dividend from our terminal in Houston. This is a stable business. So the outlook for this segment is that we will have stable and similar performance also in the quarter that is coming. When it comes to expansion projects, which is maybe the most cost efficient that you can do on the terminal side to continue to build on the established infrastructure. We did inaugurate one Tankpit in Antwerp this quarter, and we are now building another 12,000 cubic meters of stainless steel tanks. Those will be inaugurated later this year. And I'm also happy to see that finally, we get some traction in Korea. We are building out the so-called E5 area. We have started with the groundwork and the first 10 tanks will be in operation late next year. And due to the expansion, we are also improving our berth capacity, and we've also decided, therefore, to upgrade one of the two berths that we have in Korea. So I would say that we have stable and good development on the terminal side. And then to the market update and prospects. This graph reflects what I've already said. Normally, the summer season is a slow season. People are on vacations. Many of the factories are reducing their activity. So the need for the chemicals that we are transporting is seeing a dip during the summer months. This trend has been reinforced this year, partly because of all the geopolitical turmoil that we are all observing and partly because too many of the trade agreements or tariff agreements between the U.S. and other countries are still unresolved. And for that reason, we have seen slightly higher reduction in the spot rates than what we have seen previous years. We are not concerned about this. We think there are logical explanations to it. And then if we go to the next slide and look at the tariffs, I think what strikes your mind when you see the list of tariffs is that what's outstanding today is basically the BRIC countries. It's Brazil, it's Russia, it's China, it's India and it's South Africa. And maybe it's more politics into that than real financial issues. What we see is that those agreements that have been concluded are concluded at levels where our customers seem to feel that they are coping with that. The American Chemical Industry -- Chemistry Council, they estimate that the growth will be slower than they have estimated previously, but we don't observe that there is any panic going on, and there is still a significant surplus in the balance between chemical imports and exports into the U.S. Odfjell has approximately 20% of that market. So the expectation for the production in U.S., which is basically the Texas area is that we will see a modest increase this year, a modest increase next year, and then it will back to normal levels. And then to the swing tonnage. swing tonnage, those are vessels that are being built so that they can carry both EC chemicals and what they are normally doing, the CPP or petroleum products. That is an important figure for us because it's a disadvantage if those vessels are starting to swing into doing chemicals instead of gasoline and diesel. We have seen -- during the past few quarters, we have seen an increase of swing tonnage swinging into chemicals. But now if you look at the graph to the left, you will see that there has been an upswing in MR rates. And I think that will convince and encourage MR owners to swing back into where they belong on the CPP side. So we are not concerned about the influx of swing tonnage going forward. If we look at the order book, the most positive news this quarter is that there were absolutely 0 new orders for chemical tankers in our segments this quarter. And the order book is exactly the same as we reported after the first quarter. And if we start with the super-segregators, which is basically the bread and butter for companies like Odfjell, we control 40% of that segment. That is a segment where we will see a slight increase in capacity. And that increase is relatively modest. If we then go to the next segment, which is what we call large stainless steel tankers, that segment is -- those tankers are more or less the same size as the super-segregators. The big difference is that they have much fewer tanks. A 33,000 [indiscernible] of the -- inside the large stainless steel segment typically have maybe 20, 24 tanks, while the super-segregators are between 40 and 50 tanks. So in the large stainless steel segment, we will see a decrease going forward. That segment is getting smaller and smaller every year. So if you combine the super segregators and the large segment. And in total, those 2 segments together will see a slight decrease in capacity. And that means that where we really see a huge increase is on the medium stainless steel segments. The medium stainless steel segment used to be dominated by what they call the J19s, the typical 19,000 or 20,000 tonnes being built in Japan. Those vessels -- those ships are -- there are approximately 350 of them in total. Those vessels are slowly being phased out, and they are being replaced by the more modern J25s, which have much more loading capacity, of course, but they have the same draft and the same crew, so meaning that they are maybe 25% more efficient than the old J19s. So the increase is coming as a consequence of J19s being replaced by J25s. And right now, the order book is in total approximately 20% of the sailing fleet and Odfjell has 14% of that order book, which means that we will see a slight growth in our capacity in the years to come. And then this is my last slide, just to -- second last slide, just to summarize what I've said. We do see that slowly more and more of those bilateral trade or tariff agreements are falling into place. We have seen that IMF has made a small upgrade on PDP production. And transportation of liquid chemicals and the world GDP is extremely closely connected together. It's not possible to imagine one single industrialized process where the chemicals that we are transporting is not involved. Every process that you can think of, whether it's car industry, agriculture, medicine, food, they all need the chemicals that we are transporting. And for that reason, this GDP figure is extremely important for our segment. On the geopolitical side, we continue to see challenges. I think the world has more adapted to sailing around Suez and the Red Sea. We expect to continue to do that for the foreseeable future. We are concerned about sailing through into the Arabian Gulf through the Strait of Hormuz, but no, it seems that, that situation has come under control, and we are now today sailing as normal in and out of the Arabian Gulf. We do expect that the chemicals production and the need for transport will be more or less stable this year and also next year. And there is kind of a possibility for an upswing due to the increased production of oil and the increased refinery capacity in China. Swing tonnage, I've already mentioned, we expect that those vessels to either be stable or slightly decrease. And by that, we foresee a stable outlook for the trade. We see a slight uptick on the GDP. We see that tariffs are slowly coming in for a landing. We don't see any hiccups when it comes to the new buildings, and we also feel that we have a good overview of the swing tonnage. So to conclude this presentation, then we did deliver a result that we have every reason to be proud of. We managed to increase our earnings and our results in a declining market. We saw a slight increase in volumes. This is basically due to the fact that we swung into CPP and vegoils. And we did not renew any significant contracts during the quarter, and those contracts that were renewed were renewed more or less at expiring terms. On the terminal side, we had stable results in the second quarter. This is in line with the previous quarter. And as mentioned, we did have some one-offs at corporate level that reduced our net results. The outlook, we have seen some reduced activity in line with the slower summer season. We do think that increased production of oil will have a positive effect. And we do, as mentioned, expect the swing tonnage to at least not increase. So based on that, we expect the third quarter to be in line with or maybe slightly below the second quarter results. That, ladies and gentlemen, concludes our presentation, and we are open for questions. Have you received anything, Nils?

We could start out -- just sort things out, we'll start off with questions from the audience here, and then we'll continue with questions from the webcast. And we'll bring a microphone. So please. Anyone? Nils, if you have questions from the webcast.

I have a couple of questions. I'm just going to read this question is from Sam [indiscernible]. You noted an order book of 20%. Similar companies in the industry tend to report a figure below that. How does Odfjell estimate the figure? I guess the question is sort of how we define the current fleet and the existing order book in our core segment.

It's actually a good question. We are calculating deadweight versus deadweight, and that's how we calculate the figures. But it's an interesting question because the question is, how is the -- right now, how is the compliant fleet, the fleet that we are actually competing with? How is that fleet developing? And what we've seen lately, for example, when it comes to the J19s that I mentioned, there are almost 350 of them is that many of those vessels are being sold for regional trades in the Far East. So they are still alive. They are still being counted, but they are no longer competing with the international fleet. So I think this guy has a point that these figures are not absolute. But our figures are relatively -- they are relative to each other every quarter. So I think when you are looking at the figures that we are reporting, you have to compare them to what Odfjell has been reporting in previous quarters and not necessarily with what other companies or other analysts are reporting because they might have a different way to calculate the volumes. And also it's different what they actually included as a core chemical tanker. We have very specific definitions of what's being included and what's not being included.

Thank you, Harald. The next one is from Evan Carlsgal and he's asking what is the implied daily TCE for the current COA contracts. I'm not sure that's something we comment on specifically, maybe a general answer could be given.