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

Good morning to all of you and welcome to this presentation of Odfjell's third quarter results. We will follow a standard agenda for this presentation. I will take you through the highlights. My colleague, Terje Iversen, will present our financial performance. And then I will conclude this presentation by an operational review and a market update and prospects. If we then turn to the highlights. We once again delivered a strong safety performance in our third quarter, we had high operational performance and we also saw no significant incidents during the quarter. We are delivering robust financial results and this is in line with what we saw in the second quarter. Our total volumes were slightly up in the third quarter. We saw our Contract of Affreightment volumes going up and we now have a contract percentage of approximately 56%. At the same time, we also saw that the spot rates continued to decline during the third quarter. Our time charter earnings ended at $173 million and this compares to $174 million in the previous quarter. The time charter earnings per day was $28,174. This is slightly down from the previous quarter, which ended at $30,306. We delivered an EBIT of $59 million. This is very much in line with what we saw in the second quarter. Our quarterly net result was $43 million. Adjusted for one-off items, we ended at $42 million, which is again in line with what we saw in the second quarter. The net result contribution from Odfjell Terminals was $2.6 million. This is slightly up from the $1.9 million that we saw in the second quarter. And finally, our carbon intensity. The AER for our controlled fleet remained at 6.8 and this is equal to the record low achievement that we reported after the second quarter. This concludes the highlights and then I give the words to Terje, which will take you through the financials.

Thank you, Harald, and good morning to all of you. I will, as usual, start with the income statement this quarter. Starting with the time charter earnings. That decreased with USD 1 million compared to first quarter, ended at USD 173 million so very much in line with the preceding quarter. However, looking behind the figures, we saw that the time charter earnings per day was around 7% lower while we also saw that the freight rate we achieved in the quarter was very stable to the previous quarter. So the reason we are able to maintain the time charter earnings in total in line with second quarter is that we increased the number of commercial days in this quarter both with new vessels and also with fewer off-hire days than we had in the second quarter. Time charter expenses ended at USD 8 million, up from $4.1 million. Operating expenses was slightly down to $50.6 million compared to $52.9 million in the second quarter. Main reason being that we had less dry-docking activity this quarter and also we had 1 vessel that left the fleet during the quarter. Share of net results from joint ventures being our Terminal investments was USD 2.6 million, up from $1.9 million in the second quarter. That gives us an EBITDA of $97.3 million compared to $98.4 million in the second quarter. Depreciation and amortization, $39.3 million, quite the same figure that we saw in the second quarter. Then we achieved a small capital gain on the sale of Bow Fagus in this quarter, which was sold for recycling at USD 1.1 million leaving us with an EBIT of USD 59 million compared to $58.6 million in the second quarter. Net interest expenses ended at $15.5 million compared to $16.4 million. And after other financial items and taxes, we then delivered a net result of $42.8 million, an increase compared to second quarter with $40.1 million and that gave us an earnings per share of $0.54 in this quarter. Adjusting for nonrecurring items, being other financial items this quarter, we then delivered a net result of $42 million in this quarter. Looking at the time charter earnings per day compared to cash breakeven. As Harald mentioned, time charter earnings per day ended at $28,174, down from $30,306 in the previous quarter. We saw also an improvement in cash breakeven per day, which ended at USD 22,054 this quarter compared to $23,791 in the second quarter bringing our 12 months rolling average cash breakeven to $23,307. Decrease in cash breakeven was due to more commercial revenue days and also, as I mentioned, less dry-docking activity this quarter. Going forward, we expect cash breakeven to remain stable around this level in the coming quarter. Looking at the balance sheet. We took delivery of Bow Gemini this quarter, which previously was a bareboat vessel. That was already included in the balance sheet as right of use assets. And we also sold, as I mentioned, Bow Fagus for recycling for USD 10 million leaving us with a ships and newbuilding contracts book value at USD 1.3 billion end of third quarter. Right of use assets ended at $229.6 million, decreased due to the acquisition of Bow Gemini, which I mentioned was previously classified as right of use of assets. Investments in associates and joint ventures ended at $173 million, down from $181 million despite a positive result from the JVs. However, we took out dividend from the U.S. terminal of USD 9.1 million this quarter, which then was transferred to the group. Cash and cash equivalents ended at USD 136 million. If you include undrawn loan facilities, we have then available liquidity of around USD 306 million per end of third quarter. Equity increased with around USD 1 million corresponding to the total comprehensive income in the quarter and less the dividend USD 38 million that we paid out on the back of the first half result this year, which was then paid in September. Noncurrent interest-bearing debt increased slightly and that is related to the acquisition of Bow Gemini, which I mentioned. That was fully financed by bank debt when we took delivery. Looking at the cash flow. Operating cash flow ended at USD 67 million compared to $109.2 million in the second quarter. The reason for decline, I would say that is that we had really strong operational cash flow in the second quarter with a quite substantial decrease in the working capital in the second quarter where we saw a more normalized working capital this quarter leaving us with a cash flow from operation at $67 million, which is very much in line with the first quarter this year. Looking at cash flow from investing activities, we see that we have included a sale from Bow Fagus with USD 10 million and then we have invested in Bow Gemini and we also have done some dry-docking and invested in some of our assets, USD 43.7 million in total. And if we include the dividend from the terminals in the U.S., which is included in the $8.2 million, we are left then with a cash flow for investing activity of USD 25.5 million in the third quarter. On the debt side, not that much happening this quarter, but we financed the acquisition of Bow Gemini and we also paid dividend of USD 38 million as mentioned. And that is summarized then with the net cash flow from financing activities of USD 37 million this quarter. So if we include investing activities and operational activities, we are then increasing the cash this quarter with USD 5 million. Looking at the free cash flow on a quarterly basis the last 12 quarters. As I mentioned, we saw the operating cash flow this quarter was $67.4 million, a decrease of $41.8 million compared to previous quarter. The decline was, as I mentioned, primarily driven by increase in the working capital or more normalization of the working capital this quarter. While we saw cash flow from investment was summarized to USD 25.5 million in this quarter. That leaves us with a free cash flow of USD 42 million in the third quarter. And looking at the 12 months rolling, we have a free cash flow of $41.6 million and if you adjust for repayment related to right of use assets, we reached USD 28.4 million in 12 months rolling average end of third quarter. On the financing side, not much happening this quarter. This is showing the scheduled repayments in the coming quarters, including fourth quarter '27. We are showing here that we have some balloons in the fourth quarter this year, but that is actually what we have already repaid on revolving credit facilities. And then we have 2 loans that are maturing in first quarter and second quarter of '26 and we have already started refinancing of those vessels. And we are quite positive or optimistic with regard to what we are going to achieve in the market when it comes to both tenor, loan profile and also margin on this refinancing. Looking at the total debt. We today have interest-bearing debt of USD 756 million. It's expected to decline somewhat through year-end to $709 million, but we also expect a slight increase next year due to delivery of the new vessels in 2026. Here we see that we have total CapEx and time charter commitments. Looking at the CapEx. We have, as mentioned, Bow Gemini which is the last operating lease vessel where we have declared purchase options being delivered, expected to be taken ownership in first quarter next year. Also the purchase option for that is very much below the current market values. And we expect to obtain financing around the full purchase amount for that vessel. The vessel is already included in the balance sheet as current debt right of use assets so we did not include it to impact the total asset on our balance sheet. And in addition to that, we have also 2 newbuildings on order for own account. So if we summarize CapEx commitments, we are around USD 122.8 million per end of third quarter. Looking at the time charter vessels. We have 18 newbuildings that are going to be delivered from first quarter '26 until 2028; 10 of those will be delivered in 2026, 7 in '27 and 1 in 2028. Here we're showing the total expected time charter payments for these 18 vessels, that is USD 1.1 million, same figure as we have shown before. And total time charter payments on the 10 first vessels in 2026 will be USD 43 million. However, when we take ownership of these vessels or enter into the contracts, the vessels are delivered, we have to account for the total time charter commitments or the bareboat element of these vessels and we are talking around USD 300 million then will be capitalized in 2026 for these around 10 newbuildings, which will be then booked as right of use assets and also debt related to right of use assets. These amounts stated here are more the total time charter commitments, including also the OpEx element. And as we have mentioned, these vessels, together with our newbuildings account for 14% of the current order book in our core segment. Then I'll leave the word to Harald again.

Thank you, Terje. We follow on the agenda and I will take you through an operational review of the quarter that is behind you. I will start with the volumes. Once again we saw an increase in total volumes carried on board Odfjell vessels. This is the third consecutive quarter where we see volume increases. As Terje mentioned, we have started to take delivery of our newbuilding program and we did see a 7% increase in commercial revenue days during the quarter and that was compensated increase in revenue days was to some extent compensated by increase in volumes and we also saw relatively robust increase in our contract volumes. Today, the contract coverage stands at 56% and we are now entering the renewal season for contracts. Only 3% of our contract volumes were renewed in the third quarter and those contracts were renewed more or less on rollover terms. If you look at earnings per day, as mentioned, we saw a 7% decline in average time charter earnings per day. This was mainly driven by the mentioned increase in commercial revenue days, which exceeded the mentioned volume growth. We saw a positive development in specialty chemicals, which is the core business of Odfjell. We also saw an increase in the commodity chemicals, the large volume chemicals. We saw a flat development when it comes to vegetable oils. And finally, the last segment, clean products; here we saw a decline in volumes carried by Odfjell and we are now back to, what I will call, the normal influx of clean products on board of our ships. So all in all, we see an increase in our core activity, specialty and commodity chemicals; we see a flat development in bag oils; and we see a healthy decline when it comes to Odfjell vessels carrying clean products. And then turning to sustainability. As mentioned, we are repeating the record low AER that we delivered in the second quarter. Once again we delivered an AER of 6.8. This is the lowest ever reported by Odfjell. And it's important to notice that when the second quarter is perhaps the best quarter when it comes to fuel consumption due to weather conditions, we are now back to the more normal weather conditions in the areas where we operate. It comes as no surprise that Odfjell was disappointed that the IMO Net-Zero Framework was not adopted in October. However, this will not deter Odfjell from continuing on our decarbonization pathway. We will continue to invest in in decarbonization projects, we will continue to utilize biofuel to reduce our AER and we will continue to invest in a net zero future. Finally, one of those projects relates to the sale installation on our vessel Bow Olympus. We have reported on this vessel before. This vessel recently completed a westward transit of the Pacific. Here we saw a 16% reduction of our fuel consumption. This translates to 4 tonnes of fuel every day during that transit and this is not only good for the environment, it's also good for Odfjell's bottom line. The Bow Olympus is now loading for the return voyage to the U.S. Gulf. She will commence that voyage in a week or 2. And normally, the eastward passage across the Pacific has more friendly wind direction. So we are very optimistic and eagerly waiting for that transit. Finally, Tank Terminals. The headline here is stability. We continue to deliver a stable performance. We had an occupancy rate slightly above 95%, which is marginally down from the second quarter. We saw an increase in inbound throughput of approximately 3% during the quarter. And as a result of increased throughput and reduced expenses, we did see an improvement of our EBITDA of approximately USD 1 million compared to the second quarter. However, we still have one-off items at holding level that are negatively impacting the consolidated EBITDA and net results of our Terminal division. The outlook for the division is stable similar underlying performance also in the last quarter of this year. We continue to develop our terminals. We are constructing the so-called Tankpit-Q at the North Sea terminal in Antwerp. This expansion project will be completed towards the end of the fourth quarter and that will add approximately 12,000 cubic meters of capacity to our Antwerp terminal. We also have a large expansion project going on in Ulsan in Korea at our OTK terminal, the so-called E5 expansion project. Here we are constructing almost 90,000 cubic meters of capacity and that project will be completed towards the end of next year. In total, we therefore have close to 100,000 cubic meters of capacity under construction at our terminals. It's also worth mentioning that we are refurbishing both our jetties at the Ulsan terminal, OTK. When those refurbishment projects are completed, that will significantly improve the flexibility of that terminal. And finally, it's important to notice that all our CapEx related to the terminals is funded locally within the respective joint ventures. So by that, I turn to a market update and prospects going forward. Starting with the freight rate development, you will see that West of Suez we have seen a flattening of the rates. The decline that we have seen over the past 12 months have come to a stop and we now see a relatively flat development. We anticipate that some of the reason for this development is the consequence of the tariff negotiations and also the proposed port fees both in the U.S. and in China. As a consequence of these negotiations and the port fees, we have seen that some of the chemical tanker capacity has gradually moved from the Western Hemisphere and over to the Eastern Hemisphere. And the reduction of available tonnage in the Western Hemisphere has had a stabilizing effect on the freight rates in this region. Then if we look at the situation East of Suez, we've seen that there has been a decline in freight rates during the quarter and that is, in our opinion, the effect of more tonnage moving from West of Suez to East of Suez and the surplus of tonnage East of Suez has put a pressure on chemical freight rates in that region. Overall, it's important to notice that despite the recent reductions in freight rates, we are still significantly above the levels that we saw before the end of 2022 where rates were at relatively depressed levels. So even if we have had a freight rate reduction over the past 12 months, we are still significantly above the levels that we saw before the end of 2022. And then to swing tonnage. If you look at the graph on your left hand side, you will see that the MR earnings have been in a positive trajectory already since the end of 2024 and they are now at relatively robust levels. This has had an impact on the swing tonnage meaning MRs that are carrying liquid chemicals. The situation is still that we see a relatively comfortable level of MRs swinging into our segment. And we also have to take into consideration that many of the MRs are 100% employed in the chemicals segment. That also goes for Odfjell. As an example, we have 6 MRs that are continuously trading in chemicals. And that implies that we will never see that the influx of swing tonnage becomes 0, but we believe that we are now close to the lowest level that can be achieved. Finally, the order book now stands at 22% of the existing fleet. The reason for the change from the second quarter is mainly that previously entered into newbuilding contracts have now been registered in the various systems. So there has been relatively few new orders during the third quarter. The main reason for the change is that orders entered into before are now also registered in our system. The majority of the order book is still related to the medium stainless steel segment while we have a relatively modest increase for super segregators and for all practical purpose, a net zero when it comes to large stainless steel. When it comes to our outlook, we still see that volumes are resilient. We still see that despite the geopolitical uncertainty and tariff negotiations, we still see that we have relatively solid volumes out there. We do see that IMF has revised GDP growth expectations upward once again and we also see that there are indications that the tariff negotiations between the U.S. and China have a slightly reduced risk compared to what we saw 1 and 2 quarters ago. We were expecting global seaborne chemical trade volumes to see a slight decrease in 2025. This has not been the fact so far and now we are expecting a flat development when it comes to this year's volume. We also see that we have higher oil production. We see that India is shifting towards non-Russian oil and this is, as we all know, supporting the VLCC segment. We have seen a spillover to the CPP segment. And historically, an upswing in crude and CPP have historically had a spillover effect also over some time into the chemical tanker segment. As mentioned, we believe that the swing tonnage will remain low for the rest of this year. So to summarize the demand outlook; we see a stable development when it comes to chemical trade, we see a small uptick when it comes to GDP growth and we see a stable development when it comes to the tariff effects on our markets. There is an upswing when it comes to the chemical tanker fleet and we do believe that swing tonnage will remain at existing levels. So to summarize this presentation, we did deliver a robust financial result in the third quarter, which was very much in line with what we delivered in the second quarter. Time charter earnings were stable while the average time charter earnings per day saw a decline of 7%. We saw an increase in volumes. That was particularly driven by an increase in our contract volumes. And we also saw an increase of commercial revenue days of approximately 7%. This was yet another quarter where we had few contract renewals. Those that we had were renewed more or less at rollover terms and we are now entering into the renewal season, which will last until the end of first quarter next year. On the terminal side, we still deliver solid underlying financial results. These were this quarter supported by moderate revenue growth and also slightly lower operating expenses. We do have one-off items at the holding level, which are negatively impacting the consolidated EBITDA and our net results on the terminal side. Market outlook. We have put a seasonally slower season behind us and we do see some upticks in activity in our markets. We do see positive effects from the increased OPEC production and we do expect that swing tonnage will remain at moderate and low levels. And by that, we expect the fourth quarter financial results to be more or less in line with what we saw in the third quarter. So that concludes our presentation and we now turn to the Q&A and then I welcome Nils and Terje back.

And just for our listeners and viewers out there, you can still use the question button on the webcast to post any questions as we proceed with the Q&A. We have some questions that have come in. I think the first one will go to you, Harald, and it relates to we recently saw that the U.S. and China port fees were postponed for now. And the question is how does this impact Odfjell?

Yes, that is correct and I briefly touched upon that when I gave an update on the freight rate development. Odfjell was exempted or chemical tankers where chemical tankers operated by Western operators were exempted from the U.S. port fees. So the U.S. port fees did not have a direct effect on Odfjell's operations. Then we saw the introduction of China port fees. Those port fees were mainly aimed at U.S. controlled tonnage and we were also not affected directly by the Chinese suggested port fees. Having said that, there are plenty of other operators that are in some way or another impacted by those port fees. As I explained in earlier today, this has an impact on how the total world chemical tanker fleet is distributed. And by that, we have seen a change where the overall tendency is that more vessels are East of Suez and less vessels are West of Suez. So no direct impact, but yes, a considerable indirect impact.

Okay. And then we have 1 question concerning cash breakeven so that goes to you, Terje. The cash breakeven came down somewhat this quarter. How do you see the development going forward?