Odfjell SE (OTC:ODJAF) Q1 2019 Results Earnings Conference Call May 8, 2019 3:00 AM ET
Kristian Mørch – Chief Executive Officer
Terje Iversen – Chief Financial Officer
Conference Call Participants
Bendik Engebretsen – Danske Bank
Good morning, and welcome to the presentation of the First Quarter Results 2019 for Odfjell SE. We are today having the conference call here from Bergen. Present here is Terje Iversen, CFO; Bjørn Kristian Røed, Head of IR and Research; and Kristian Mørch, I'm the CEO of the company. We will first of all go through the presentation that there's a link to and that has been sent out. And then afterwards, we will open up for questions.
So if you – we start here on Slide 3. First of all, maybe I should just say that I will take you through the highlights on Slide 3, and then Terje will take you through the financials and then I will come back and take you through some of the operational and the market update.
But if we start on Slide number 3 and the highlights, I think after a very, very difficult 2018, it was nice to see that the chemical tanker market improved into the first quarter. The spot market continued to improve and we'll talk a little bit later in this presentation about why and how we see the market developed further. The EBITDA was $47 million compared to $33 million in the fourth quarter.
Of course, the main impact of that comes from the new IFRS 16 impact that Terje will also speak about. But if you look at the Odfjell Tankers' EBITDA adjusted for IFRS, it improved $4 million from $23 million to $27 million on a comparative basis. The EBITDA from Odfjell Terminals was increased from $5 million to $7 million, which is up $2 million as well. And the net result of the – for the quarter was $15 million minus compared to $48 million in the last quarter.
As I said, it was especially the spot rates that improved as an average in our main tradelanes. The spot rates approved by 16% that was partly offset by the fact that we had a little bit of – we have fewer revenue days compared to the previous quarter. And all the changes we're doing to our portfolio of tankers, ships coming in and ships coming out and kind of – if you see in isolation the first quarter, then that came off a little bit and we had one ship that was off-hire throughout the quarter.
One of the main highlights for the quarter is that you will see our contract coverage dropping from 59% to 50%. And we do not want to sell our capacity forward at last given levels when we see the markets coming up, so we have taken – we just – we do not think that it makes sense to aggressively pursue contracts. So we are reducing our contract portfolio as a result, and of course, thereby, also increasing our exposure to the market. Finally, for – in terms of highlights, the Board decided not to recommend the dividend for the full year 2018, given the magnitude of the loss last year and that was approved yesterday by the – during the AGM.
So in short, as you can see on the right-hand side, we do believe that the markets have turned. Our contract level is coming down by design, and that means that our exposure comes up. And in terms of performance, we believe that the worst is behind us, and that we will continue to improve performance into the second quarter.
And this time, I'll hand it over to Terje Iversen, and then I will come back a little bit later.
Thank you. I will then turn the page to Slide number 5, where we are stating the income statement for the quarter. Starting with the Tanker business. We see that the gross revenue declined slightly this quarter, as Kristian mentioned that is also tied to fewer revenue days compared to fourth quarter 2018. Voyage expenses decreased from $94.5 million to $90.2 million, mainly due to the reduced banker expenses this quarter compared to the fourth quarter 2018. And we also see that pool distribution increased from $9.7 million to $13.0 million, also due to the fact that we increased the number of fuel vessels in this quarter.
Then we have the time-charter revenue for the quarter of USD 115.2 million. And then we have time-charter expenses decreased from $35 million to $15.4 million. The main driver behind that is IFRS 16, where we're decomposing the time-charter expenses. So that is also expected going forward that the time-charter expenses will be much lower than we have reported earlier because of the changes in the accounting rules. But excluding that, we also have a small decrease in the time-charter fleet this quarter also reducing the time-charter expenses.
In terms of the operating expenses and they are very close to last quarter 2018 at $37.2 million. Then we have this new item, operating expenses from IFRS 16, which has done the decomposing of the time-charter expenses being $5.3 million this quarter. And then we see that G&A quite stable compared to fourth quarter 2018, ended at $17.6 million. At which time, it gives an EBITDA of USD 39.7 million, increasing from $27 million in the fourth quarter. But if you adjust for the IFRS 16 effects this quarter, then we would be at the same level of USD 27 million, same as in fourth quarter. But if we look behind the figures, we had some one-offs that increased EBITDA of around USD 4 million in the fourth quarter 2018, so there's actually an improvement of around USD 4 million compared to the fourth quarter in 2018.
After depreciations and capital gain and losses, we ended with an EBIT of $5.4 million compared to $2.1 million in the fourth quarter. We also see that the net interest expenses increased slightly this quarter to $20.1 million that is also partly due to the – decomposing the time-charter expenses according to new accounting regulations. And then net finance of negative $19.4 million and after taxes of $1.2 million, and the net results for the Tankers of negative $15.2 million compared to negative $32.9 million in the fourth quarter.
Terminal business, a small increase in the revenue to $17.6 million this quarter. Operating expenses same as fourth quarter. Then we have G&A ending at $4.0 million this quarter compared to $5.6 million fourth quarter. Main driver is that it was including some one-offs in the fourth quarter, so we are no more on normal and stabilized level with $4.0 million in this quarter. And that ended with an EBITDA of $6.7 million. And then after depreciation, capital gain and losses, EBIT from the Terminal business was $0.8 million. And after net interest expenses and taxes, we ended a net result from the Terminal business as – at negative $1.0 million compared to negative $12.1 million in the fourth quarter. But that also included a depreciation or an impairment of one terminal of USD 10 million in the fourth quarter.
Looking briefly at the total figures this quarter, also including the gas vessels, the two gas vessels that we have classified as held for sale. We ended with an EBITDA of $47.2 million compared to $32.7 million. If we exclude IFRS 16 effects, the adjusted EBITDA would be around $34 million. And I'm showing a slight improvement compared to the fourth quarter 2018. EBIT ended at $7.0 million, after net finance and taxes, we ended a net result of negative $15.4 million compared to negative $47.6 million in the fourth quarter.
The next slide, number 6, just briefly touching upon this IFRS 16 again, showing what would the results look like if we did not implement IFRS 16 in the first quarter. Then we have the column we call first quarter 2019 adjusted to the right and then showing that's – the adjusted EBITDA this quarter would have been $27.0 million compared to the same figure in fourth quarter, if we haven't had implemented IFRS 16 this quarter. Main changes related to time-charter expenses, where we are reporting our $15.4 million, while we actually paid USD 32.6 million in time-charter expenses this quarter. EBIT would have been $4.2 million compared to reported $5.4 million, but the net result would have been $13.5 million negative, compared to the reported negative $15.2 million.
On the next slide, we are touching upon the time charter and the bareboats commitments going forward, the long-term commitments being time charters and bareboats more than 12 months tenure. We see that this is quite stable going forward in coming quarters, where we are decomposing – for example, looking at the first quarter 2019, we have in total USD 19 million, which is then decomposed into OpEx with USD 5 million interest fee and long – and then USD 11 million in depreciation. In addition, we have shorter term time-charter commitments being done less than 12 months, where we had commitments starting of the year at USD 29 million, which has then increased to USD 14 million per end of the first quarter. But we are planning and intending to renegotiate and renew some of time-charter fleet going forward. So we expect the shorter time-charter commitments will increase in the coming quarters.
Then on the balance sheet, Slide number 8. We see that the ships and newbuilding contracts are quite stable compared to end of last year. And that is, of course, due to some installments paid on the newbuildings at the same time we have depreciation included. And then we have the new kind of assets related to short-term time charter and bareboats that we have capitalized to USD 216.8 million in total, which should then have been added to the total assets on our balance sheet. And also on the debt side, where we are showing that the decomposing of the right of use asset into short-term and on the long-term interest bearing debts.
We see that the cash and cash equivalents decreased somewhat this quarter. End of this quarter, we had USD 138.6 million. Decrease is mainly due to repayment of debts during the quarter and also some installments paid on the newbuildings. The equity, end of first quarter, is USD 583.5 million, which is around 29%. If we exclude IFRS 16 debt commitments that has been added to the balance sheet this quarter, we would be around 32.0 in equity percentage.
Then on next slide, we showed the cash flow from the quarter. We showed that we had cash flow from operating activities around $11.2 million compared to $8.2 million in the fourth quarter. And then we have cash flow from investing activities, negative $15.3 million, mainly due to installments on the newbuildings and also some docking expenses and installments of equipment on some of the vessels this quarter. And then from financing, we had negative $25.2 million mainly due to the repayments of debt during this quarter, but we also drew some new debt on a new loan and also some of the installments for the newbuilds were paid by the external loan providers. So then we ended with a negative net cash flow this quarter of $29.3 million compared to $39.0 million in the fourth quarter.
Next slide, bunker expenses continue to be one of the main cost proponents for our business. And we see that this quarter – actually, our bunker expenses were reduced by 13%, mainly due to the decrease in the bunker cost, oil price towards the end of the last year and the beginning of this year. And also due to the first-in-first-out principle we see that the reduction in bunker cost or bunker prices is effected into our accounts at a later stage when we're actually burning the fuel and not necessarily when we are buying the fuel in the price the time we are buying the fuel.
So the gross bunker cost ended at $40.8 million this quarter compared to $46.7 million the last quarter. And also see, we had some positive effects from the bunker hedging, financial derivatives this quarter, but we also see that the compensation from our customers due to the oil price decreased from $4.9 million in the fourth quarter to $1.2 million in this quarter.
On the debt side, we showed the expected repayments or the scheduled repayments for the coming quarters. As you can see, we have some installments of balloons maturing in the third quarter. The two main items there is a ship finance loan of around USD 40 million that we are in advanced discussions with the bank to refinance that maturity, so that is well taken care of. In addition, we have a bond maturing in September. And we are closely following the markets and the terms that are possible to obtain in today's market, if we should refinance at this stage. But we're also preparing ourself for possibly only repaying the bond at maturity without issuing any new bond, depending on the market circumstances and the terms we are able to obtain in the market. We could consider issuing a new bond, but we could also consider to do a tap issue of the existing bonds, if we find that effective.
On the bottom of the page, we showed estimated development of the gross debt going forward. And as you see, also including expected refinancing, we expect to increase the total debt in our balance sheets towards the end of this year and also towards the end of next year. But when all the newbuildings have been delivered, we expect to start decreasing the total debt on our balance sheet, of course, depending on the market circumstances and earnings that we are generating in the markets.
Then on the CapEx side, not very much new to report on. We still have the six newbuildings from Hudong being delivered in the coming two years. We expect for today that two of the vessels will be delivered during the second half of 2019, and the third one quite close to the end of the year or maybe into 2020. And as you can see from the overview, it's a rather limited equity installment needed for us to take full delivery of these vessels, which has been fully financed all of them.
In addition, we show expected CapEx from the Tank Terminal business. We have expected maintenance CapEx for the next three years around USD 7 million and then we also have planned expansion CapEx this year at USD 8 million being the Odfjell share of the CapEx. In addition, as we have flagged earlier, there's a reason to believe that when we have the new partnership in place in the U.S., with Northleaf coming in and replacing Lindsay Goldberg as our joint venture partner. We are going to embark on a large expansion program, but that is – has to be in – kind of reported later when we have a more firm plan together with the new partner at that terminal.
Then I will leave the road to you again, Kristian.
Thank you, Terje. If we continue on Slide number 14, I already mentioned that what you're seeing this quarter is that our contract coverage on the chemical tankers, that it's dropping from 59% to 50%. And this is a result of the fact that the contract rates that you're seeing on the bottom of this page are at all-time low levels, and we do not think that it makes sense for us to extend or aggressively pursue contract – new contracts at those levels. Especially, not when we are seeing that the markets are firming.
So we have taken a tougher stand in terms of rate-wise and how we view the contracts. And as a result of that, we have had to let some contracts go. And we have not had any problems in replacing those volumes with better-paying spot volumes. So I think this is a – we believe strongly that the fundamentals are in our favor and that the markets will begin to improve and as such, selling our capacity forward and a loss simply does not make any sense. And that is what – that is the effect that you're seeing here.
If we turn to Page 15 on Odfjell Tankers, just a few comments here. I mentioned some of the effects already. If you start on the bottom right-hand corner, you're seeing that our total voyage days is dropping in the first quarter. And this is a – not a general sign that we're reducing the size of the fleet. It is simply quarter by quarter, when you're doing as many changes to the fleet as we are at the moment ships coming in, ships coming out and there's some timing issues here, so this is what you're seeing here. And as a result, on the top right-hand corner, you're seeing that the volumes carried in the first quarter is also dropping to 3.6 million tons during the quarter.
On the left-hand side, you are seeing that the ODFIX index, our earnings Index is up by 5.5% this quarter, whereas the Clarksons' spot index is down by 3%. That can seem a little bit strange when you – when we're saying that the average spot rates are up. I think with these indexes, as always, there is a time lag, ongoing voyages has to be completed before we can reload with new rates and so on. So zooming in quarter-by-quarter is a little bit – can be a little bit misleading. But the general trend for the spot market is up and that will mean that probably the Clarksons index will be up when you look at it next quarter.
If we turn to the Terminals on Page 16, we are really beginning to see now the effects that we do not have the Rotterdam terminal in our results anymore. First of all, the average utilization development is up sharply, so we have 96% of the remaining capacity. In the top right-hand corner, you're seeing, of course, that the absolute number in terms of EBITDA from terminals have come down. Of course, we have a smaller footprint, but the returns we are getting on that capacity, which is the EBITDA margin is up dramatically. So – but that is a – the majority of that effect comes from the changes we have done to the portfolio.
There's also one point that's important to say, that the market especially in the U.S. for storage and chemical storage is very, very firm at the moment. And there was a big fire by the end of March at ITC, which will not reopen for a number of years. It's expected. And so the pressure on that market has just increased even further. So we are at full capacity at the Houston terminal and actually, also in our Charleston terminal as a result. Terje mentioned that we will – once that the deal with Northleaf closes towards the end of this month or beginning of next month, we will – beginning to form the plan to build out the spare capacity that we do have especially on the Houston terminal.
If I continue on Slide number 17, this is an overview of the remaining portfolio of the Terminals. The Lindsay Goldberg exit from our Terminals business is well underway. It has been completed in Europe where we bought Lindsay Goldberg out of the Antwerp terminal. That terminal continues to perform well and growing. In the U.S., the deal with Northleaf, as I said, is scheduled to close either end of May or just in early June. And we cannot wait to get going. We have a new CEO in place that's going to start on Monday. And so we have high hopes for him and the team there to take that terminal further on. So then that means that the remaining terminals fall into Goldberg's exit is in Asia, and that discussion is ongoing at the moment.
If we then turn to the market prospects, I think that's a slide number on there, that must be Slide number 19. And we keep referring to the fact that we believe that the markets have changed towards the end of 2018, and there were really kind of three main reasons why we see that there was a shift in them – – was a shift in that market. First of all, it's no secret that towards the end of the year, the CPP markets, the Product Tanker markets came off – up quite dramatically.
It has since then dropped back just a little bit, but I think that's a very much more firmer sentiment than the Product Tankers market, partly driven by the IMO 2020 and partly driven by low stocks that has been refilled and so on. And so what we are seeing as a result is that the swing tonnage, which means that the coded product tankers that has been trading in easy chemicals that is beginning to swing back. On the top graph, the light blue bars is the effect of the swing tonnage, and that has been reduced by 1% since the beginning of the fourth quarter. So that is a – it certainly has an impact on our business.
The second thing is that the palm oil markets has firmed dramatically as well. Production is up in Southeast Asia by nearly 10%, export's up by nearly 20%. And of course, that benefits both the Product Tanker story but it certainly also benefits the – in the chemical tanker demand.
And the third thing is that we have talked for a while now about the addition of organic chemical capacity, both in the U.S. and in the Middle East. And that capacity is now really coming on stream. You can see that in 2018, the volume demand was up by nearly 4%, but the ton miles are up by 5%. So really, we're seeing these peak methanol plans coming on stream that's stocking up tonnage and that has a measurable effect on the actual demand situation in the market. So these are the three fundamental things that's really driving a fundamental that has been – that otherwise also looks strong in the other sector.
On the following slide, we're looking at the supply side, the order book. This was another quarter with no new orders into the core chemical segment. So first quarter 2019 was the peak quarter of deliveries with 12 ships delivered and two ships going out. So that was 10 ships addition to the fleet, but when you look at the quarters following, then it's trailing off quite fast. The current order book in this segment stands at around 7.5% or 7.4%, which implies an average supply growth of around 2.5%, maybe 3%, but compounded 2.5% over the coming years. So that is in comparison with the demand growth we're seeing. I think – we think that, that's a really healthy balance.
So what we have done on the right-hand side is that we have said, okay, so a 7.4% order book, how does that come – is that a big number or a small number? I mean compared to historical levels, it's – it is very much modest, I would say. But if you compare that, for instance, to the number of ships being built between '95 and 2000 that will soon turn 20 years, that's 17% of the war fleet. So in that comparison, 7.4% is not a lot.
And if you look at the previous slide when I talked about swing tonnage, if that regresses back to the historic mean, then that would reduce the actual supply into the chemical market by around 6%. So there are some real – if you look at real supply into this market compared to the order book, there's some quite, we don't think that 7.4% or 2.5% growth is scary by any measure.
So on the conclusion slide, taking demand over supply, we believe that demand is going to continue to – real demand is going to continue to grow by around 4%. If you then to that add, that demand will be carried over longer distances, you can add anywhere between, let's say, 1%, 2%, and maybe even 3% if you are really – if you're really aggressive. But at least you have to add a factor to the 4%. So let's say real demand is going to grow by somewhere between 5% and 6% compound over the next couple of years. And that compares to the supply picture that I just spoke about, which means call it 2.5% or 2% growth in supply. So this is the more – the healthiest fundamental picture we've been looking at for quite a while, and this is also why we start managing the business after that view.
Finally, summary and prospects. We have the improved results for Odfjell Tankers as of late 2018. We have said that 2018 was a transitional year, also in terms of the market. And we're seeing early signs that, that could indeed be the case. And we – under Tankers, we are – we're taking the consequence of that, and we are not extending our contracts – or some of the contracts at loss giving levels, and we're exposing ourselves to a market that we believe is firming. On Odfjell Terminals, stronger performance, improving returns. And it was also a transitional year for Terminals, many changes going on last year, sale of Rotterdam and Lindsay Goldberg's exit and so on. And we are seeing a strong market for Terminals, especially, in the U.S. So we expect to improve results next quarter for Odfjell Tankers and Odfjell Terminals results to remain stable.
So that was really the presentation. And I think we will open up for questions.
Thank you. [Operator Instructions] We will now take our first question.
Good morning. Bendik Engebretsen from Danske Bank here. Thank you for the presentation. Two quick questions for me. Could you comment on how you are coming along with passing on the expected increase fuel costs from low – from fuel oil onto counterparties?
We have not entered into any contracts for 2000 – after 1st of January 2020, where the fuel cost is not passed along. There are some contracts where there's a clause that has – where the parties have to sit down towards the end of the year, agree to a fair clause regarding that fuel cost. But in case we should not agree, we are not committed beyond 1st of January 2020, and we are taking a very firm stance. We don't believe that for the past many years, there has been a principal that there's a bunker adjustment clause. And just because the regulations change, we don't think that, that principle is changing. And I think – my own view is that there's a general acceptance in the market that we will succeed with that.
All right. Secondly, and last question, you've briefly mentioned the current plans for Houston, that Houston terminal, that includes expansion and improvement projects. Could you elaborate on these spends? What scale of improvements should we expect? And which earnings improvements can we expect from these expansions?
Yes, I think the scale in monetary terms and the improvements, I don't think we are ready to share that. We have a new shareholder coming in who do not own the shares yet, and we are not – so with respect for that, we have to spend the time together with them to discuss and what pace do we go and so on. But it's quite clear that in the strongest market we've seen in the U.S., we have a terminal that's ideally located in the Houston – outside the Houston ship channel.
And on that terminal, we have actually three bays that are not built today that are greenfield and brownfield. And it's obvious that within the current infrastructure of that terminal, we can add tanks to those bays. And this is what our intention is. We have previously spoken about the ethylene project on what's called the point, and we don't think that the ethylene project – we think we lost the timing a little bit on that one, but that's a strong case for building that out with conventional storage. But I think it's too early to talk about the scale and the speed of which because we have to respect that we have a – another shareholder on – from, let's say, 1st of June.
All right, thank you very much.
Thank you, sir. [Operator Instructions] There are no further questions at this time, sir.
Okay. Are there any written questions on the line? No? Okay. So last chance for a question [Operator Instructions]
It doesn't seem like it. So on that note, thank you very much for listening in, even though you haven't asked your question today, please don't hesitate to reach out to Bjørn Kristian or Terje or myself, and we're always available to answer questions. But in the meantime, thank you for listening and then have a nice day. Stay safe.