Ocean Yield ASA (OYIEF) Q1 2023 Earnings Call Transcript

Ocean Yield ASA (OTCQX:OYIEF) Q1 2023 Results Conference Call May 25, 2023 3:00 AM ET

Company Participants

Andreas Roede - Chief Executive Officer

Eirik Eide - Chief Financial Officer

Conference Call Participants

Alexander Jost - Arctic Securities

Pal Dahl - SB 1 Markets

Magnus Hjermann - SEB

Andreas Roede

Good morning everyone, and welcome Ocean Yield’s First Quarter 2023 Earnings Presentation. I will start today's presentation with the highlights of the quarter and provide an update on our portfolio before our CFO, Eirik Eide will take us through the financials. Then the presentation will be concluded with opening up for questions.

Starting off on page two, we are pleased to report another quarter with strong and stable performance for Ocean Yield. We report an EBITDA adjusted for finance lease effects of $87.4 million and a net profit of $23 million. Despite some seasonal weakness in some of the underlying shipping markets, the counterparty risk in the portfolio remains low, and asset values remain firm resulting in comfortable lease to value on a portfolio basis.

We are ending the quarter with a strong and robust balance sheet with $113 million in cash and an equity ratio of 30.15%. Several refinancing initiatives have been concluded during and after the quarter and Eirik will cover this in greater detail later in the presentation.

During the quarter, the bond loan OCY05 was settled with cash and a new bond OCY08 with the nominal amount of NOK750 million was issued. In connection with the issue, $39.3 million of OCY06 and NOK299.5 million of OCY07 was repurchased. Also, during the quarter, we entered into 5-year bareboat charters for the two AHTS vessels to Viking Supply Ships, in line with our previously communicated strategy for these vessels. At the end of the first quarter, the EBITDA backlog was $3.7 billion with an average remaining contract duration of 9.3 years.

Moving to page three. On March 14, we announced a new five-year bareboat charter agreement with Viking Supply Ships for the two AHTS vessels Far Senator and Normand Statesman, currently operating in a pool with Solstad Offshore. Viking will have purchase options during the charter period and an obligation to purchase the vessels at the end of the period if requested by Ocean Yield. There is also a substantial element of prepaid charter hire to be paid upon commencement of the charter. Once the vessels are delivered to Viking Supply, during the second half of 2023, a 100% of Ocean Yield's fleet will be on long-term charters.

Moving to Page four for an update on the portfolio. Following the sale of the 2015-built dry bulk vessels Interlink Sagacity and Interlink Priority through third parties by Interlink. We agreed to replace these vessels with the 2017-built system vessels Interlink Celerity and Interlink Fortuity in the charter agreements. No other changes were made to the commercial terms and as such further enhancing the risk reward of these transactions.

During and after the quarter, Hoegh Tracer, STI Sanctity, Hafnia Turquoise and STI Steadfast were delivered following the closing of the previously announced purchase options under the charter agreements. No purchase or sales options have been declared during the quarter or post quarter end. Our portfolio vessels on the construction is progressing according to plan, and we look forward to gradually welcoming these vessels to our fleet upon delivery.

Moving to Page five. Including the investment activity completed during 2022, we now have an EBITDA backlog of $3.7 billion. The average contract duration of the portfolio is more than nine years, and a 100% of the portfolio is now employed on long-term charters. The diversified modern fleet with an average age of five years comprised 68 vessels at the end of Q1 and the vessels are on charter to 18 different customers representative in eight different segments. This provide the foundation for stable and predictable earnings in the years to come and serve as a strong platform for further profitable growth.

We remain segment agnostic when evaluating new investment opportunities and experience increased deal flow as rising interest rates and uncertain macroeconomic outlook have affected cost of funding in certain shipping segments, increasing new building activities also contributing to increased activity.

So with that, I would like to hand over to Eirik, who will take us through the financials for the first quarter.

Eirik Eide

Thank you, Andreas. So we move on to Slide six, which shows a financial snapshot of the company as of the first quarter. We have recorded EBITDA of $58.1 million in the quarter, and EBITDA adjusted for finance lease effects was $87.4 million. Net profit $23 million. The cash position of the company remains solid with $113 million at the end of the quarter. Equity ratio was 30.5% and the Board of Directors has not declared a dividend this quarter.

Moving on to the P&L, and starting off then with the operating revenues where we have recorded $18.8 million compared to $17.5 million in the fourth quarter. Operating lease revenue was positively impacted by higher interest rates in the quarter, which affected the floating interest rate based operating leases. While the anchor handling vessels in the Solstad pool had higher revenues compared with the fourth quarter.

Finance lease revenues increased to $33.6 million in Q1 compared to $32.4 in Q4. And the increase here is due to higher interest rates in the quarter, which affected the floating interest rate based leases. Income from investments in associates, which is related to the 50% ownership in two tankers and also the 49.9% ownership in seven container vessels that was in total $5.4 million compared to $3.9 million in Q4. The increase is mainly due to full quarter earnings from the container vessel MSC Fatma, which was delivered in the fourth quarter.

Then we had other income of $3.2 million, which is mainly related to vessel sales, and that gives us then total revenues of $61 million compared to $55.4 million last quarter. Depreciation was $6.6 million and is unchanged from the last quarter, so nothing specific to comment there. Operating profits improved to $51.5 million compared to $45.2 million in Q4.

Financial expenses, $28.9 million compared to $25.1 million last quarter. The increase here is mainly due to higher interest rates during the quarter, but also costs related to the partial buyback of the bond issue OCY07. And note that the increase in interest expenses is offset by higher lease revenues due to floating LIBOR SOFR clauses in our charter agreement. But as mentioned earlier, there may be a lag effect before revenues are fully offset by the increase in interest rate expenses due to the nature of the contract.

Foreign exchange movements and mark-to-market of derivatives were net negative with $1.1 million, and this is mainly related to the cross currency swaps for our bond loans denominated in NOK, which has been swapped into US dollars. So the quarter then ended with the net profit of $23 million compared to $21.1 million in Q4.

Moving then onto the balance sheet, a couple of items to comment here. We have on the left hand side, a slight decrease in vessels and equipment compared to the fourth quarter. And this is mainly due to vessel sales for a vessel accounted for as an operating lease.

Cash and cash equivalence $113 million as mentioned earlier compared to $122 million last quarter. Book equity $677 million compared to $706 in Q4. The decrease here is mainly due to buyback of the hybrid perpetual bond, which was $125 million in Q4 and now stands at $86 million at the end of Q1. Total liabilities, $1.544 billion and total assets were $2.221 billion, and that gives us an equity ratio of 30.5% at the end of the quarter.

Moving on to financing initiatives, the first quarter continued to be very active in terms of financing activities where we have refinanced and upsized several loan agreements. In addition to buying back both hybrid perpetual bonds, a part of the unsecured bond OCY07 and also issued a new unsecured bond. So we started off the quarter by repaying the NOK750 million bond loan OCY05 with cash, and that had maturity in May this year. Then later in the quarter, we issued a new NOK750 million bond loan with a four-year maturity. This bond is priced at LIBOR plus 395 basis points, and at the same time we’ve repurchase $39.3 million in the hybrid perpetual bond OCY06 and also bought back NOK299.5 million in the unsecured bond OCY07, which has maturity in December, 2024. And this is all part of proactively managing near term debt maturities in the company.

Then further, we have refinance and upsized three secured loan facilities, which will give an overall positive liquidity effect of $26 million. $13 million of these are closed after the end of the quarter, and hence we'll have a positive effect in Q2. When it comes to the financing of our new buildings, we have now completed long-term financing for all three new building container vessels, and in addition, we have signed a term sheet for the long term financing of the two LEG vessels with long-term chartered to Braskem.

We're also progressing well with the financing of the Newcastlemax dry bulk vessels. So far, one bank has obtained credit approval for the financing of two vessels on a bilateral basis, and we are progressing well in other financing discussions for the remaining vessels. We have no near term maturities as all the refinancings for 2023 has been taken care of.

And with that, I will give the word back to Andreas who will summarize.

Andreas Roede

Thank you, Eirik. So to summarize on page 10, Q1 was another testimony to the strong and stable performance of our vessels on long-term charters. Ocean Yield has robust final financial position, and our access to financing as Eirik just explained, remains strong despite some increased volatility and uncertainty in the banking sector. Again, we thank our banks for their continued support in financing both new and existing transactions during the quarter. We also like to thank our bondholders for their continued support and their participation in the recently issued bond loan OCY08.

Ocean Yield has a clear strategy and ambition of playing a leading role with our partners and clients as we collectively seek to facilitate energy transition. As such, we are actively looking at new transactions with modern and future-proof assets.

So with that, I would like to thank you all for listening to the Ocean Yield Q1 2023 earnings release, and I would now like to open up for questions from the web.

Question-and-Answer Session

Operator

[Operator Instructions] And we have already received a couple of questions starting off with questions from Alexander Jost with Arctic Securities.

Alexander Jost

We are very pleased to see another quarter without dividend. At the same time, you're saying that you are actively evaluating growth of opportunities, are the two tied together, will dividends be adjusted up, down, depending on the opportunities that you see in terms of the yield flow?

The second question is, as you're actively looking for growth opportunities, will growth come at expense of your internal IRR hurdles or other investing policies? Third question. Could you give an indication of the funding cost on the term sheet that you have signed on the Braskem vessels? And a fourth question, please elaborate on the asset swap. It seems like you are getting more valuable assets for free. Is it really a free lunch?

Andreas Roede

I can start off. First and foremost, thank you for very good questions, Alexander. Let me start off with question number one. So, I think it's important to say that our capital allocation policy is always determined by one, the strength of our balance sheet and of course always looking at upcoming and potential growth opportunities. So yes, you are right. We can adjust the dividends up and down pending on available and tangible growth opportunities. And I think this is probably one of the greater advantages of being owned by an owner like KKR that has a very great degree of flexibility when it comes to potentially returning capital to them as a shareholder.

With respect to question number two, and the fact that we are actively looking at growth opportunities, it's important for me to iterate that we are never going to grow just for the sake of growing. We're only going to grow and invest when we find the risk reward as attractive. And as such, there is no change in our strategy when it comes to new investments.

Question three, perhaps Eirik, you can shed some light on the financing of the Braskem vessels.

Eirik Eide

Yes, I can do that. Without sort of revealing the full sort of details, I can say that, the financing of those vessels obviously on the back of an investment grade counterparty has higher LTV than what we normally look for, and also a much longer tenor than we normally do in the banking market. In terms of the margin, I would say that it's in line with what we normally see from our banks.

Andreas Roede

Great. Then the final question, with respect to the asset swap and whether or not we get free lunch. So you're right, we are enhancing the risk profile of the transaction replacing to a 15-year built vessels with to 17-year -- 2017 built vessels. It's fair to say that in Interlink is a longstanding client of ours, and really swapping these two vessels into the facility that they have with us made sense for them as the vessels were unencumbered and as such should fit well into their financing plan.

Operator

Then we have received a question from Pal Dahl with SB 1 Markets.

Pal Dahl

New building prices are up versus two, three years ago. Can you elaborate on the considerations you make evaluating investments at this point in the new building price cycle as compared to the new building prices per lower?

Andreas Roede

Thank you for that Pal. I can start off with that. So I mean, yes, we are as previously communicated, always cognizant of where we are in the cycle. But it's also important to remember that when you invest for a period of up to 15 years, it's fair to say that for us the most important part and what we've always said before is that client selection for us is sort of the most paramount. So we can mitigate this partly by having increased focus on client selection, which we always have. And then finally, it's also fair to mention that new built prices have partially also gone up as we have gradually been moving towards new fuel systems. And those vessels will be future-proof. In addition, it's also fair to comment on the fact that currently rates are also reflecting the higher new built prices, and we've also seen that the charter tender has been increasing to reflect the underlying increase in new built asset prices.

Operator

Then we have received a question from Magnus Hjermann at SEB.

Magnus Hjermann

Can you say something about the lag, like timing related to when interest rate increases kicks into your charter agreements?

Andreas Roede

Yes. I mean, that sort of comes from the nature of some of the contracts. There's a variety of leasing contracts that we have in the portfolio. And some of them, I would say the majority have sort of quarterly adjustment towards the charter, but also quarterly adjustments from our banks. And then there are some lease agreements that will have either six monthly or 12 monthly interest rate adjustments so that you only adjust sort of the chart rate based on interest rates on once per annum or maybe two times per year. And that's where you see sort of the lag effect coming into play.

Magnus Hjermann

Thank you for that.

Operator

There are no further questions. If you have questions that hasn't been raised, please do reach out to us at the IR department as well. So, with that, I'll hand over back to you Andreas for final remarks.

Andreas Roede

Thank you all for listening, and we wish you all a pleasant day.