Morning everyone, and welcome to the first quarter, result presentation of Klaveness Combination Carriers. My name is Engebret Dahm. I'm the CEO of the company, and together with me, I have Liv Dyrnes, the CFO. As normal, please use the webcast solution to write your questions, and we'll go through it after the presentation. The first quarter was a spectacular quarter for KCC, but a quite a mixed market backdrop. Both the dry bulk market and the product tanker market fell down quite substantially during January. The product tankers picked up to very high levels again during February and March, while the dry bulk market had a deeper and longer downturn than normal.
For the TCE one, TCE earnings for KCC, we ended at the new record of $38,700 per day, which is around $4,000 higher than the midpoint of our guiding for the quarter. This corresponds to 3.8 x the dry bulk spot earnings and 0.9 x the product tankers. The higher earnings of both the car moves and the clean moves in combination with the lower OPEX, led to a 46% increase in EBITDA, ending at $41 million, which corresponds to 21% return on capital employed. Based on the strong earnings, the board decided to increase the dividends by $0.10 to $0.40 per share.
Looking at the market, we had also in this quarter positive value from our diversified earnings base being both in the dry bulk and tanker market and having a positive effect of higher fuel prices. Looking on the dry bulk earnings, we had the seasonal downturn in the first quarter was deeper and took longer time to recover than normal. Spot market earnings after recovery in March is currently around $12,500 per day for Capesize, which is not too inspiring. The product tanker market, on the other hand, also fell back in early January, but bounced back in end of January and has kept up at very high levels through February and March.
The fuel prices have trended down, but still are at pretty good levels. Taking first a look on the dry bulk market. There has been a positive demand growth. This is the deadweight ton-mile growth, which ended positive in the first quarter. The large effective supply growth in the quarter more than offset this positive effect on demand side. While a nominal supply growth was only 2.8%, the effect of increasing, I mean, lower congestion and lower speeds of the fleet made the effective growth in the dry bulk market up to 6%. This balance between supply and demand explains the weakening of the market.
The market is at the current levels, pretty balanced. It takes quite little to move the market up. We believe that the prospects of stronger Chinese growth could tighten the market considerably over the coming quarters. The graph to the right shows the, in the blue is the trade-weighted Purchasing Managers' Index on a global basis, showing the flattening out towards the end of last year and getting up to around 50, which is the inflection point between expansion and contraction. In China, we see rather mixed economic signals. We see that this week, the PMI ended lower than expected.
The manufacturing activity is also lower than expected, but also positive signs both on the credit to growth and house prices, which should, from experts, lead to increasing investments and increasing demand coming into the year. In totality, we believe that the effective fleet growth for the second half will turn around being lower due to the potential of increased efficiency in the market being, having peaked, and in combination with increased demand should tighten the market into the second half. On the tanker side, the demand for and supply of oil is back from before the pre-COVID levels, and based on the recent estimates from IEA will improve further into the second half of the year. Also, the inventories are at the lower than historical average.
The main reason for the stronger market is the higher ton-mile development, which has been very strong given the replacement of Russian oil into Europe. Based on the latest forecast of Clarksons, we see an estimate of 11% growth in ton-mile in the product tanker market in this year and a further 7% increase in ton-mile for next year. Knowing we have a supply growth of 1%-2%, this shows the positiveness in the product tanker market for the next year or two. Looking at the earnings of our company. We have over time delivered time charter earnings well above the spot market in the dry bulk and the product tankers.
Here we see the product tankers in black and the dry bulk in light blue compared to our earnings in the columns. Over the last five years, the average premium for the compared to the dry bulk and product tanker market has been 1.4. 2022, we ended at an earnings of close to $30,000 per day, more or less matching the product tanker market, but being 1.4 x stronger than the dry market. In first quarter 2023, average earnings, so $38,700 per day, was 3.8 x the dry bulk market and 0.9x the booming product tanker market.
Looking on the CABUs, we note that the first quarter, we have a slightly higher dry bulk trading in the quarter due to seasonally low caustic soda shipments in the start of the year, which has later improved substantially into the second quarter. This resulted in a very strong trading efficiency of the CABUs ending at 95% in combination trade and with a ballast of only 11%. The having more than 50% of the capacity in dry bulk market explains why the CABU earnings was hit by the weak dry market.
Here we see the earnings, time charter earnings per day of the CABU fleet in the dry market compared to the average Panamax spot earnings in the dotted line and the Pacific spot earnings in the blue line. Given that our CABUs are trading only in the Pacific, the blue line is the best benchmark for the dry earnings of our CABUs. We see that from fourth quarter to the first quarter, the average spot earnings more or less halved, and also our dry earnings in the quarter fell back slightly less but from $17,900 to $9,700 per day.
This was also impacted by the fact that our older units are struggling a little bit more in a very low dry market to find employment. Looking ahead, we see the recovery in the dry market, both in the Pacific and in the average global market, is positive for the second quarter, which of course explains the upside potential for the CABU earnings. Looking at the earnings for the quarter, we ended at $31,466 per day, which is driven by strong earnings for the caustic soda contracts and despite the weak dry bulk earnings.
This is 3.3 x the Panamax spot earnings and 0.8 x the MR product tanker spot earnings. Going over to the CLEANBUs, we see that we had an extremely high tanker trading in the first quarter, ending at 91%. This is a result of partly that we added an extra tanker voyage into triangulation trade. We replaced dry cargos with shipments of vegetable oil out of South America. We also employed some ships as a tanker vessel to benefit from the booming market in late 2022 and early 2023. This resulted in lower share in combination trading and also having an effect of higher ballast percentage.
As we explained before, the variations between the quarters are due in terms of tanker trading is an effect of the geographical positions of our ships. That in some quarters, we have more ships that are in regions where they load tanker cargos and which implies that the next quarter will have more loadings of dry cargos and more days in dry. Meaning that as we saw in the second half, after very high share of tanker trading in the third quarter, we ended quite lower in terms of the tanker trading in the fourth quarter. After the spectacular high tanker trading in the first quarter, we also get a lower percentage in tanker trade in the second quarter.
As you see, we have succeeded, if we look on a half year by half year basis, to increase considerably the share of the tanker trading over the last year. This, the fact of the lower tanker trading for the second quarter will have all other things equal and negative effect on the earnings of the CLEANBUs in the quarter, given the large differences in earnings between the tanker market and the dry market at the moment. Looking on the results for the CLEANBUs, it's ended at $45,900 per day, which is the highest ever. It's $9,000 higher than the fourth quarter and around $900 higher than the last record in the third quarter.
This is as much as 4 x higher than the Kamsarmax spot earnings, but pretty close to the LR1 spot earnings in a booming tanker market.
Liv.
Thank you, Engebret. Over to the financial update. As mentioned, the EBITDA for the quarter ended at $41 million, a record high quarter and a 46% increase from last quarter. This is driven by the very strong underlying earnings for both segments. As you saw from the previous graphs that Engebret showed, the TC earnings for the CABU vessels increased by approximately $5,700 per day from last quarter, and the CLEANBU TC earnings by approximately $9,100 per day. In total, this amounts to approximately $10.5 million Q on Q. Operating expenses down $2.2 million. I'll give you some more details on the next slide. SG&A increased by $400K. 50% of SG&A, or the increase relates to option declarations in Q1.
Over to operating expenses, as mentioned, down $2.2 million from last quarter. As you can see here, the CABU OPEX per day ended at $7,128, and the CLEANBU OPEX per day at $8,648. We have over the last years seen a trend where OPEX is higher towards the end of the year. We do expect the same trend this year. We saw limited unscheduled off-hire for the quarter, 10 days, which is a substantial improvement from the last quarters, and this is mainly related to some minor operational issues. We have seven vessels scheduled for dry docking for the remaining three quarters of the year. You can see more details on both off-hire and costs on slide 33.
Over to the full P&L for the quarter, the items below EBITDA. Depreciation ended at $8.5 million. That's down 7% Q-on-Q, and it's mainly related to the date of the dockings. On an annualized basis, I think Q1 is quite representative for the year. Net financial cost $4.2 million, an increase of 15% Q-on-Q, which mainly relates to a positive effect in Q4 last year. A record strong profit for the quarter of $28.2 million, an increase of 84% from last quarter. This, of course, also results in very strong return figures for the year, for the quarter, sorry. Return on capital employed on an annualized basis, 21%, and return on equity on an annualized basis, 37%.
Dividends as mentioned up $0.10 per share, 33%, to $0.40 per share, based on an exceptionally strong quarter. No major or unusual changes in the balance sheet from year-end 2022. Total assets increased by $8 million, while equity increased by $9.5 million. In addition to the profit for the quarter, the equity is impacted by negative other comprehensive income of approximately $3 million. That mainly relates to mark-to-market on interest rate swaps and cross-currency interest rate swaps. In addition, we paid $15.7 million in dividends in Q1, and hence the equity or the net equity effect is $9.5 million. This results in increased or strengthened equity ratio of approximately one percentage point during the quarter and ended Q1 at 47%.
We have built both solidity and liquidity through the quarter. Cash and cash equivalents increased approximately $14.5 million and available liquidity increased approximately or close to $13 million during the quarter. The very strong operational cash flow is of course one of the main drivers behind this increase. However, we had limited working capital effects during the quarter. CapEx relates mainly to prepaid investments in energy efficiency measures coming later this year. Debt service as approximately as last quarters, close to $10 million. Of course, dividend payments, as mentioned, $15.7 million. The last item in the financial update is an update on the refinancing of the maturity falling due in December this year.
We have now received credit approval for both this bank facility and another bank facility falling due in October 2025. The new facility will be up to $190 million or 65% loan-to-value, which means an upsizing of approximately $35 million. It's 50/50 revolving credit facility and term loan with a repayment for profile on an age adjusted basis of approximately or close to 18 years. Ten or five years pricing SOFR plus 2.1%, which is a reduction in the margin of approximately 45 basis points, comparing with the existing facilities and comparing apples and apples, which means on SOFR basis. This is subject to documentation, but based on this, we have limited refinancing risk over the next years, and the first debt falling due is the bond loan in February 2025.
Engebret, over to you again for sustainability.
Thank you, Liv. Based on all the high efficiency of our combination carriers, unique combination carriers, we deliver the lowest carbon footprint to our customers in the dry bulk and tanker space. Back in 2018 and 2019, we started working to see how can we improve this further? How can we move faster than our competitors to increase further our competitive advantage. This resulted in the first environmental strategy we presented back in January 2020. Since then, we have learned a lot over the three years that has passed. We have had great success with implementation of energy and voyage efficiency measures. Our biggest learning may be that everything takes longer time than expected.
It takes longer time to get effective international regulations, longer time to get customer support, and just to implement some of the measures that we are doing has a longer lead time than we expect. We presented in 29th of March a revised strategy where we try to build on what we have learned over the last three years and see how can we move forward, continue to reduce the carbon footprint of our business and offer our customers the lowest cost carbon reductions, and also our shareholders the highest profitability in terms of benefiting from this development.
Based on this strategy, we are focusing over the next three, four years on implementing an improvement in energy efficiency of our fleet. And also adding further improvements in the voyage efficiency and also the trading efficiency of our fleet. In totality, we have a target of reaching a 30% lower carbon intensity in 2026 compared to 2018. We, in this period, will use very limited new fuels that we will be more on the agenda for the subsequent four years, where we will firstly have, expect to have post effects from a fleet renewal, planned fleet renewal of our CABU fleet, and also continued energy efficiency investments.
To get to the transition to new fuels, we need backing from both more effective international regulations, and we also need support from our customers. Based on fairly conservative assumptions on use of biofuel and zero-emission fuels, we expect to reach 45% lower carbon intensity by 2030 compared to 2018. Looking at the start of the year, it's been not particularly impressive, we had a higher speed in the first quarter, led to higher CO2 emission on average for the fleet. The higher tanker trading will increase the ballasting led also to a small increase in carbon intensity for the fleet.
We expect to improve this considerably over the year as the trading will be more normal, and we also get benefits of all the ongoing work with energy efficiency initiatives. Looking ahead, we know that despite continued high geopolitical and macroeconomic risks, we are optimistic both on the tanker and dry bulk market and the fuel markets for the remaining part of this year. This graph shows the quarterly spot earnings of product tankers in black, the dry bulk market in blue, and the fuel prices in gray. The dotted line shows how the forward derivative markets are pricing these, this for the next quarters. What we know is that the forward derivative markets very seldom get it right.
In our opinion, the markets are as underestimating the potential we see in the market for the coming quarters. If we are right, we may end up in the second half of this year with three strong markets which we are deriving our earnings from, a strong product tanker market, a strong dry market, and increasing fuel prices. We have positioned our fleet and our contracts based on this market view. We have for the second quarter, we are more or less fully booked taking into account the index-linked contracts we have both in the dry bulk and tanker space. For the second half, we have in the tanker space a very high percentage fixed rate coverage for our CABUs in the caustic soda contracts, around 60% of the capacity for the second half.
We have one of the CLEANBUs fixed on a two-year charter that is adding further fixed rate coverage. In totality for the tanker part of our capacity, we are at 37% coverage for the second half. Based on our optimism of the dry bulk market, we have decided to keep the coverage for the second half for the dry bulk market low. Only 7% of the capacity is covered. Making we are positioned to get the full market upside of an upturn in the dry bulk market. Looking at the second quarter, it will be another strong quarter for KCC, backed by the strong earnings on our caustic soda contracts and improving dry market.
The earnings for the CABUs are estimated to increase by $2,500-$3,500 per day to $34,000-$35,000 per day. The CLEANBUs also benefit from a stronger dry market, the fact of lower tanker trading and the continued large differences between dry bulk and tanker earnings reduced the earnings for the CLEANBUs down to $31,500-$33,500 per day. Seen on a totality, the second quarter still ends up at the second and possibly the third or possibly the second-highest earnings in our company's history, somewhere between $32,700 and $34,200 per day, which is very strong.
Looking further ahead, we know that after a low tanker trading or for the CLEANBUs in the second quarter, we end up with higher tanker trading in the third quarter. With our estimates on or expectations on market development, the third quarter and fourth quarter looks pretty good for the company. At normal and underlining that the value proposition to our shareholders and other stakeholders is quite unique. We offer the lowest carbon emission transportation solution in the dry bulk and tanker space, and as we like to say, we believe that advantage will be more and more important going forward.
Due to the diversification of our earnings base, we have a lower earnings volatility and our efficiency has over time, and we will do our best to repeat that, outperforming the standard dry bulk and tanker earnings in the future. That ends our presentation. We are ready for questions.
Yes. Thank you, very much, Engebret. We do have a few questions actually. Just before we start, I just want to acknowledge that a few people out there had issues with the stream not automatically starting for them, so they had to refresh the page a few times. We just want to apologize for anyone that experienced that, and the recording will be on our website very shortly after we're done, and we'll also send it around as an email in case you missed anything at the start. Question one, why do you take down tanker exposure for CLEANBU in Q2 with the expectation to increase it in Q3? Seems like a shift away from the most profitable markets.
I think it is a reflection of the way we trade our ships, meaning that, in the first quarter, the tanker market was extremely high in December and early January. At that time, it was a no-brainer. Despite we use our shadow carbon pricing into our chartering decisions, there were no way we could defend continuing trading dry bulk in certain trades, ending up that with the ballasting and increasing the share in the tanker market. For the remaining quarters, if we look on more than one quarter isolated, it makes sense earnings-wise to increase the combination trading. By just by this normal difference, variations in vessel positions, we end up that this trading has a lower share in tanker trading in the second quarter.
It is we expect to maintain a very high percentage, a high percentage seen over more than one quarter based on two quarters, but it will vary from quarter to quarter. Meaning that we're not reducing the tank exposure from 91 to 55%. It's so dramatic. It's more that if we look on this first half as a totality, you see that we actually increase from the second half of 2022 to the first half of 2023.
How should we think about dividends going forward? Will you allow the DPS vary from quarter to quarter, or should we now expect 40% to be kept in the next quarters?
We have the policy, as we have communicated, that 80% of the free cash flow is paid as dividends. We have tried to smoothen out a little bit from quarter to quarter. That means that. Still our dividends depends on our earnings and how the market is moving. Again, if we assume the market development that we have been through in this presentation with a stronger dry market, and continued high, high product market, we expect to be able to continue with a high, high dividend payments over the next quarters. Again, clearly it depends on that we can deliver the earnings that we are forecasting and are expecting for the coming quarters.
Can you explain the rationale for lower share of tank days for CLEANBUs in Q2, but up again in Q3? Compared to the tanker versus bulker market development, it seems counterintuitive as a strategic decision.
As I mentioned, it is a part of our concept. We trade in these ships to get the best value creation of our ships. We do a combination of dry bulk and tanker trading. That's how we can deliver the highest earnings over time.
Mm-hmm.
We have a possibility, especially when it comes to the CLEANBUs, to tweak the tanker capacity, as mentioned, by increasing slightly the capacity of in the, in the tanker space by increased triangulation trade. We replace dry bulk shipments with vegetable oil. Look, you know, as the market has developed with a somewhat weaker tanker market in, you know, compared to the end of last year, it makes sense to take dry bulk in the trades from South America back to Middle East and India. It actually pays more. Likewise, it is this effectiveness of operation will deliver higher earnings seen over more than a quarter.
We are in the business of running our business of an outlook of more than one quarter at a time.
Mm-hmm.
Basically, it is optimal for our business to reduce the tanker trading in the second quarter because it is a part of our concept of combination trading. It will, due to the position of the ships, it will increase again in the third quarter.
The same person was also asking about dividends, if we're targeting a consistent dividend based on the latest level or subject quarter to quarter fluctuations, in case you wanted to expand on the earlier answer.
I think, you know, we are saying that we believe that our concept of a lower volatility in earnings shall mean that we should be able to deliver a more stable dividend flow than standard dry bulk and tanker companies.
Mm-hmm.
Again, we are dependent on the market and our performance. Yes, we have shown a up, a constant upturn in dividends over the last years, and we'll do what we can to keep it up that way, but it is dependent on the performance and the markets.
I have three people asking about the fleet, so I'll try.
Mm-hmm
... bake them into one question. Very similar. They're asking if you can talk a little bit about the future of the fleet in terms of renewal and timing of potential orders, commenting that some of the vessels are getting a little bit older now, and what delivery times might be possible today for vessels if you expand.
I think we have communicated before that our CABUs, which are, we have three ships that are now more than 20 years old, that we at some stage will renew these ships and replace them with new builds. That is, we have an acceptance from our customers to operate these ships until they are 25 years old, meaning that they will trade until 2026, 2027. Our CLEANBUs are constructed to be able to replace the CABUs trade if need be. Our job as management is to find the right time to replace it, because this is a hugely profitable business, as we have shown over time.
If you look at how it looks at the moment, if we went out in the new building market today, we would secure a delivery in 2026.
Mm-hmm.
Maybe the last part of the delivery of would be into 2027.
There's also a question asking if you could elaborate more on the freight contracts with earnings linked to emissions performance with South32.
Mm-hmm.
Asking, if you can shed any light on the difference in earnings between best and worst performance?
That was a bit difficult, the last part of it. Again, just to remind everyone that the South32 contract is a six-year contract starting up in early 2022. During last year, we worked together with our customers to develop a mechanism whereby our earnings under contract is linked to the emission performance relative to a baseline, and the baseline is basically our historical performance in the trades. From first of January this year, we have implemented this mechanism. This mechanism is linked to a carbon pricing which is, we find to be acceptable compared to how the carbon is priced in the market today. The effect of earnings is a bit difficult to say by precisely.
It is in the first quarter, we have in fact a slightly negative effect. As we go further and we succeed with the implementation of these energy efficiency initiatives and voyage efficiency initiatives, I think we are talking about probably a couple of thousand dollars per day. It's not dramatic with the current carbon pricing, but it's something that definitely will support the efforts we do when it comes to implementing energy efficiency measures.
A question asking what does shadow carbon pricing mean for your potential to maximize earnings?
The shadow carbon pricing is used in where we are seeing it difficult to defend the combination trade. Meaning that we will include a carbon pricing equal to the carbon pricing in the EU, which at the moment is around $100 per ton CO2. That will be added to the cost, the earnings or deducted earnings of the alternative with the longest ballast. The impact in reality with the current pricing is that we will actually accept a slightly lower earnings to maintain the combination trading, which secures the lowest carbon emission.
Based on what we have done to date with the implementation of this shadow pricing, we have not had any voyage where this carbon pricing has been sufficient to trigger a different chartering decision than we otherwise would have done without the carbon pricing. Up to today, it has had no effect in terms of earnings, but potentially it could have an effect of $1,000-$2,000 per day, I guess, in terms of difference between what is earnings-wise the optimal and what is optimal when respect to a carbon emission performance. We feel that is consistent with our strategy, and we think it's the right way to move forward.
Yeah. If current tanker and dry bulk earnings remain at current levels throughout 2023, would it be reasonable to expect the share of tanker days for CLEANBUs to increase in the second half of 23 versus the first half?
As we say, we ended up in the first half based on our estimates for the second quarter at something like 65%, if I recall it correctly, in tanker trade. I think that it is, if the market is as it looks at the moment, the third quarter will likely be something like 70-75% in the tanker trading. Then the fourth quarter will be subsequently lower. Meaning that we will maintain the current market overweight in the tanker trading in the second half.
Whether it will be as high as it was in the first half is difficult to say, but I, unless the market goes really more extreme than we ever seen, I don't expect that to be much higher than what we have seen in the first half.
More questions on the fleet. I'll put this as a two-parter. We are asked, since the CLEANBU vessels offer more flexibility regarding cargo, is that the kind of vessels that you'll be ordering? Someone also asking if you can say anything about pricing for new builds today.
I think the CLEANBUs as the question indicates are more flexible ships. They are full-fledged one tankers. They can take more or less any liquid cargo and any dry bulk cargos. While the CABUs are more restricted in their trades, mainly taking caustic soda as the tanker cargo. The CLEANBUs are also quite a bit more expensive assets. I would expect that the difference between a CLEANBU and a CABU today would probably be something at least $10 million-$15 million difference. Also the OPEX of the CLEANBUs are higher. Meaning that, you know, trades to Australia, it is clearly beneficial for us to continue using majority of CABUs in the trade.
Meaning that, with the age profile of our fleet, we expect that the next step of fleet renewal will be CABUs. At the same time, there is clearly a potential to increase the CLEANBU trading. We are seeing that we are knowing that we are fixed out one ship on a two-year charter. We are basically fully booked in the trades where we trade. We would have liked to expand with the new customers, and that is limited with the capacity we have. Clearly a potential to expand the CLEANBU fleet, and hopefully we can succeed with that, but as I said, the first step is the CABUs.
When it comes to the pricing, it is clearly that when it comes to the CABUs, the CABU pricing will be based on the dry market. Sorry, the pricing for a Capesize dry bulk, then there will be an additional pricing on top of the Capesize prices. The Capesizes has reduced from closer to $38 million last autumn down now to somewhere between $34 million and $35 million per day. Meaning that there it has had a better development than what we have seen in the tanker space where prices have continued to rise consistently over the last two years.
If you look on a CABU today, I would expect that the pricing, probably would be, closer to around $50 million per day dependent on what we do on energy efficiency initiatives and preparations for zero-emission fuels.
It looks like the last question. Are you experiencing any change in interest and trade routes following the EU's carbon pricing regime coming into play from next year?
We have not really at the moment. I think it is as the question indicates that it is a benefit for us with implementation of the EU ETS system into shipping from 1st of January 2024. But at the same time we have a bit more unpredictable trading in and out of Europe after the replacement of Russian oil imports and also the would call interruptions in grain shipments out of the Black Sea. Making that for us, we have at the moment decided to reduce our exposure to Europe given this trading uncertainty.
over time we definitely believe that the trade we had established up to in 2022 and will be a good potential and which will be strengthened by the EU ETS system.
Yeah, that's it. Thank you.
Thank you all for joining and, we look forward to delivering what we have promised. Thank you.