Edited Transcript of DNORD.CO earnings conference call or presentation 5-May-20 1:30pm GMT

Thomson Reuters StreetEvents

Q1 2020 Dampskibsselskabet Norden A/S Earnings Call

Copenhagen May 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Dampskibsselskabet Norden A/S earnings conference call or presentation Tuesday, May 5, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jan Rindbo

Dampskibsselskabet Norden A/S - CEO

* Martin Badsted

Dampskibsselskabet Norden A/S - CFO

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Conference Call Participants

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* Alex Sweet;Highclere Investors;Investment Analyst

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Presentation

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Jan Rindbo, Dampskibsselskabet Norden A/S - CEO [1]

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Welcome to the presentation of Norden's results for the first quarter of 2020. And thank you for dialing in. My name is Jan Rindbo, and I'm the CEO of Norden. CFO, Martin Badsted. And I will be presenting our results today.

I trust you have all found time to download the accompanying presentation available on our website. We will go through selected slides, and we'll refer to the specific slides as we go along.

Please go to Slide #2, please. The agenda for today will be as follows. I will start by outlining the highlights of the quarter. Martin will then give you an update on the results in the individual business units as well as a market outlook. And finally, I will conclude with the guidance for 2020 and a few final words before we will open up for the usual Q&A session.

Please turn to Slide #4. NORDEN had a strong start to the year with an adjusted result for the first quarter at $29 million, which is our -- which is our best first quarter result since 2015.

The result was driven by profitability in all of our 3 business units. Looking at the business unit level, Asset Management is benefiting from its strategy with decreased exposure in Dry Cargo and increased exposure in Tankers.

Dry Operator delivered a good result in a weak Dry Cargo market, and thereby showed the strength of our business model. Finally, Tanker Operator had a great start, as I said, as a (inaudible) by being well positioned in a strong market.

On that basis, we raised the guidance for 2020 to a range between $30 million and $80 million, which is up from $30 million to $70 million previously announced. However, the COVID-19 virus adds considerable uncertainty to the outlook.

Due to the lockdown ordered by the Danish authorities, the AGM scheduled for March was postponed until further notice.

It is still NORDEN's intention to complete the AGM as soon as possible and pay the dividend related to the financial year 2019 when it has been approved by the AGM.

Please turn to Slide #5, please. Many shipping companies are evaluated and valued on the basis of NAV, net asset value. This represents the market value of the owned fleet and the financial position of the company.

However, we do not believe this fully captures the value of NORDEN. We own less than 15% of the fleet that we operate and have 3 significant activities behind our own vessels.

Firstly, the Asset Management portfolio of lease tonnage and copper contracts add significant value and upside through extensive period and purchase optionality. Secondly, the Dry Operator, which since its beginning mid-2017, has made an average of $5 million per quarter or $20 million annualized profit.

And thirdly, the Tanker Operator, has over the last 12 months, made $25 million in profit and has a long track record of delivering TC earnings well above the average 1-year TC rate. We believe that the new business unit structure significantly improves performance transparency.

It also assigns a clear value to each type of activity and provides a stronger focus on active management of cyclical market exposure and short-term trading oriented operator activities.

And now over to Martin for an update on the business units and the markets. Slide #7, please.

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Martin Badsted, Dampskibsselskabet Norden A/S - CFO [2]

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Thank you, Jan. Asset Management made an adjusted result of $7 million during the quarter, corresponding to an EBIT of $12 million. The Asset Management fleet counted 89 active vessels in the period with 48 being Dry Cargo ships being Tanker ships. NORDEN has a high coverage in Dry Cargo with 90% and 65% of capacity being covered for 2020 and 2021, respectively, at rates that are substantially higher than current forward rates. The tanker part of Asset Management is called at 70% because most of NORDEN's short-term exposure is now in Tanker Operator. Asset Management continued to actively improve its portfolio and sold 1 Supramax vessel and leased out 2 scrubber-fitted Panamaxes.

In addition, the long-term fleet for future delivery was supplemented with one leased MR and one leased Handysize bulker, both with significant optionality attached.

Next slide, please. The Dry assets and time charter markets declined in Q1 due to deteriorating demand and sentiment caused by the COVID-19 lockdowns. The price of a 5-year-old Supramax fell by 9%, and the 1-year TC market dropped to $9,500 per day. Product tanker period rates and enterprises, on the other hand, remain firm as a result of strong crude markets and significant storage demand. Both the value of a 5-year-old MR and the 1-year TC market remained unchanged despite weak underlying volume.

Next slide, please. The Dry Cargo market is expected to improve in the second half but still to relatively weak levels, and there is a risk that the economy will not see any meaningful recovery until 2021. The speed and the strength of the recovery in the Dry Cargo market is very much related to how the COVID-19 lockdowns are lifted and economic activity can return to normal.

The demand side is as usual, driven by China, where iron ore imports are strong due to stocking. Outside China, however, both iron ore demand, steel production and coal demand are expected to be weak. While fleet growth will be reduced by higher scrapping, effective supply growth will remain high due to vessels returning to active service following scrubber dry dockings.

Next slide, please. We expect a strong tanker market in Q2 with historically high product tanker rates on the high volatility. Crude supply overhang will force floating storage since the OPEC+ supply cuts will not be enough to fully offset the decline in demand. With a very weak underlying demand due to COVID-19, second half of 2020 is expected to be more challenging.

The market is expected to be supported by low effective supply as a substantial part of the fleet is tied up in floating storage.

However, the oil price contango is expected to weaken based on declining crude supply and growing oil demand. And this, in turn, will lead to a destocking cycle, which will reduce transportation demand and release vessels for effective supply. This great deal of uncertainty and volatility in rates at the moment, and the prolonged oil price contango may still support rates in the second half.

Next slide, please. Dry Operator proved the resilience of its business model and realized an adjusted result in Q1 of $4 million. The business units generated a margin of about $200 per day driven by crude arbitrage from short-term activity in a declining market.

The activity level is now expected to be lower than previously thought. Dry Operator had deliberately reduced the fleet ahead of the IMO 2020 transition and has gradually built the fleet again to around 270 vessels. However, low rates and weak cargo demand due to COVID-19 also means fewer trading opportunities going forward.

Spot rates have been very weak in Q1, with declines of 16% to 18% versus a weak last year and are in Q2, hitting fresh lows. While the grain trade is flowing quite well, the general lack of demand means that the normal Q2 seasonal upturn has not yet happened.

Next slide, please. Q1 2020 is the first quarter for Tanker Operator as a separate business unit. The business had a good start with an adjusted result of $18 million with a margin of more than $1,800 per vessel day.

The reason for the solid result was a combination of strong spot rates as well as active positioning. The average fleet size was 105 vessels, including pool vessels. Tanker Operator had deliberately increased its fleet in expectation of higher rates and NORDEN, therefore, has a significant position of time-chartered tonnage and optionality.

The tanker market was supported by high demand for floating storage and a reduced available fleet as vessels are tied up either at storage or waiting to unload. This strong rate environment is expected to last at least through Q2. Please move over to Slide #14 and back to Jan.

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Jan Rindbo, Dampskibsselskabet Norden A/S - CEO [3]

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Thank you, Martin. NORDEN raises its guidance from $30 million to $70 million to now an adjusted net result of $30 million to $80 million.

We expect improved results in all 3 business units compared to last year even though the COVID-19 situation caused a lot of uncertainty in the global economy.

In Asset Management, we still expect a significant improvement in the results compared to last year. However, lower than earlier anticipated due to lower scrubber earnings and Dry Cargo forward rates.

In Dry Operator, the expectation is based on margins per vessel day in line with the last 10 quarters as well as an activity level similar to or slightly below 2019.

In Tanker Operator, the full year expectation is based on a strong spot market through the second quarter and an activity level similar to 2019. Spot rates are, however, very volatile, which leads to significant uncertainty in the earnings estimate.

Next slide, please. And let me just highlight the key messages here at the end. The true value of NORDEN is more than the market value of our own vessels. With the business unit structure implemented in the beginning of the year, NORDEN has made great progress in its transition towards a more intelligent and modern business model with focus on operator activities and training.

Q1 showed the strength of our business model, with all 3 business units proving to be profitable in a challenging Dry Cargo market and volatile tanker market. In the second quarter, we expect the Dry Cargo market to remain difficult, while the tanker market continues to be strong.

Looking further ahead, we expect a more challenging tanker market in the second half year. Finally, we raised our guidance for 2020 to $30 million to $80 million.

The next slide, please. And just a reminder that there are uncertainties related to any forward-looking statements. Next slide, please.

This concludes our presentation. We will now open up the lines for our Q&A session.

(Operator Instructions)

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Questions and Answers

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Jan Rindbo, Dampskibsselskabet Norden A/S - CEO [1]

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So we're just waiting to see if there are any questions.

(Operator Instructions)

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Alex Sweet;Highclere Investors;Investment Analyst, [2]

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Yes. This is Alex Sweet from Highclere Investors.

Yes. It seems like for your updated guidance, maybe there have been 2 changes since you set the original guidance, maybe one change with the evolution of COVID situation and maybe the second change with the change in the tanker market environment.

Could you comment on the influence for both effects in your change of guidance? And does one effect somehow offset the other one?

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Jan Rindbo, Dampskibsselskabet Norden A/S - CEO [3]

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Yes. So you're right. Actually, I think the 2, to a large extent, are offsetting each other in the sense that the sort of backward reaction to the lack of oil demand being very high storage demand and very high product tanker rates did actually come as a surprise compared to what we expected in connection with the annual report.

So that is why we now expect better results in our Tanker Operator.

On the other hand, that is, to some extent, at least offset by the weaker Dry Cargo market that is, to some extent, hurting the long-term fleet in the Asset Management part, where we -- despite having high coverage, we still actually have some open date there. But also actually, the trading environment for Dry Operator, which, as we stated, is a little bit more challenged due to very low rates and lack of activity in general. Does that answer your question?

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Alex Sweet;Highclere Investors;Investment Analyst, [4]

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Yes.

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Jan Rindbo, Dampskibsselskabet Norden A/S - CEO [5]

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Are there any other questions?

That does not seem to be the case. So let me just conclude by thanking you for your interest in NORDEN, and we wish you an onwards, good day.

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