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Edited Transcript of DNORD.CO earnings conference call or presentation 6-Nov-19 2:30pm GMT

Q3 2019 Dampskibsselskabet Norden A/S Earnings Call

Copenhagen Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Dampskibsselskabet Norden A/S earnings conference call or presentation Wednesday, November 6, 2019 at 2:30:00pm 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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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to today's NORDEN Interim Report Third Quarter of 2019 Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, 6th of November 2019.

And I would now like to hand the conference over to your first speaker today, Mr. Jan Rindbo, CEO of NORDEN. Please go ahead, sir.

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Jan Rindbo, Dampskibsselskabet Norden A/S - CEO [2]

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Thank you and welcome to the presentation of NORDEN's Third Quarterly Results for 2019. 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 note that this presentation and the following Q&A session will be recorded and made available on our website.

Slide #2 please. The agenda for today will be as follows. I will start by outlining the highlights of the quarter and our guidance for 2019 followed by some points on the valuation of NORDEN. Martin will then give you an update on the individual business units and the markets. Finally, I will conclude with a few final words regarding the third quarter before we will open up for the usual Q&A session.

Please turn to Slide #4. NORDEN realized an adjusted results for the period of minus $4 million, corresponding to an EBIT of $12 million. Dry Operator used the quarter to successfully position itself for the fourth quarter of the year while realizing an adjusted result of $3 million.

High coverage in the Dry Owner resulted in an adjusted result of $2 million while the adjusted result in Tankers amounted to a loss of $8 million from a seasonally weak market. The fourth quarter looks promising. And with Dry Operator well positioned and many open, owned and charter days in Tankers, we are looking forward to delivering a good result.

NORDEN maintains an extensive fleet of both long- and short-term time-chartered vessels, and the value of this portfolio has increased significantly as a result of both high product tanker forward rates and attractive coverage. Scrubber installations are on track and we expect to have 20 scrubbers ready to generate cash at the onset of the IMO 2020 regulation. And finally, NORDEN has initiated a share buyback program of $10 million to adjust a capital structure of the company in view of our reduced CapEx going forward and continued focusing on asset-light growth.

Turn to the next slide please. On October 24, NORDEN revised the guidance for the full year of 2019 to an adjusted result of between $10 million and $45 million. In Dry Operator, expectations for the full year result were increased to a range of $5 million to $20 million due to an improved position going into the fourth quarter. In Dry Owner, expectations for the full year results were maintained at a range of minus $5 million to $5 million as high coverage reduces the impact of market rates during the rest of the year.

On the basis of an IFRS 16 related estimation error of $15 million and a market that was weaker than expected in the third quarter, the full year expectations for Tankers were adjusted to $10 million to $20 million from previously $30 million to $45 million.

Next slide 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 a significant portfolio of time charter contracts and long-term cover contracts, including extensive optionality, which are not part of the classic NAV framework.

This portfolio adds significantly to the market exposure and can in periods represent a sizable value addition to the owned fleet. Additionally, we believe that NORDEN is able to generate value that goes beyond the usual NAV assessment through the Dry Operator as evidenced by our results in this business unit over the last 4 quarters.

And now over to Martin for an update on the business units and the markets. Slide #8, please.

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Martin Badsted, Dampskibsselskabet Norden A/S - CFO [3]

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Dry Operator utilized the quarter to turn the position for the second half of 2019 and realized an adjusted result of $3 million in Q3. Due to the improved position, Dry Operator expects a satisfying result from the final quarter of the year and positive full year results.

Over the last 4 quarters, Dry Operator has generated a positive contribution margin of $64 million and an adjusted net result of $10 million. This corresponds to a margin of USD 103 per vessel day.

Dry Operator is continuing its growth strategy. Our overall activity level was 10% above the same quarter of last year, and we are building our risk management and market analysis capabilities underpinning future profitable growth.

I'll turn to Slide 10 please and over to the Dry Owner. In line with our strategy of a balanced portfolio with a high level of coverage, Dry Owner made an adjusted result of $2 million during the quarter. For the final quarter of 2019, 97% of Dry Owner vessel days are covered, and the recent steep decline in spot market will therefore only have a limited impact on earnings during the quarter.

The scrubber installation program has started on the owned fleet. And through a combination of retrofits and chartered-in tonnage, Dry Owner is expected to have 11 scrubbers in operation at the 1st of January 2020. Dry Owner sold 1 Supramax and subsequently delivered the vessel to the new owners during the quarter. Despite having reduced the number of owned vessels, Dry Owner maintains considerable capacity through the long-term time charter fleet with significant optionality in the contracts.

Next slide, please. Compared to the first half of 2019, the Dry Cargo market rebounded in the third quarter as strong Chinese imports outweighed a decline in activity almost anywhere else in the world. The stronger market affected all dry cargo shipments as the Chinese import growth covered both iron ore, coal and minor bulks.

Panamax and Supramax rates were on average 29% and 6% higher than the same quarter last year. The market was supported further by lower effective supply growth as a larger than usual share of the dry cargo fleet is off-hire from installations of scrubbers and ballast water treatment systems.

Next slide, please. The outlook for the dry cargo market remains very uncertain. On the one hand, the global economy is still weak. Trade volumes are only held up by Chinese imports as volumes elsewhere are down year-on-year. And coal stocks in key importing countries are already at elevated levels.

On the other hand, Chinese imports have surprised positively in the last 3 months. Iron ore stocks are still quite low and the larger-than-normal amount of the fleet is tied up in dockings due to scrubber and ballast water installations. Overall, we believe that the negative economic outlook will weigh on demand and see a weaker rate environment going forward.

Now skip to Slide 14 please for a review of our Tanker business. During the third quarter of 2019, our Tanker business realized a quarterly adjusted result of minus $8 million in a seasonally weak product tanker market. Although the quarter was characterized by weak spot rates, high expectations of a strong 2019 and 2020 have continued to lift both asset prices and forward rates increasing the value of NORDEN's tanker fleet and extensive time charter portfolio.

Six of the 8 planned scrubber retrofits on our MR fleet was completed during the weak quarter, and these vessels are therefore back trading in the improved market. NORDEN maintains a significant open position in the Tanker business in both Q4 of this year and 2020 and is therefore positioned to benefit from the expected upturn in tanker rates.

Next slide, please. The third quarter of this year was characterized by a seasonally weak market, low demand from higher-than-usual refinery maintenance and continued stock draws. During October, the crude tanker market rebounded from a combination of reduced fleet supply from scrubber installations, increase in floating storage and uncertainty over the magnitude of U.S. sanctions on parts of the COSCO fleet. The improving market also started to benefit product tankers as an increasing number of LR2s and LR1s began trading it early. However, MRs have yet to see the full impact of this, still leaving upside for MR rates.

Next slide, please, where we'll will discuss the tanker market going forward. Looking ahead, we maintain our expectations of a strong tanker market towards the end of the year and well into 2020. While oil demand growth will probably still be subdued from a slowing global economy, the demand side is expected to get support from an increase in refinery runs and new refineries coming on stream as well as the IMO 2020 sulfur regulation, which will have a significant and positive effect on product trades.

On the supply side, nominal fee growth is decelerating leading to low fleet demand in 2020 and onwards. Combined with the current fleet inefficiencies from increased off-hire due the installation of scrubbers and ballast water treatment systems, we expect a strong tanker market throughout the coming year.

And now back to Jan for a few final words. Please turn to Slide 18.

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Jan Rindbo, Dampskibsselskabet Norden A/S - CEO [4]

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Thank you, Martin. Let me just highlight the key messages here at the end. We maintain the overall guidance and expect a strong finish to the year and a profitable full year result. The true value of NORDEN is more than the market value of our own vessels, and NORDEN continues to transition towards a more asset-light business with less dependency on long-term market cycles.

With high coverage, the Dry Owner is protected from negative market developments but with significant upside potential from more than 30,000 optional days available during the coming years, enabling us to benefit from stronger markets. Expectations on improved product tanker market at the end of the year have greatly increase the value of our time chartered portfolio. We have chartered out several tankers at attractive rates but maintained significant exposure enabling us to profit from a stronger market.

Next slide, please. And please remember that there are uncertainties related to any forward-looking statements.

Next slide, please. This concludes our presentation. We are now opening up for our Q&A session. Please await the conference host's instructions.

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Operator [5]

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(Operator Instructions) Okay. Sir, there are no further questions at this time. Please continue.

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Jan Rindbo, Dampskibsselskabet Norden A/S - CEO [6]

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Okay. All right. Well, thank you for your interest in NORDEN. Thank you and goodbye.

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Operator [7]

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Okay. That does conclude our conference for today. Thank you for participating. You may all disconnect.