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Edited Transcript of DNORD.CO earnings conference call or presentation 4-Mar-20 2:30pm GMT

Q4 2019 Dampskibsselskabet Norden A/S Earnings Call

Copenhagen Mar 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Dampskibsselskabet Norden A/S earnings conference call or presentation Wednesday, March 4, 2020 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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The line is now open. Sir, you may go ahead.

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

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Thank you very much, and welcome to the presentation of NORDEN's annual 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 slide 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 2020. Martin will then give you an update on 2019 and results in the individual business units, following which, I will present our new business unit structure. We will then give you our view on the market outlook. And finally, I will conclude with a few final words before we will open up for the usual Q&A session.

Please turn to Slide #4. NORDEN realized a strong finish to the year with an adjusted result for fourth quarter at $31 million, the best quarterly results since the second quarter of 2015. The results were primarily driven by good performance in both Dry Operator and Tankers. The full year adjusted results ended at $23 million, which was negatively impacted by $14 million from the introduction of the new lease accounting IFRS 16.

The Board proposes a dividend of DKK 2.5 per share, which is a 77% payout ratio and at the same time, we introduced a new dividend policy, targeting payouts of at least 50% of adjusted results.

Compared to 2019, NORDEN expects an overall stronger tanker market in 2020 and a lower dry cargo market and has positioned itself for that. On that basis, we expect an adjusted result for 2020 of between $30 million and $70 million. However, the coronavirus situation adds considerable uncertainty to the outlook. NORDEN maintains an extensive fleet of both long and short-term time chartered vessels, and the value of this portfolio has increased during the year as a result of both higher product tanker forward rates and attractive coverage. 16 out of 18 scrubber installations have been completed, and we have taken delivery of 4 lease newbuildings with scrubbers installed.

Finally, NORDEN has implemented a new business unit structure, creating a Tanker Operator similar to the Dry Operator, which was established 2.5 years ago. Going forward, NORDEN will have 3 business units: Asset Management, Dry Operator and Tanker Operator.

Turning to Slide #6, please. Dry Operator realized an adjusted result in Q4 of $14 million, making it by far the best quarter of the year. The business steered successfully through a market which had a short peak, followed by general declines throughout the quarter. Due to added uncertainty related to the IMO 2020 introduction, Dry Operator actively reduced its fleet towards year-end, operating only about 220 vessels by then. The activity level is back over 270 vessels and the ambition is to grow further. Following weaker performance in the first half of the year, the adjusted result for 2019 ended at $8 million. Dry Operator was established 10 quarters ago and has in that period made an average net result of USD 5 million per quarter, but as the graph shows, with substantial seasonality.

Next slide, please. Dry Owner made an adjusted result of $2 million during the quarter. For the full year, the adjusted result was also $2 million and this was negatively impacted by $12 million from the introduction of the new lease accounting IFRS 16. Dry Owner has used 2019 to reduce its exposure to a challenging dry cargo market and sold a total of 6 vessels and entered into long-term coverage for 6,000 vessel days.

Next slide, please. During the final quarter of 2019, our Tanker business realized a quarterly adjusted result of $15 million, bringing the full year result to $13 million. While Handysize rates were mostly strong during the period, the MR markets only really took off towards December. We have been active during 2019 in optimizing our tanker fleet. We sold 2 Handys and acquired 2 MRs instead, which delivers in December. And we took 5 vessels on long-term time charter and re-let 8 on somewhat shorter term. In general, asset prices and forward rates continue to move, increasing the value of NORDEN's tanker fleet and extensive time charter portfolio. NORDEN maintains a significant open position in the Tanker business in 2020 and is positioned to benefit from an improved tanker market.

Please move to Slide #10. NORDEN introduces its new business unit structure, which establishes a Tanker Operator similar to the Dry Operator. These units will actively manage our short-term exposure in those segments, while a combined Asset Management unit will manage NORDEN's cyclical exposure. We believe the focus on operator activities and actively trading our positions will yield better long-term returns to our shareholders.

Before we dive into the specifics of the new business units, let me highlight the major trends, which we believe requires a more agile business approach than the traditional shipping business models can offer. The shipping industry has faced a supply crisis over much of the past decade in form of overcapacity. And the good news is we are finally solving this as newbuilding orders have slowed significantly, not least as ship owners hesitate to order ships due to uncertainty about future fuel technologies.

But the bad news is, we are in a new era of stagnating demand growth due to decarbonization, Chinese economy becoming less commodity intensive and rising trade protectionism. And this means shorter shipping titles and market volatility. And it means it is difficult to generate sufficient returns to justify passive long-only market exposures. However, market volatility, human expertise and advanced data analytics is a powerful combination, which provides great trading opportunities in the spot market and on assets.

Next slide, please. We have, over the past 3 to 4 years, built a more intelligent business where we, with agility and focus, constantly optimize our market positions and provide our customers with a competitive service. We believe that our new setup will enable us to generate higher risk-adjusted returns. The ability to measure individual bottom lines will drive performance, transparency and focus and facilitate more efficient capital allocation. Also, by reporting on these new business units, we want to highlight the value that is being generated in the company beyond the traditional net asset value approach. And based on this combination of better performance, strong balance sheet and low CapEx requirement from our asset-light growth strategy, we have ability to increase dividend payments to shareholders.

Next slide, please. With the new business unit structure, we have separated the long-term cyclical exposure from the short-term daily management of vessels and cargos. The Asset Management business unit holds the owned vessels and long-term leases within both Dry Cargo and Tankers, and their main objective is to generate a return by timing and negotiating such transactions. Dry Operator and Tanker Operator actively manage NORDEN's short-term activities within Dry Cargo and Tankers, respectively. They are the activities to earn a margin, both from the short-term trading and from operational optimization of voyages and efficient combination of vessels and cargos. All 3 business units have their own bottom line, responsible manager and organization.

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 3 significant activities beyond our own vessels. Firstly, the Dry Operator, which, since its beginning in 2017, has made an average of $5 million per quarter or $20 million annualized. Secondly, the Tanker Operator, which in 2019 made $17 million and has a long track record of delivering TC earnings well above the average 1-year rate. And thirdly, the portfolio of time charter contracts and long-term power contracts, including extensive optionality. We believe that the new business unit structure significantly improves performance, transparency and will, over time, lead to improved risk-adjusted returns.

Now over to Martin for an update on the markets. Slide 15, please.

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

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Looking ahead, we maintain our expectations of our tanker market in 2020, which will be better than in 2019. 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 new refineries coming on stream, increased utilization of existing refineries as well as longer distances as Atlantic crude supply growth is transported to refineries in the East.

On the supply side, nominal fleet growth is decelerating for both product and crude tankers. And even though effective fleet growth will be higher due to vessels returning to active trade following scrubber installations, we believe the overall fundamentals look positive for 2020. The main uncertainty to this outlook is the potential negative impact on oil demand from a spreading of the coronavirus.

Next slide, please. For Dry Cargo, we expect an overall weakening of rates compared to last year. On the one hand, demand expectations are actually quite positive with growing iron ore volume out of Brazil and healthy grain seasons. On the other hand, fee growth remains too high due to a 10% order book and the effect of vessels returning to the market after having installed scrubbers. Overall, you see a weaker rate environment going forward, even though we may see a rebound in demand when the corona-related uncertainty wears off.

Please skip to Slide 18 for a look at our guidance. NORDEN expects to generate improved earnings in 2020 with a guidance for the adjusted result of $30 million to $70 million. In Asset Management, we expect a significant improvement due to higher tanker rates and higher time charter earnings on scrubber-fitted vessels. In Dry Operator, we expect a better result based on higher margins and an activity level similar to 2019. In Tanker Operator, we expect a lower result due to higher cost of tonnage chartered-in during 2019. With a substantial open exposure, the Tanker Operator margins will be subject to volatility in spot tanker rates.

Please skip to Slide #20 for the final words. Let me just highlight the key messages here at the end. The true value of NORDEN is more than the market value of our owned vessels. And with a new business unit structure, NORDEN has now completed its transition towards a more intelligent business model with focus on operator activities and trading. We propose to pay out DKK 2.5 per share in dividends, and launch a new dividend policy targeting to pay out a minimum 50% of adjusted net profits. We have had a good start to the year and expect an adjusted net result of $30 million to $70 million, which would be the best result since 2011.

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

Next slide, please. So this concludes our presentation. Now we will open up for our Q&A session. Please await the conference host's instructions.

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Operator [4]

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(Operator Instructions)

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

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All right. If there are no questions, we will conclude the conference call here.

Thank you for your interest in NORDEN and for dialing in. Thank you, and good day.

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Operator [6]

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Thank you. That concludes the conference for today. Thank you all for participating. You may now disconnect.