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Edited Transcript of DNORD.CO earnings conference call or presentation 19-Aug-20 8:30am GMT

Q2 2020 Dampskibsselskabet Norden A/S Earnings Call

Copenhagen Sep 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Dampskibsselskabet Norden A/S earnings conference call or presentation Wednesday, August 19, 2020 at 8:30:00am 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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* Anders Redigh Karlsen

Danske Bank A/S, Research Division - Analyst

* Ulrik Bak

SEB, Research Division - Research Analyst

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Presentation

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

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Hello, everyone. Welcome to the presentation of NORDEN's results for the second quarter of 2020. In a moment, we will put everyone on mute while we just go through the slides, and then we will open up for the usual Q&A session at the end.

But first of all, thank you for dialing in. My name is Jan Rindbo. I'm the CEO of NORDEN. CFO Martin Badsted and I will be presenting our results today. I hope that you've all had the time to download the accompanying presentation available on our website.

So on this call, we will be using a slightly different format than before in which we will focus only on a few selected slides, but we will elaborate a bit more on these. And we will, of course, refer to the specific slides as we go along.

So please turn to Slide 2, where we can see the agenda for today. And the agenda for today will be as follows. I will start off by outlining the highlights of the quarter. Martin will then update you on the market outlook for each of our business units. And then, at the end, I will conclude with our guidance for 2020 and a few final words before we open up for the usual Q&A session.

Please turn to Slide #4, with our business update. NORDEN continues the strong performance in 2020, with a second quarter result of $29 million, which is the strongest second quarter results since 2015. And this means we have realized a first half year result of $58 million. This also means that we are raising our full year guidance to $40 million to $80 million, and that is mainly due to improved expectations for our Dry Operator business unit.

On a business unit level, Asset Management delivered a profit of $11 million in the second quarter. In terms of our capital allocation, we seized on good Dry Cargo asset opportunities in the second quarter, which will help shift our relative exposure more towards Dry Cargo and less towards Tankers going forward. And this is in line with our asset trading strategy, as these vessels should be seen as short-term investments and are not intended for a long-term ownership. In line with this, we also stay committed, of course, to returning capital to our shareholders by launching a new share buyback program of up to $10 million. This comes on top of our new dividend policy of paying out minimum 50% of our annual adjusted result as well as the share buyback program that we concluded in the first quarter. And in total, including this new program, we have returned $35 million to our shareholders over the past 9 months.

As part of our asset-light strategy, we are establishing a new joint venture with Synergy Marine Group for the technical management of our owned tanker vessels, which allows for a more flexible approach to our ownership platform. And when combined with the streamlining of our finance function made earlier this year, this will provide total yearly savings of $7 million to $8 million.

Dry Operator proved the resilience of its business model, reaching a reasonable result in an extremely weak market with minus $4 million for second quarter. This amounts to a small profit of $0.4 million for the first half of 2020. Dry Operator is investing in its position and building value for the second half of 2020, which is expected to be a significantly better period than the first 6 months, just like we've seen in previous years.

Tanker Operator continued the strong performance as a separate business unit by capturing the full value of the strong spot rates in the second quarter and actively managing its position, delivering a profit of $22 million. Tanker Operator has since used a strong second quarter to reduce forward market exposure through time charter cover at attractive rates in what is expected to be a difficult tanker market in the second half of 2020. Towards the end of the quarter, Tanker Operator also announced that it has entered a new strategic partnership with Diamond S Shipping for the commercial management of their MR Tankers. This makes the NORDEN-owned Norient Product Pool one of the largest operators in the world with around 150 ships, which underlines NORDEN's ambitions and scale and allows us to be more agile in how we manage our own fleet.

And now over to Martin for an update on the market outlook for each business unit. Please turn to Slide #9.

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

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Thank you. So looking ahead in the Dry Cargo market, we expect that market to continue to recover as supply growth declines and demand rebounds from the COVID-19 trough seen in the first half. We believe actually that supply growth is peaking right around now. And with order books at the lowest point we've seen in 20 years, it should remain low going forward as well.

On the demand side, China, as usual, has been in the driver seat in Q2 with 15% volume growth. And while this growth rate is, of course, unlikely to continue, we do expect good support from infrastructure projects launched in China and a credit fuel rebound in that economy. Later in 2021, we expect the demand in the rest of the world to also come back, and we are seeing early signs of that troughing at the moment.

One of the key drivers of the increased demand has been iron ore so far this year. But there is still plenty of upside, both in the second half of this year and in 2021 based on the production guidance from the Vale mining company. So overall, we expect the rebound in TC rates and asset values, which we have seen starting over the summer to continue through 2021.

Please turn to Slide 10. In the tanker market, we now expect a challenging period ahead in the short term but still good upside in the longer term. Right now, transportation demand is subdued as a result of elevated stocks around the world that were built up in the first half, and we expect a destocking phase, which will last a couple of quarters and lead to both low demand and an increase in effective supply, as vessels return to service after floating storage. Beyond this destocking phase, we are looking at relatively healthy fundamentals as oil demand rebounds and the OPEC+ cuts are reduced, leading to more volumes and transportation demand.

In terms of supply, the new building order book also in this segment remains at historical lows, while a healthy scrapping amount is expected based on the overall fleet profile of the tanker fleet. So with supply growth nearing 1% as we go through 2021, we see the asset price risk skewed to the upside in the longer term.

Jan will now provide you with the final words of our presentation. Please turn to Slide 15.

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

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Thank you, Martin. So just to sum up here, let me highlight some of the key messages for the second quarter. We managed to reach a great result for the quarter despite operating in a challenging market environment. Based on expectations for an improving Dry Operator results, we are raising our guidance to $40 million to $80 million. And in terms of our capital allocation, we acted on good opportunities in the Dry Cargo asset market during the second quarter and we stay committed to our asset-light strategy while making sure we return capital to our shareholders by launching a new share buyback program for this year of up to $10 million.

Finally, we believe our second quarter results once again show that 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 trading-oriented and data-driven business model, combining operator activities and active management of a typical market exposure, allowing us to capitalize on the volatility in both markets.

And at this point, we will move to our Q&A session.

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Questions and Answers

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

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(Operator Instructions) And we are ready to answer your questions.

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Anders Redigh Karlsen, Danske Bank A/S, Research Division - Analyst [2]

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This is Anders Karlsen from Danske Bank. I was just wondering, you made some vessel orders during the quarter and -- I mean there is a lot of talk about what is the fuel of the future. What are your thoughts around that? Are you happy with the way that things are at present? Or would you like to consider alternative propulsion here or alternative fuels for the future?

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

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I think you are raising one of the biggest industry questions that we have. And I think the truth here is that both the vessels that we are operating, we are looking some years ahead before we can consider a real alternative to fuels that we're using today. And I think that is perhaps the important point with the ships that we buy today that we do not see ourselves as being long-term owners of those ships. But we think it will take a long time before you are replacing, say, the ships of today.

I think also more likely -- the more likely solution going forward would be for a fuel type that you can actually use on the existing setup, so I think with minor modifications if you still use the same engine types. You may know that we have -- we've been running some tests on biofuel, for example, on some of our vessels, and we're doing that on existing ships with very, very minor modifications that the existing crew can do on their own.

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Anders Redigh Karlsen, Danske Bank A/S, Research Division - Analyst [4]

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Okay. And your new orders are also, at some point, prepared to use alternate fuels, I guess.

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

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Yes. I mean that depends -- I think the answer here is that we do not know yet what will be the alternate fuels of the future. But for the fuel types that we have tested so far, we can use existing engine types. But if there is a new invention coming up, then, of course, that can change again. But then we're talking about many years out in the future before we'll be in that situation.

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Ulrik Bak, SEB, Research Division - Research Analyst [6]

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Yes. This is Ulrik Bak from SEB. I have a couple of questions. The first one is to Tanker Operator. It is my understanding that your vessels in this segment, they are mainly engaged in the spot market. But how should we think about the cost per day for this segment? And how do you expect the cost per day to develop throughout the second half of 2020 and also in 2021?

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Jan Rindbo, Dampskibsselskabet Norden A/S - CEO [7]

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Yes. So I can start and then maybe Martin can fill in later. But the earnings in the Tanker Operator is really the margin between the time charter costs and then the revenue that we can earn on those ships. So it's really a margin business. So the cost of the fleet is very much related to the 1-year TC market. And that's why, of course, in the first half of the year, there have been a great margin between what we are paying for the ships on a 1-year time charter basis compared to the very strong market rate. And as we go into the second half of the year and as we renew the fleet with the new ships and new charter, then we would now expect to be renewing those ships at a lower cost base in line with the TC market. And I think it's fair to say that the TC market have declined by maybe about 15%, 20% since the first half.

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Martin Badsted, Dampskibsselskabet Norden A/S - CFO [8]

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Yes. And regarding your other question, Ulrik, it's true that the majority of the business in the Tanker Operator currently is employed in the spot market. But we do actually try to develop cover opportunities as well. So that is actually something that we have been focusing during the second quarter to cover ourselves against the expected downturn that we think will happen going through the second half.

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Ulrik Bak, SEB, Research Division - Research Analyst [9]

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Yes. Okay. And can you say anything about how many percent of your vessel days in the Tanker Operator are covered for the second half?

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Jan Rindbo, Dampskibsselskabet Norden A/S - CEO [10]

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So the majority of the days are still exposed to the spot market. We don't actually publish the exact percentage figures. But you can expect that the majority will be spot-oriented, but not all of those. There will be a chunk of cover that we will carry forward with us into the second half.

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Ulrik Bak, SEB, Research Division - Research Analyst [11]

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Okay. So I believe you previously had like a table in your report saying that if tanker rates improve or decline by $1,000 per day, that would have this effect on our adjusted results. Can you say anything about that for 2020?

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Jan Rindbo, Dampskibsselskabet Norden A/S - CEO [12]

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Yes. So I think we probably have around 6,000 open days for the remainder, for the second half. So I think that gives you at least an indication of the sensitivity to the development in spot rates through H2.

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Ulrik Bak, SEB, Research Division - Research Analyst [13]

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Okay. And that is a mix between Tanker Operator and Asset Management, I suppose.

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Jan Rindbo, Dampskibsselskabet Norden A/S - CEO [14]

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Yes. Yes. And I think the important thing to remember here is that we are also actively out both taking cover but also chartering in additional vessels. So there may be a time where if we see an opportunity to take in more tonnage at cheap rates that we will be increasing our number of days again.

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Ulrik Bak, SEB, Research Division - Research Analyst [15]

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Okay. Okay. But those 6,000 days that you're mentioning, can you -- is it 50-50 between the Asset Management and Tanker Operator? Or is it 90-10? Or -- can you give any indication about the split?

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Jan Rindbo, Dampskibsselskabet Norden A/S - CEO [16]

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The majority, by far, is in the Tanker Operator.

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Ulrik Bak, SEB, Research Division - Research Analyst [17]

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Okay. Okay. And then a final question to your Dry Operator. In Q1, the Balkan market was very weak also as in Q2, but you managed to generate a positive return. And now in this quarter, you generated a loss despite a similar dry bulk market. Can you shed some light on that? And what makes you expect, yes, the second half to be stronger? I know you elaborated on it in your presentation, but if you can say a few words on that.

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Jan Rindbo, Dampskibsselskabet Norden A/S - CEO [18]

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Yes. I think you have to be a little bit careful reading too much into the quarterly results. We'd like to see our -- these results over a slightly longer period, at least 2 quarters. But in the second quarter, we've made a significant investment into our position in the second half. And what we have actually done is that we've been out time chartering in a lot of ships on short-period charters. We've also employed our ships on backhaul trades, so this is where we get a lower rate. But then we position our ships into better positions that will benefit our results in the second half.

So I think that investment is significant and should be seen in context of the Q2 results. And actually, I think coming out of the first 6 months of 2020, we have had a disastrous Dry Cargo market with actually still a profit for the Dry Operator, even though it's small. I think, actually, it's a great achievement and especially now coming into the second half with a much better position. And we still expect a good result for the Dry Operator for the full year.

Do we have any other questions before we finish the call? That does not seem to be the case.

So let me take this opportunity to thank you for your attention and your interest in DS NORDEN. I hope you'll have a good day. Thank you, and goodbye.