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Edited Transcript of DNORD.CO earnings conference call or presentation 14-Aug-19 1:30pm GMT

Q2 2019 Dampskibsselskabet Norden A/S Earnings Call

Copenhagen Sep 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Dampskibsselskabet Norden A/S earnings conference call or presentation Wednesday, August 14, 2019 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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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's NORDEN Interim Report Second Quarter of 2019 Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, 14th of August 2019. I would like to hand the call over to your speaker today, Jan Rindbo. Please go ahead, sir.

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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 second quarterly results for 2019. Thank you for dialing in. My name is Jan Rindbo, and I am the CEO of NORDEN. CFO Martin Badsted and I will be presenting our results today. I trust that you've 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. And again, 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. And finally, I will conclude with a few final words regarding the second quarter before we will open up for the usual Q&A session.

Please turn to Slide #4. NORDEN realized an adjusted result for the period of minus $12 million corresponding to an EBIT of $1 million. In a challenging trading environment, Dry Operator realized an adjusted result of minus $6 million, while high coverage sheltered Dry Owner from weak rates resulting in an adjusted result of minus $2 million. Finally, the adjusted result in Tankers ended at minus $3 million from a seasonally weak market.

NORDEN sold one dry cargo vessel during the second quarter, and the owned fleet has now reached a tradable position, which is in line with our strategy. NORDEN maintains an extensive fleet of both long and short-term chartered vessels. The value of this portfolio has increased significantly as a result of both higher product tanker and dry cargo forward rates.

Especially, the increase in product tanker forward rates have enabled us to charter out several vessels at attractive rates, while we expect -- which we expect will contribute to a positive full year Tanker result. Finally, NORDEN has posted an already strong liquidity position by refinancing of existing debt. This has improved the company's debt repayment profile and lowered the overall interest expenses.

Please turn to the next slide. We maintain the expectations for the adjusted result for the year at $25 million to $60 million, but the expectations for the individual business units are adjusted. In Dry Operator, expectations are lower to a range of 0 to $10 million due to the disappointing first half year result. We do, however, maintain expectations of a positive full year result in this business unit.

In Dry Owner, expectations are maintained at a range of minus $5 million to plus $5 million as high coverage reduces the impact of market rates during the rest of the year. With the expectation that the IMO 2020 regulation will strengthen the product tanker market, combined with attractive coverage, the full year expectations for Tankers are adjusted to $30 million to $45 million from previously $15 million to $30 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 fully believe that this captures the value of NORDEN. We own less than 15% of the fleet that we operate and have a significant portfolio of time-chartered contracts and long-term cover contracts, which are not part of the classic NAV framework.

This portfolio adds significantly to the market exposure and can in periods represent a sizeable 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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Thank you, Jan. Dry Operator expected a weak second quarter and was positioned accordingly. However, surprisingly high Chinese and Indian coal demand resulted in a more resilient market than expected. Although the position was quickly adjusted and a positive trading margin was secured, it was not enough to cover overhead expenses and the result ended at minus $6 million. Over the last 4 quarters, Dry Operator has generated $9 million in adjusted result corresponding to a margin of USD 97 per vessel day.

Dry Operator is continuing its growth strategy. Our overall activity level was 2% above the same quarter of last year, and we are building our risk management and market analysis capabilities to underpin profitable growth.

Turn to Slide 10, please, and Dry Owner. Going into the quarter with considerable coverage against weak spot rates, Dry Owner made an adjusted result of minus $2 million. Dry Owner sold 1 vessel during the quarter, and at the start of the third quarter, 1 more vessel was sold. The Dry Owner has now reached a tradable position of between 0 and 15 owned vessels depending on the point in the Dry Cargo market cycle, which is in line with the strategy of the business unit.

Despite being increasingly asset light, Dry Owner maintains considerable capacity through the long-term chartered fleet with significant optionality attached. For the third quarter, 88% of Dry Owner vessel days are covered and market developments will therefore only have a limited impact on third quarter earnings.

Next slide, please. Uncertainties from trade tensions, reduced iron ore supply and macroeconomic concerns continued to weigh down the market. However, strong imports of coal to China and India kept rates at a stable level throughout the quarter.

Despite having recovered from the low levels at the start of the year, Panamax and Supramax rates were on average 10% and 26% lower than the same quarter last year. At the end of the quarter, a rebound in the supply of iron ore out of Brazil and Australia caused rates to spike but have since normalized to lower levels.

Next slide, please. The outlook for Dry Cargo is very uncertain. On the one hand, the global economy is weakening, trade volumes outside China are down year-on-year and coal starts in key importing countries are already at elevated levels. On the other hand, import growth to China has been up 8% 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 treatment installations.

Overall, we think that these factors will keep balancing each other up with potential for temporary rate spikes. And as the IMO 2020 deadline closes in, market uncertainty is increasing.

Please get to Slide 14 to the Tanker business. During the second quarter of 2019, our Tanker business realized a quarterly adjusted result of minus $3 million in a seasonally weak product tanker market. Although the quarter was characterized by weak spot rates, high expectations of a strong 2019 have continued to lift both asset prices and forward rates increasing the value of NORDEN's tanker fleet and extensive time-chartered portfolio.

The business unit capitalized on the rising expectations by chartering out several vessels at rates significantly above current spot rates. Simultaneously to securing coverage, the business unit has chartered in 2 scrubber-fitted MR tankers for a 5-year period with delivery in early 2020.

Next slide, please. The second quarter of 2019 was characterized by a seasonally weak market and demand growth for clean oil products slumped to below 1% year-over-year, which is the lowest level seen for many years. However, market rates were higher than in the same quarter of last year as increased sailing distances and a smaller share of the tanker fleet trading clean cargoes gave support to the market.

Next slide, please. Looking ahead, we maintain our expectation of a strengthening tanker market towards the end of the year. While oil demand growth will probably still be subdued from a slowing global economy, the demand side will get support from an increase in new refinery capacity coming on stream and the IMO 2020 sulfur regulation, which will have a significant and positive effect on products trade.

On the supply side, we see nominal fee growth remaining high, but we also expect significant fleet inefficiencies from increased off-hire due to installation of scrubbers and ballast water treatment systems. So even though the seasonally weak spot market has continued well into the third quarter, we think there's good upside towards the end of 2019.

Now back to Jan for a few final words on Page 18, please.

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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 full year result for the company. The true value of NORDEN is more than the market value of our owned 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 for a strong product tanker market towards the end of the year have greatly increased 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. And this concludes our presentation. We are now opening up for our usual Q&A session. Please await the conference host instructions.

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Operator [5]

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(Operator Instructions)

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

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Okay. If there are no questions, then let us conclude by saying thank you for dialing in and thank you for your interest in NORDEN. Thank you, and have a good day. Bye.

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Operator [7]

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Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.