Dampskibsselskabet Norden A/S (DNORD) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the NORDEN Interim Report Third quarter of 2020 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, the 4th of November 2020. I would now like to hand the conference over to our first speaker today, Jan Rinbdo. Thank you. Please go ahead.

Thank you, and welcome to the presentation of NORDEN's results for the third quarter 2020. Thank you for dialing in or following online. My name is Jan Rinbdo, and I'm the CEO of NORDEN; CFO, Martin Badsted, and I will be presenting our results today. I trust that you have all found time to download the Q3 presentation available on our website. During this call, we will be showing the individual slides as we move along but we also refer to the slide numbers for those of you listening in. Turning to Slide 2. We can see the agenda for today. I will start by summarizing the highlights of the third quarter. Martin will then update you on the market outlook for each of the 3 business units, and finally, 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. During a period that is still marked by the ongoing COVID-19 pandemic, NORDEN continues to deliver strong results with an adjusted result of $27 million for the third quarter of 2020. This is primarily based on an outstanding performance from Dry Operator, which I will return to in a moment. For the first 9 months of 2020, NORDEN realized an adjusted result of $85 million. Following this, we are once again raising our guidance for the full year to between $90 million and $120 million up from $70 million to $110 million. At the same time, we stay committed to returning cash to our shareholders by launching a new share buyback program of $20 million. This comes on top of our new dividend policy of paying out minimum 50% of our annual results as well as the share buyback programs already concluded earlier this year. In total, including the new program, we have returned $80 million to our shareholders over the past 2 years. Taking a closer look at our 3 business units. Asset Management delivered an adjusted result of $6 million for the quarter. During the period, Asset Management continued to shift its exposure from tankers to Dry Cargo, based on our view that the risk reward outlook is better in Dry Cargo over the coming period. We make use of low Dry Cargo asset prices in Q3 to acquire 3 Dry Cargo vessels, 1 secondhand vessel and 2 new buildings. This is an example of our asset trading approach where we buy vessels not as a long-term investment, but because prices are low enough that we expect to make a good return when selling them again. As part of this, we also sold 2 ships during Q3 and a further 3 vessels after the end of the quarter. Our own vessels continue to amount to only approximately 10% of our total operating fleet. Dry Operator delivered an outstanding result of $31 million for the quarter and really showed its ability to create value based on its asset-light operations. This result should also be seen in light of the modest Dry Cargo market, where we were able to increase our activity through record high levels and benefit from an increasing number of customers seeking a solid partner during uncertain times. After chartering in short-term vessels during Q2, we made use of the vessel's regional positioning during Q3 to gain substantial margins over a short period of time. This is a clear example of how our agile business model in Dry Operator can adjust to short-term opportunities in the market. In Tanker Operator, the market was very challenged during Q3, as we already anticipated at the end of the last quarter. The adjusted result was minus $10 million for the Q3 period and is impacted by very weak spot rates even for the Q3 season. We expected this going into Q3, and therefore, reduced our market exposure by redelivering vessels after contract expiring, selling forward freight agreements and chartering out some of our tanker vessels on time charter. I will now hand over to Martin for an update on the market outlook. Please turn to Slide #8.

Thank you. Looking ahead in Dry Cargo, we expect the market to continue its gradual recovery but with a large degree of uncertainty related to the current COVID-19 developments across the world. The main driver of growth here being the Chinese import demand, at the moment, supported by infrastructure investment initiated by government and stimulus packages. On the export side, the Brazilian iron ore production is increasing, which supports the activity levels in industrial Dry Cargo. On the vessel supply side, there is good fundamental support from low fleet growth, now about 2%, and with extremely low vessel ordering activity, order books are now below 7% of the fleet, the lowest level witnessed for more than 25 years. In combination with a gradual normalization of demand, we believe this creates a good foundation for the Dry Cargo market looking into 2021 and '22. Next slide, please. Looking at the Tanker market outlook. NORDEN expects the tanker asset prices and period rates to remain at low levels for the remainder of the year and continuing into 2021. While there is some support from low fleet growth and an order book, which at 7%, is also at the lowest level for 25 years, the rebound in oil demand is developing slower than most have anticipated, with COVID-19 continuing to negatively affect global oil demand. In addition, the market is still under pressure from the unwinding of floating storage built up during the first half of the year. Now I'll hand you back to Jan, who will update on the guidance for 2020. Please turn to Slide 13.

Thank you, Martin. Based on the good results across the 3 business units so far and combined with improved expectations for dry operator going forward, we are raising our guidance to $90 million to $120 million for the annual adjusted result. In Asset Management, we expect a full year result, which is much better than last year. The second half of the year is expected to be much weaker than the first half, mainly because of lower scrubber earnings due to a more narrow price spreads between high and low sulfur fuel oil. In Dry Operator, we expect to reach a better Q4 result than last year, and at the same time, deliver a full year result significantly better than both 2018 and 2019. In Tanker Operator, we'll continue to operate in a challenged market. And this year, we don't expect the usual seasonal Q4 uptake to have any significant effect in 2020. Turning to Slide 15, please. To sum up, the third quarter brought a strong overall result for NORDEN based on Dry Operator's, agile capabilities and the ability to generate earnings in a modest Dry Cargo market. This signified what our agile business model is capable of and how we can use it to leverage market opportunities and mid-market volatility. We managed to generate record high activity levels in both operators, and we are raising our guidance for 2020. In terms of our capital allocation, we pursued Dry Cargo opportunities as part of our asset trading strategy. And we stay committed to returning cash to our shareholders by launching a new share buyback program of $20 million. This comes in addition to our yearly dividend policy, whereby we return a minimum 50% of the annual adjusted result. And finally, we are well on our way to create the best results for NORDEN in 10 years, showing the potential in our asset trading and agile business model during very volatile markets. At this point, we will move to our Q&A session and open up for any questions you may have. Operator, please open up for questions.

[Operator Instructions] And we have questions coming in. The first question comes from the line of Ulrik Bak from SEB.

Congratulations on a strong report. And a few questions from my side. Can you talk a little bit about what has happened in your Dry Operator segment since your outlook upgrade in September so that you're now able to upgrade the guidance again?

Yes, we can. So very strong performance by the Dry Operator business unit, really driven by, I would say, 3 main parameters. First of all, we've had a good margin from our base business of providing transport solutions to our customers on ships that we charter from other shipowners. We've seen more customers turning to NORDEN during this period, and we've had this record high activity levels. The second point is that we have taken full advantage of these very volatile markets. We chartered a lot of cheaper vessels during the lows of the market in Q2, and we have now benefited from that during the third quarter in -- where rates have picked up. Although the absolute levels in the market are still very modest. And then the third point is that we've been good at predicting the regional demand. So we have been able to position our ships optimally in accordance with these regional rate developments. And that combination has led to higher margins in Q3 than we expected. And we can also see that now continuing into the fourth quarter. So we have basically hit right on all points in the Dry Operator in the third quarter to a much higher degree than we expected previously.

Okay. So was the previous guidance that you announced in September was that just conservative? Or how should I read it that not much more than 1 month later, you can upgrade it again? I guess something must have happened between September and now.

Yes. I think the main driver here is not actually market-related, but it's more related to the routes that we employ the ships on. So we have been -- we've had ships in positions, mainly in the Atlantic, where the front haul rates have been much higher on those specific ships at that specific time than we have anticipated. That's one element. And the other element is that we continue to generate new business, and that's driving also this record high activity level that we have in the Dry Operator. So these are the main drivers behind the raised expectations.

Okay. Got it. Okay. My second question is that, yes, you talk about the Dry Operator being the main driver for the good results in Q3. And from the sound of it, it will also be the case for Q4. But if we take a look to 2021, can you give any color on what you anticipate to be like the main drivers for earnings between Dry Operator and Tanker Operator, I mean?

Yes, I think for -- if I were to comment on that, of course, I can't give you any numbers yet. But I would say for the Dry Operator, it's really a question about the attractiveness of the trading environment. So to the extent that we see good volatility and perhaps continued interest from new and existing clients in actually growing the amount of business with us, we should still be able to generate some decent buffets in Dry Operator also going forward. But of course, you know when we start 2021, the entire portfolio or what is known about the future for Dry Operator is fairly limited. So profits in that business, it's something that is, to a large extent, created during the year. It's perhaps a little bit different for the Tanker Operator, which is not as neutral to the market as the Dry Operator. So here, we will have a fundamentally long TC position. So we are dependent in Tanker Operator on the rate environment. But I will say, actually, that we have worked quite a lot on bringing new tools to use in the sense of redelivering ships and TC and out ships and actually taking cargo through FFAs. So that that we expect to open 2021 in Tanker Operator with a fairly limited exposure, not neutral, but fairly limited compared to normal. So there we will depend on both the market environment, but also on our own ability to then build up the portfolio at a good cost level again.

Okay. And then my final question. In terms of vessel days, what do you expect for the coming quarter and also for 2021, if you have made up your mind about that yet? Is the amount of vessel days, are they going to be increase, decrease or stay flat for Dry Operator and Tanker Operator for the coming quarters?

So if I can start with the Tanker Operator. So the fleet size here is more stable than it is in Dry Operator because we generally commit on slightly longer-term contracts. Having said that, we are redelivering ships. So I think it's fair to expect maybe a small decline there. But I think it's important to say that both the Dry Operator and Tanker Operator, these are very live businesses that drive on margins and on the opportunities that we see in the market all the time. So it's a bit hard to judge the number of days just in 1 quarter. If we take a slightly longer-term perspective because I think this is important when you try to judge what is the value of the operator business units when you take a longer-term perspective, then we would expect the dry operator to continue to grow. Dry Operator has not actually grown a lot this year, but we are growing faster than the market. And we would expect that to continue into 2021. So as I mentioned earlier, we see customers and also ship owners turning to NORDEN increasingly at -- in these uncertain times. So we would expect to continue to grow the Dry Operator organically as we have done. But it's -- on a quarter-to-quarter basis, it's very much driven by the opportunities. And as we saw in the first quarter in the Dry Operator, we actually scaled down the activity because of the IMO 2020 Regulations at the time gave some uncertainty. So we had a lower than normal sort of start to the year in terms of activity levels. But we see great prospects to grow the business. We are both in Tanker Operator and Dry Operator operating at a market share of 2% to 3% in our ship types. There's plenty of room for us to grow, but the emphasis is on growing profitably and then driven by the opportunities in the market.

[Operator Instructions] And the next question comes from the line of Marcus Bellander from Nordea.

I have a few questions. First, I would like to follow-up on Ulrik's questions. You mentioned that volatility helped the Dry Operator in Q3, but I'm wondering if you think that any of those -- any of those new customers that you acquired are there to stay? Or if they're just turning to NORDEN in Q3 because it's a volatile environment and NORDEN represents stability, and they will go away again when volatility subsides, would we start with that one, please?

I think volatility is not something that is unique for these quarters. We actually enjoy, I would say, volatility most of the time. Perhaps there's been the additional focus on supply chains and securing supply chain. So that could have led some customers to prefer safe harbors, such as NORDEN. But it's not the sense that I get from our customers that they're just turning to NORDEN short-term because I think there are a lot of other developments in the business that is happening at the same time. There are increased focus on sanctions, increased focus on decarbonization and reducing your CO2 footprint. We actually see, I think, a general trend of customers turning to some of the larger operators such as NORDEN, where we have a very professional setup to actually manage all these, I think, increase sort of compliance and uncertainties that we are managing. We have a big team, risk management team. We have teams that are managing compliance and sanctions. And I think actually that gives -- give some security or safety for our customers. And I think we are increasingly seeing customers are putting some preference to that. Having said that, we're still in a very, very competitive industry, and price is still very, very important. And I think here, our ability to actually use the market -- charter ships from the market in a much more flexible asset-light way, actually, also gives security to our customers. And certainly, it allows NORDEN to be competitive as well because our cost base is more flexible. So I'm not actually that concerned. I think that we can grow the business next year. Whether we have COVID-19 pandemic or whatever the market environment is, I think we have a good base to grow from.

Understood. And the second question kind of on the same topic. How much of this can we extrapolate into the future? You mentioned that you've done a good job of predicting the regional rate development. And I guess, I'm wondering, was that just a lucky strike in Q3? Or do you feel that you're sort of predictive ability has improved now that you've been running the Dry Operator for a few years?

Yes. I actually think that -- so these are not always pure predictions. I think there's a lot of intelligence that with our scale, we are getting from the customers and brokers and in the market that we can assemble that, I think, makes this a little bit, not just pure luck, but also a skill game. Of course, there will always be an element of luck in trying to anticipate these things. But that's certainly also, in my view, a large element of skill. And I think maybe we cannot repeat the performance that we are witnessing right now every year. But when you look at the performance of Dry Operator over the last couple of years, I do actually think that, in general, our feeling is that we are strengthening the overall platform here. And that the team has an ability to deliver decent profits. It will be volatile. But overall, when you look at it and you look at the graph of the performance since we started, we are very satisfied with it. And now we had $45 million over the last 12 months and way higher than $20 million since the beginning of Dry Operator on an annualized basis. So I do think this is something that we can continue improving.

Okay. That's good to hear. My second question or, I guess, third question concerns the asset trading that you've been engaging in lately. I'm just wondering how you -- what kind of returns do you expect on when you make such trades? I mean what's your -- where is the bar set for such trades? And which time horizons, are we talking about here?

So on asset trading, if I start with the time horizon, we are looking at that based on a 24-month period. So within that time frame, we would expect to to be able to trade, buy and sell a ship, again. It doesn't necessarily have to be that exactly ship -- that exact ship, it could be a ship within the portfolio. But the time horizon here is fairly short, so 2 years. And I think we have a good example of that, we have the NORD ANDES a tanker that we bought back in December 2019, that ship we have now sold 10 months later. So during the 10 months, we have generated fantastic earnings on the ship and generated a great return. We don't sort of specify the exact returns on a ship by ship basis, but that was a very, very strong return on that ship. And I think it is fair to say that we would expect to generate at least a 10% return on these asset trades that we are doing. And the potential is certainly there to do better. We have not had -- one thing, we have not actually seen that much of in the last period here is volatility in asset prices. So Dry Cargo asset prices have had a softening trend over the last couple of years. We -- the ships that we have acquired now we're buying those ships at a 15% to 20% a lower level than when we were selling ships back in 2018 and '19. But that is actually a relatively flat development over that period. So we would expect more volatility also in asset prices going forward. And I think here, it's interesting to note at least that the order book, both in Dry and Tankers is coming to a -- I think it's a 25-year low now with both Tankers and Dry Cargo sitting at only 7% of the order book based on the current fleet. So that is a very low level indeed. And that gives, I think, a better foundation for this asset trading in the coming years than in the past few years.

Okay. And then my final question, just a housekeeping question or a detail. I noticed that your -- you said you made a killer profit in Q3, but I've noticed that your equity has decreased from end of Q2 to end of Q3. And it seems that there's a $30 million or $35 million reduction in reserves. Why is that?

Yes. So these are some of the -- we're doing hedge accounting for our use of bunker derivatives and FFA derivatives or certain parts of it, at least, and that implies that we need to take unrealized mark-to-market changes on those instruments on the equity. And of course, this will settle over time. And it's important, I think, to stress that there will always be a physical flip side to the changes in the unrealized values. So that is the reason for the development in equity. You saw it increase earlier in the year, and now it's decreasing again. So when you look through over a longer period, of course, the development in equity will still trail the or trend along the side of net results and less dividends. But from quarter-to-quarter, there can be some noise here from these hedging instruments.

Okay. But -- so it's main -- it's fuel hedges, it's not currency or anything like that?

No, no, it's fuel hedges and some FFA or rate hedges. Yes.

There are no further questions at this time. Please continue.

All right. Well, thank you for your attention. Also thank you for some great questions. This concludes our presentation for the Q3 results. Thank you for your interest in NORDEN and for dialing in. Have a good day. Bye.

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