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

Ladies and gentlemen, thank you for standing by, and welcome to the NORDEN Full Year Results 2020 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, the 4th of March 2021. And I would now like to hand the conference over to our first speaker today, Jan Rindbo, CEO. Thank you. Please go ahead.

Thank you very much, and welcome to the presentation of NORDEN's annual results for 2020. Thank you for dialing in or following the presentation online. My name is Jan Rindbo, and I'm the CEO of NORDEN. I will, together with our CFO, Martin Badsted, today be presenting our full year and Q4 results. I hope you have all found time to download the full year presentation available on our website, which we will be going through on this webcast, and we will 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 highlighting the highlights for 2020 and Q4, initially on a group level and then per business unit. Martin will then update you on the market outlook for each of our 2 markets. And finally, I will conclude with our guidance for '21 and a few final words before we open for the usual Q&A session. Please turn to Slide #4. During a very unusual and challenging year, NORDEN managed to generate an outstanding result of $106 million based on record high activity levels. This is the best group result in 10 years. The strong performance led to an improved return on equity of 10%, further strengthening NORDEN's financial position. For Q4, we reached another great result amounting to $21 million during the quarter. For 2020, the Board of Directors proposes a dividend of DKK 9 per share paid out to the shareholders equal to 53% of the adjusted result, in line with our dividend policy. In general, 2020 was a very volatile year on both dry and tanker markets, but we have managed to utilize this volatility by adjusting our activity and exposure throughout the year. And by doing this, 2020 ended up becoming a year that proved the resilience of NORDEN's business model as reflected in the positive results across all 3 business units, which we are reporting on for the first time here in 2020. If we look closer at our business units, Asset Management delivered a result of $29 million during the year with $5 million in the fourth quarter. Throughout the year, Asset Management gradually shifted its market exposure from tankers to dry cargo, capitalizing on good trading opportunities. This is reflected in a total of 21 owned and leased vessels added to the portfolio. It's important to note here that our purchases and long-term leases are part of Asset Management's active portfolio management and are not intended as long-term passive investments. The estimated market value of Asset Management's portfolio of owned and leased vessels was $918 million at the end of 2020, corresponding to DKK 148 per share. And on top of this comes the value generated from our 2 operators. In Dry Operator, the unit achieved an outstanding result with $59 million for the full year and with $27 million in the fourth quarter. Dry Operator improved its daily margins to $559 per day and also increased the average operating fleet size to 294 vessels. Dry Operator increased its operations to record high activity levels based on a very strong second half of 2020. The strong performance was created by optimizing the market exposure and regional positioning of the fleet and by continuing to deliver efficient service to a growing number of customers, who were seeking supply chain reliability during the very unpredictable period in 2020. In Tanker Operator, the unit achieved a full year result of $18 million with minus $11 million in the fourth quarter. 2020 was characterized by an extreme level of volatility with very high spot rates during the first half of the year, which then dropped to quite weak levels in the second half of the year. And in this second half of 2020, Tanker Operator has done well to protect its earnings, partly by reducing exposure to redelivery of expiring T/C vessels and partly by increasing forward cover. Tanker Operator continued to benefit from pool management of third-party vessels, which enables Tanker Operator to expand its customer reach and diversify its product range to now include vegetable oils, which is expected to become an increasingly relevant commodity for NORDEN in the future. I will now hand over to Martin for an update on the market outlook. Please turn to Slide #8.

Thank you, Jan. Looking ahead in the dry cargo markets, we expect the market to be strong. We have seen gradual improvements during late 2020 and a strong spike here in February. So far, demand growth has been centered a lot around China, but the rest of the world is expected to add support as lockdowns are lifted. On the vessel supply side, we continue to see support from very low fleet growth, driven by an order book, which is now below 6% of the active fleet. Ordering activity continues to decline and has been about 1.5% of the fleet in the last 12 months. We have already seen the effects of market tightening here in the first months of 2021, where 1 year T/C rates have spiked to above $15,000 a day in the sub-cape segment and asset prices are up at least 10%. While the market will probably not be able to sustain current high spot levels, we do expect an overall strong market this year as demand rebounds further. Please turn to Slide 9, please. Looking at the tanker market outlook, we expect tanker asset prices and period rates to remain at the current low levels in the first half of 2021, which may only gradually recover during the second half of the year. In general, the product tanker market this year will be held back by the crude tanker market, which is suffering under a greatly reduced level of crude oil production. While both oil demand and crude output are gradually recovering, it will take time before we reach the levels of 2019 and before we catch up with fleet growth realized during the last 1 to 2 years. Fundamentally, there is support from low fleet growth and an order book, which is down to 6.5% of the global fleet, but this is not likely to be enough to offset the negatively impacted world market activity, which continues to be impacted by the COVID-19 lockdowns. At this point, I will hand you back to Jan, who will update you on the guidance for 2021. Please turn to Slide 13.

Thank you, Martin. Looking ahead, we believe 2021 will be a year of gradual recovery in global trade. When comparing to the outstanding results for 2020, NORDEN expects lower earnings in '21. In Asset Management, a lower result is expected for '21. High coverage on tankers will help protect earnings to some extent, while high coverage on dry cargo vessels means the recent rate increase will only have limited P&L impact in '21. However, the portfolio value should increase following improved asset values and period rates during '21. Dry Operator expects a lower adjusted result compared to 2020, but higher than the historical average achieved since the unit was established. This is based on an expected activity growth compared to the 2020 average. Earnings per quarter are expected to be volatile and primarily generated in Q2 and Q4. Tanker Operator expects a much weaker adjusted result than in 2020, following the very hard hit tanker spot market. While the second half of the year is expected to be better, this will only partially offset the weak first half of the year. Please turn to Slide #14, please. The estimated market value of NORDEN's portfolio of owned and leased vessels was $918 million at the end of 2020. This results in a net asset value per share of DKK 148 per share. On top of this comes the value generated from our 2 operators. When looking at the annualized earnings since both units were established, Dry Operator has achieved $31 million on average per year in earnings, while tanker operator has achieved $18 million on average per year. We believe the ongoing value generated from our 2 operator units is a major part of assessing NORDEN's value and earnings potential going forward. Turning to Slide 15, please. To sum up, NORDEN achieved the best result in 10 years with record high activity levels and positive results across all 3 business units. This was achieved during a volatile year, which proved the resilience of our asset-light business model. During the year, Asset Management portfolio values have benefited from actively shifting fleet exposure from tankers to dry cargo vessels. Based on a strong balance sheet and low CapEx requirement, NORDEN's Board of Directors proposed a dividend of DKK 9 per share paid out to the shareholders, equal to 53% of the adjusted result. This comes on top of $30 million returned to shareholders through share buyback programs during 2020 and early 2021. At this point, we will move to the Q&A session and open up for any questions that you may have. Operator, please open up for questions.

Thank you, speakers. [Operator Instructions] The first question comes from the line of Casper Blom from ABG.

First of all, congrats with the 150-year anniversary and congrats also with the strong set of results. Good to see you coming out of 2020 so strong. First question goes to your comment about expecting higher values within the Asset Management business -- higher portfolio values in the Asset Management business. Is this basically just a reflection of what you've seen here in the first 2 months of the year with values coming up? Is it an expectation that the vessel values can go even higher? And if so, should we then also expect that you started rushing out to acquire vessels at prices that would then be expected to increase? That's my first question, please.

Thank you, Casper, for a good question. And if I start with the how we should expect asset values to develop? Then, yes, we have already seen here at the beginning of the year asset prices go up. A 5-year Supramax ship has appreciated by about 10% since the 1st of January in value. And I think it's fair to say that in the current market, we have seen a massive spike in spot rates, which gradually is also transferring into the long-term curve and also asset value. So provided that there is continued support in the spot market, and it may not actually be at the current levels, it could also be at lower levels, then I think there is some good upside on both asset prices and also the forward curve beyond the next quarter.

But if that's the case, again, why don't you rush out and buy vessels?

Well, we have already done that and we've done that at lower levels than -- obviously, than what we're seeing in the market now. You may recall that last year, we ordered 6 newbuildings and we've also bought 3 second-hand ships. And on top of that, we have actually done a lot of transactions on leased vessels as well. So in total, when you include both owned and leased vessels, we have already added 19 ships to the long-term portfolio, and here, we are just talking about Asset Management. Then, of course, in Dry Operator, which is more short-term focused, we're also adding ships on shorter-term contracts there. So we've already done a lot, and we believe, at very attractive prices. And of course, we keep an open mind on what other opportunities are out there. And we may add a few more ships. Whether it's ships that we buy or lease or ships that we perhaps charter on shorter-term contracts, that depends on the opportunities. But I think it's also important to go back to our business model and why did we generate such a great result in 2020? We did that because we had the agility, we could change our positions. So we are still very mindful of not actually just expanding the fleet because there is a very sort of more positive shorter-term market view. We still want to retain our ability to change positions and basically take advantage of the volatility in the market. And we're just happy that we have already done a lot here to shift our exposure from tankers to dry cargo in 2020.

Great. Second question, a little bit more detail. In the annual report on Page 26, you're very kind to show the CapEx expectations, but in the Asset Management business. Is it fair to assume that's also broadly the CapEx to expect for the whole of your business? Or are there additional CapEx commitments outside the Asset Management business?

No. You can safely assume that this is, by far, the majority that we have in the business.

The next question comes from the line of Anders Karlsen from Danske Bank.

I was wondering, you have seen a pretty strong dry cargo market lately. How is that affecting your ability to take in vessels on charter and expand on your Dry Operator business segment? Is that part of the reason also for being a bit soft on the guidance for 2020 (sic) [ 2021 ]?

Thank you, Anders. If I start just with the softer guidance, we should remember that we're comparing it to our record results that we just delivered in 2020. And I think it's fair to say that the main reason for the lower guidance in '21 compared to the record result in 2020 is based on tanker market, a much lower tanker market, where we have significant headwinds. So that's the main driver there. If we turn to dry operator and the higher market, you're right that, of course, it makes it more expensive for the dry operator to build up its position and taking capacity in the first quarter and especially because the first quarter this year has been unusually high. The first quarter is usually a period where we can build up that position at a much, much cheaper rate. So on one hand, it's more expensive to build a position in dry operator. On the other hand, there is perhaps better upside in the market this year than we have seen certainly in the past few years. But it's a very, very volatile market, that's for sure.

Okay. Next question is really apart from you know, what do you see as the main -- what can go wrong in 2021 in terms of I know the tanker market looks a bit challenging in short term, but say in the dry cargo market, what could actually go wrong there so that you don't see the recovery that you anticipate -- the gradual recovery that you're anticipating?

Yes. What can go wrong? Well, it's not -- you don't have to turn time back that long. I mean, 1 year, maybe 1.25 year now where I think having a pandemic was not on our radar. So another black swan event, of course, that we cannot foresee could change things. But having said that, I would say that the outlook for dry cargo is probably the best that we have seen for a long time. And I base that both on a very low order book where we've seen very little ordering and that actually gives a much better foundation for the dry cargo market, not just for '21, but actually also in the coming years. So perhaps that is one area to watch. Will there be more and more ordering of newbuildings? I think here that we have the benefit of actually having some uncertainty in terms of what is the future fuel for the industry, how much are you willing to invest into new ships with that uncertainty. I think that may hold back investments in ships. So we are quite optimistic in terms of the supply side for the, at least, the foreseeable future. The demand side is, of course, much harder to predict. We have seen exceptionally strong markets here at the beginning of the year and actually mainly driven by the minor bulk segments, not so much iron ore and capesize, which is usually what is driving the market. And that is positive because that means it's more broader based, it's more a sort of industrial-based recovery that goes across many different commodities. We've also seen commodity prices go up. So I think there's also a much more positive picture on dry cargo is also forming here. And of course, if there was a hiccup in that recovery, then that would be hurtful for the dry cargo market.

Yes. And I think you might add that the last part of the recovery and the stimulus packages that we have seen to abate the effects of the COVID-19 lockdowns are still quite necessary to drive the recovery. So policy mistakes in the sense of too early tightening, either of interest rates or fiscal policies, I think could be a risk here. But it is our base case that politicians are looking to actually err on the side of too much diminished rather than too little at the moment.

[Operator Instructions] And the next question comes from the line of Ulrik Bak from SEB.

Also congratulations on the strong result. The first one is related to your 2021 guidance. Can you get any closer to a split of your guidance between the 3 segments? And by doing that, maybe you can quantify what is meant by the lower earnings you stated for Asset Management and below 2020 but above a historical average for Dry Operator and a much weaker earnings for Tanker Operator? That would be my first question.

It's very hard, Ulrik, to actually say a lot more about it without accidentally giving you some guidance. So I think actually what it says for Dry Operator is that, of course, you compare with the record result in 2020, it would be heroic to expect that already at this stage. But based on our outlook and our position, and that's the first few weeks of the year, we do expect -- and actually fairly strong result in Dry Operator compared to sort of the historical averages. I don't think I can get much closer than that. Yes.

Yes. Okay. But then a follow-up on that. You state that the Dry Operator should be driven by a higher activity level. Can you get a bit closer to what that means in terms of percentage change versus 2020?

Yes. I think we are aiming for somewhere around 5% to 10% growth.

Okay. Yes. Okay. That's great. And also a question on the Dry Operator and the strong Q1 that you -- we've seen so far because it's my understanding that you used Q1 to charter in vessels at lower rates as rates are usually lower in Q1 and then you leverage on that during the rest of the year. So has that changed your positioning, your strategy to generate value in the Dry Operator segment that Q1 has been so strong during the year?

I don't know if it has changed, but I would say it has made it harder because there's not been that window of opportunity to take in what we think is cheaper tonnage. Now the tonnage that we are taking in may actually prove to be cheap as the year goes on. So we'll have to see. But it's not been a -- the buying window, so to speak, for Dry Operator in Q1 has not been so obvious this year than perhaps in previous years. But again, as I said earlier, with the perhaps more positive outlook and strong markets we're seeing right now, it may be that when we look back, that there were actually some cheap opportunities in Q1, they just didn't seem that cheap at the time because of our historic experience on rates at that time of the year.

Okay. So you're still taking in capacity at these levels despite being higher than, yes, historical seasonality?

Yes. We don't really look too much at historical values because I think that's very dangerous in Dry Operator. That -- we have to assess the market all the time and we do that constantly. And we constantly adjust our positions, increasing -- decreasing exposure to the market depending on both opportunities and outlook in the market. So it's a very, very vibrant, very live sort of situation in Dry Operator. And as Martin just alluded to before, we actually do expect, despite, you can say, the higher cost of tonnage here at the beginning of the year, we still expect Dry Operator to deliver a strong result in '21, if not quite at the same level as in 2020.

Okay. That's very clear. Then a question on your Tanker Operator. You state that your coverage is rather large for 2021 in this segment. Can you quantify how much of your vessel days are covered and whether the coverage is profitable at current levels in terms of T/C-in versus T/C-out?

Yes. So I think coverage is somewhere between 30% and 40% of the known volume in Tanker Operator. So it depends a little bit on your definition of profitable because the coverage rates that we have achieved are, of course, far higher than what spot rates are at the moment. And there might be sort of just about profitable on accounting levels, but they are probably not value-generating in the sense of providing an okay return. But of course, it depends a little bit on whether that cover was taken in Q4 or just lately.

Okay. And then my final question relates to your vessel transactions during Q4. You incurred a loss from the sale of these vessels of $18 million during Q4 and considering that the tanker market will recover once vaccines have been rolled out and what you stated in your presentation. So what was the math by taking that loss versus having the opportunity to leverage on a recovering tanker market later on in 2021?

I think you have to be a little bit careful of looking at sort of the book values. We constantly look at what our market values and sometimes you have ships reaching a certain age category where the sort of linear depreciation does not quite cover the market valuation for those ships. So there can be a bit of a gap there. Now we were buying tankers back in 2018 and sort of been building our position, and we're very happy with that. And last year, we started to take off some exposure. And there will be an opportunity to go back in again in tankers. Whether we do that through buying ships or leasing ships in Asset Management or maybe through shorter-term contracts in Tanker Operator, there will be, we think, great opportunities to take on more exposure in tankers and that becomes a timing issue when we think that is the right moment.

Thank you, Ulrik. And thank you, speakers. That's our final question. Please continue. Thank you.

Okay. Thank you very much for some great questions, and thank you for your interest in NORDEN. This concludes our investor presentation for the full year 2020, and we look forward to turning now to '21 and speak to you about our performance and results in this year. So thank you very much, and have a good day.

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