Dampskibsselskabet Norden A/S

CSE:DNORD

Earnings Call Transcript 2023-Q1

[Unknown Analyst]

Good morning, everybody, and welcome to this Q1 presentation of NORDEN. It's a pleasure for me to welcome you, Martin Badsted, CFO of the company, and we'll take you through the quarterly results. Please feel free to ask any question you may have. We'll take them as we go along or potentially in the end. [Operator Instructions]. My name is [indiscernible] with [ HCA ], and I'll be the moderator of today.

Welcome to you, Martin, and let's dig into the Q1.

[Martin Badsted, executive]

Thank you very much, too, and thank you for giving me the opportunity to present our recently announced Q1 results. So the agenda that I have prepared here today is, of course, a short review of the main figures; a little bit deep dive into the 2 business units and their performance; and then, of course, a review of the market and outlook for the rest the year.

Overall, I would say that we had a solid performance in Q1 against the market background. That was actually a little bit challenging with both weak spot markets in dry. And even though tanker markets were quite strong, they were still down 30% compared to Q4 of last year. But overall, as you can see here, we made $150 million in net profit in the quarter. And that actually means that we have very strong margins in Freight Services & Trading division where we made close to $1,700 per vessel day, and that was driven by the strong tanker earnings and also a short position in dry cargo market, as I said, that was actually quite weak.

In our Asset Management business unit, the net asset value, which we published more or less stayed unchanged, but it's actually the nominal figure declined, but that was mainly due to the DKK 30 dividend that we paid out following the annual report earlier in the year.

What we are focusing on right now or have been focusing on is really to increase our dry cargo exposure again, following a period during the second half of last year where we basically took down both the number of assets, the purchase options and generally covered our positions. We have now been turning that around, and I'll get back to that in a little while.

The Board has decided to pay out an interim dividend of DKK 15 per share, which is this equivalent to $75 million or about 50% of the net profit for the quarter.

And finally, we maintain our guidance of a net profit in between USD 330 million and USD 430 million for the full year.

Now looking a little bit on the activity highlights. You will see on the right-hand side a copy of the graph that I also showed you after the annual report, which really indicates the exposure that we have split up between tankers and dry, with tankers being the blue line and dry cargo the red line.

And you remember, we had a big swing towards tankers earlier in 2022. And you can see that lately, it has been going the other way, meaning basically that we have been adding exposure again in dry cargo and derisking the tanker position a little bit also. So both factors are actually working. And I would say we are probably at a 60-40 split right now in favor of tankers.

Looking a little bit into the short term, what we are doing in the Freight Services & Trading business unit. There's a graph on the left-hand side here, which shows our forward position measured in vessel days. And you will see that around January 23, we were at minus 5,000 to 6,000 days. So as we said, a net short position coming into the year.

And during the quarter, we decided that the market had fallen enough and we started building the position again. And you will see that pretty quickly actually really ramped up to a net long position close to 15,000 days. So now again, we are positioned for dry cargo market strength.

We continue our policy of paying out substantial shares of our net profit. As I said, DKK 15 per share for Q1, which is 50% of the realized net profit for the quarter. You will remember that during this period, we also had a share buyback of $50 million, which we have just completed. And that is certainly a tool, which we will be willing to use again later in the year if we feel that, that is appropriate.

Looking a little bit more into the individual business units. You will see that the Freight Services & Trading made a Q1 profit of $67 million. And as I already mentioned or alluded to, that was driven, to a large extent, by the very strong tanker spot market and the high exposure that we had to that market. So we benefited from that position. And our focus now is actually to sort of gradually start easing that high tanker exposure going forward. We are still convinced that the market will remain quite strong, but we think it's prudent to derisk that position a little bit.

On dry cargo, we maintained a high activity level, even though the market was actually, as I said, quite challenging. And we did benefit from the short dry composition at the beginning of the year as rates bottomed out, and we actually did manage to come back to a long position before the market spiked again.

It's actually a tricky trading environment with the high forward prices and low spot prices in the quarter. So there's been a lot of focus also on the basics, which is really the operational cost efficiency, optimizing all the voyages and so forth and making sure we do the right voyages at all times. And we did maintain our activity level at close to 450 vessels on average during the quarter.

[Unknown Analyst]

Martin, can I ask here about the strong tanker market and the situation in Russia because Q1 was also where the ban actually was effectuated. Have you seen what you expect beyond that? Or is it -- has there been any surprises for you in the market in terms of this?

[Martin Badsted, executive]

I think we, more or less, have seen what it is and what we expected. I'll get back to it in a little while that, overall, while volumes are maybe not impressive as such, the amount of oil on water taking up vessel capacity has grown 20% over the last 3 years. So there is a strong demand support from the sanctions and the resulting new trading patterns.

I would say, if anything, the weakness that we have seen in the last sort of week or two is probably a little surprising because it seems that China reopening is fairly strong. Oil demand is actually doing okay. But it seems that there's a lot of vessel sort of positioning that suddenly you have a lot of ships in the Atlantic right now, which is pushing down rates. So we do think there's a little bit of a strong reaction right now that is likely to reverse in the coming weeks.

[Unknown Analyst]

We'll get back to them, Martin, here.

[Martin Badsted, executive]

Yes. In the Assets & Logistics business unit, we made a profit of $83 million. We did record a slight decrease in the NAV for the business unit. But as I said before, that was actually mainly due to the DKK 30 dividend paid out in the period, but also to a little extent, a 4% decline in the quoted tanker values that we saw since the end of last year.

Half of the $83 million of profit came from sales gains, $42 million. And actually, we have done additional sales that are just not delivered yet. So we are awaiting an additional $28 million of sales gains to be included in our numbers in the coming periods.

And as I said, we are gradually adding more dry cargo capacity in line with the outlook that we think the market is going to strengthen. And importantly, we actually entered the Capesize segment again with 4 acquisitions done just around the end of Q1. And of course, we are really happy to again be part of this segment, which really completes our total vessel offering to our clients.

Importantly, we still have a lot of optionality in our Asset & Logistics business unit. So you will remember, we have a lot of leases that include both extension options and purchase options. And a short summary here indicates that we have close to 200 extension years that we can call in the coming years. And we have 80 purchase options where we are allowed to purchase the underlying ship at a fixed price.

And for instance, you can see from the graph here that the MR is the red line and the red dots. So you'll see from the difference between the red dots and the red line that there is actually significant upside in this optionality, both on the extension options and certainly also on the purchase options when they become available to us. And this really means that, as I said, we can't derisk sort of our normal position here and still sit on a lot of upside through this optionality.

A short review of valuation of the 2 business units here where we do provide an NAV for the assets and logistics part, as I already commented on DKK 380 per share. And then on the Freight Services & Trading part, this is not really, in our view, at least good for an NAV valuation, but more suitable for an earnings-based valuation.

So we try to focus on what are the average margins and the average activity levels that we have seen. And you will see here from the table that the average margin that we have been able to deliver since the 2019 is $1,400 a day. And when you multiply that with the annual vessel days of 155,000, you arrive at a full year profit of $260 million which, with a multiple of either 5 or 10, would actually correspond to DKK 200 or even DKK 450 per share on top of the NAV for the assets and logistics part.

Now turning to the very exciting market developments. The dry cargo market, as expected, was actually quite weak during Q1, but also saw a bottoming out and renewed strength towards the end of the period. And especially when you look at the forward expectations, as measured by the 1-year T/C rate, the 1 for Supramax actually increased 18% to $18,000 a day.

The market was really divided into with China showing very strong growth, whereas the rest of the world actually showing decent negative development in the volumes imported. So really, a world in 2 different places at the moment.

On the tanker side, as expected, it was a strong market, although it was weaker than Q4. And it's the same story with the sanctions that are leading to longer distances and the resulting high utilization of the world fleet. And as I said also earlier, the volume of refined oil products on water, meaning tying up ship capacity, has actually increased by 20% over the last couple of years.

The 1-year T/C rate, even though the spot market showed some weakness, the 1-year T/C rate for the future remained fairly stable at around $33,000 per day.

The outlook in dry, we think that there will still be gradual improvements coming, mainly driven still by the China reopening although there is a limit to the upside here because it does seem like the rest of the world is showing weaker economic growth, and there is still very little support from congestion or strong container market, which is really also back to normal at this point in time.

We do think actually that in the longer perspective, that the fundamentals for dry are looking quite good, especially when considering the supply growth, which looks really historically low with an order book, which is around 6% of the total fleet. We do expect only net fleet growth of 2% to 2.5% for the coming 2 years, which really means that we don't need a lot of demand to still see healthy levels and healthy asset prices in dry cargo.

On the tanker side, we do expect the strong and volatile tanker rates to remain. And when I say strong, I mean sort of the average for Q1, not the current spot prices that we are seeing now, which we think have corrected a little bit too much.

Here, again, it will be the support from sanctions and trading patterns that are tying up vessel capacity. But it's also important for me to say that, as usual, there is a high risk here. We are at a point in the market where only small changes in the assumptions will lead to big changes in the rates that you can actually realize.

We have the same story actually on the supply side, even better on tankers, where the order book indicates a global fleet growth of about 2% for the next 2 years, which really is only 1% net in each of the 2 years. And we don't see a lot of additional yard capacity being available. So even though ordering is picking up a little bit, we still think that the supply picture for the next couple of years will be fairly contained.

[Unknown Analyst]

And Martin, maybe that's a good start of a discussion on the tanker side because the way I see this and sort of is expecting to see this is that this is more a structural thing than actually sort of just a blip in terms of things because who would want to order a tanker for 30 years from now. I guess that's the reasoning behind the fleet growth is so low. So what's your thinking on this? Is this more like a structural thing on the product tanker market than it has been before where we've just seen some blips, the rates go up bananas, and then it comes back?

[Martin Badsted, executive]

Yes. So I think, actually, there are a couple of factors at play here and some are structural and some are perhaps a little bit temporary. So I certainly agree with you that the whole decarbonization agenda makes people worry that they will order a vessel with a technology that becomes obsolete within, say, the next 5 years or so.

So even with the decarbonization maybe [ peak ] oil, there will still be a need for tanker vessels for a long time yet. But you don't want to end up with an asset that is obsolete or whether residual value risk is too great.

But then there is another structural factor at play, which is that, over the last 10 years since the super cycle back in '07 and '08, all focus has really been on reducing yard capacity because there was ample yard capacity over the years. And then I think maybe the market has gone a little bit too far. So we don't see a lot of actually yard slots available. So even if you wanted to go out and order tankers right now, you can't really get them at least not in the near term. So that also indicates that something else may be at play even if interest was there.

And then I think the final thing, which is I think temporary is the massive ordering of container ships and LNGs to some extent, which is tying up yard capacity. And strangely enough, in my view, although I'm not a container expert, but there are still a lot of container orders rolling into the yards order book, even though the container market has clearly corrected down to more normal levels again.

So they are sort of stealing all the slots that were otherwise available to dry and tankers, which is, of course, quite good for our long-term fundamentals, but it is probably also something that could change a little bit in the coming years. So that's the one, I think, downside that still remains.

[Unknown Analyst]

So you would not be surprised to see more ordering in tankers, that's what you're saying, because of the slots opening up in the market.

[Martin Badsted, executive]

Yes. So -- but I don't see it for '24 or '25 because those slots are not there. But maybe if you go into early '26, you will be able to get your hands on some slots. So it's not a near-term threat in any way.

[Unknown Analyst]

No. But there has been -- I mean, I don't think it's massive at all, but you can actually see on your slide here that on the blue line, it has slightly picked up, slightly picked up. I know that.

[Martin Badsted, executive]

Still compared to the strength of the market, this is a very, very limited reaction.

[Unknown Analyst]

Yes, I agree. I agree. Okay. Yes, please continue.

[Martin Badsted, executive]

Thank you. But this actually brings me to the final slides. We maintain our full year guidance of $330 million to $430 million. We still have 6,000 open MR tanker vessel days here at the start of May. And as we have said, it is still our policy to pay out at least 50% of the profit for the year.

[Unknown Analyst]

Cool. Let's take some of the questions. I -- first of all, I mean, you keep your guidance and you have USD 150 million. So that's, I think, 40% of the full year. What -- I mean, if you are an outside investor, what would you think about you keeping that guidance at this stage?

[Martin Badsted, executive]

Well, I think our view on this is to be prudent and also have an eye for the fact that there are still some tremendous risks in this market, especially on the tanker side. We have just seen in the last few weeks that the market has basically crashed from maybe $35,000 a day to $20,000 a day. So with these swings, you can actually really get burned in the market.

And I would also say that USD 42 million of the USD 150 million for Q1 have been sales gains. So these are not really recurring. So if you subtract that, the sort of -- the recurring part is substantially lower.

[Unknown Analyst]

Okay. So again, about the Capesize and your new entry into this area. I mean, that's new for you. You were quite fortunate in business as far as I know. Can you perhaps talk a little bit more about the reasoning for that? And what's driven you into that market again?

[Martin Badsted, executive]

Yes. So there are a couple of reasons behind it. First of all, we actually think that, over time, this will enable us to have an even broader and more attractive service offering to our main clients that we can service all their transportation needs all the way from Handysize up to Capesize.

Then I also think that in terms of the pricing of -- the relative pricing between different dry cargo segments, we think actually that the Cape outlook and the upside to current cape pricing is where you see the most attractive risk reward.

And then the good thing about Capes is that you sort of get a lot of exposure for very limited activity. So actually, with just 4 ships here in Capes, we can actually significantly, let's say, add exposure to the dry cargo market, which we see gradually improving. So it's easier, you can say also from an internal point of view, to acquire for Capes rather than, call it, 10 Supras or something like that.

[Unknown Analyst]

Okay. Cool. About the dividend and your dividend policy, I guess it's 50% of the net profit. That's how you do it, right, over time?

[Martin Badsted, executive]

Yes, that's the minimum, yes.

[Unknown Analyst]

The minimum, yes. And then you combine it into share buybacks and ordinary dividends or extraordinary dividends like this one. When do you actually get the DKK 15 now?

[Martin Badsted, executive]

I believe it's the 9th of May.

[Unknown Analyst]

9th of May. Okay. Cool. And this is how you will do it for the rest of the year, you will evaluate what the -- how you will do it quarter-by-quarter. Is that the way you think about it?

[Martin Badsted, executive]

Yes. So we started with quarterly dividends last year, starting in August. And I think actually that has proven to be a good way for us to manage the cash that is rolling in. So we have had a very strong cash flow also of $146 million of operating cash flow. So you can say as long as earnings are actually converted into cash at that rate, we will be able to, I think, still uphold the quarterly dividends.

[Unknown Analyst]

Cool. And then, of course, there's a lot of market-related questions about Russia, and we've been through some of it. Is there anything from an investor point of view, you would watch on this stack fleet and stuff like that? How as an investor looking into NORDEN and evaluating this market in terms of the tankers? Can you give us any advice on what we should keep an eye for in terms of the Russian sanctions?

[Martin Badsted, executive]

I would say, first of all, that it's very, very tricky to keep an eye on indicators that will sort of tell you where this is heading. But I do think -- and we talk a lot about the demand and trading pattern implications of the sanctions and then the order book from the point of view of sort of finding out what is the balance of the fundamentals. Of course, the very hard part is figuring out both how long will the sanctions stay in place, but also how effective will they be over time.

Typically, what we see is when sanctions come into place, people are very sort of hesitant and a little bit cautious. And then as time goes by, more and more people will find, I wouldn't call them loopholes, but they will find gray areas where it's possible to sort of still work with the cargoes without being in direct reach of sanctions.

So some of the early trade pattern effects that will -- was very positive for the market, you can say, of Russian products going all the way to the Middle East or even out to Asia and then the ships coming back in balance and importing products from India and Asia back to Europe. These are the extreme effects on trading patterns. You are likely to see, some can say, efficiency gains while still abiding by sanctions, but still finding more efficient solutions. And I think that is the key thing to watch to extent will the market be able to find alternative solutions that will sort of take out some of the premium of spot [ buying ].

[Unknown Analyst]

Another market-related question about the refining capacity, and we constantly talk about refineries being closed and how that impact the -- there's been a continuous theme. Is there anything you would remind us on refinery capacity right now that can affect the margin in your view?

[Martin Badsted, executive]

Well, generally, refining capacity has also been a little bit scarce in the last 12 months, and you have seen very strong refining margins. And I think lack of refining capacity is usually overall good for product tanker shipping in the sense that if you can't really get the products through the refineries, then you have to distribute them to other places via ships. So that tends to be, to some extent, positively correlated.

And I still think that there are refineries coming, for instance, in the Middle East that will be -- have more capacity that is actually needed down there. So the old story, if you will, of also the refining structure of the world changing to a place where it adds more tonne miles is actually still ongoing.

[Unknown Analyst]

There's another question here about your clients' perception of your partnership with 123Carbon. I'm not sure I know that much about that thing. But maybe you can talk a little bit about it. And perhaps also, there's a question about your targets for biofuel purchases in 2023.

[Martin Badsted, executive]

And so we are doing actually quite a lot on the decarbonization front and teaming up with many different people. I think one of the things that we have been working hard on in the last couple of years is really to establish a system where we could actually use biofuels on our vessels. And let our customers get the credit for the CO2 that is not emitted then on those voyages.

The problem with that is really that we cannot guarantee that is the particular voyage that we do for the customer that will actually be using the biofuel. So that biofuel may be burned on another ship.

So having these things coordinated in an audited fashion that clients and other bodies can verify, it's actually quite difficult. But things are looking good. And I think we are quite ready with the product actually where you can get CO2 tokens based on audited emissions reductions. So I really hope that we can also persuade some of our customers to actually take this up going forward because we're convinced that could be a really valuable addition to the decarbonization agenda of the global shipping community, really.

[Unknown Analyst]

Thank you very much, Martin. I think we'll end it here. There's been a couple of questions on the tanker market in particular. And then, of course, your interim dividend is also key and your Capesize. I think that's been the main questionnaires that's been for you this time.

Martin, that's -- thank you very much for participating. Thank you for all the participants who view. You can see this video again if you want to in just a couple of hours. Thank you very much, Martin. Have a good day.

[Martin Badsted, executive]

Thank you. You, too.