Dampskibsselskabet Norden A/S

CSE:DNORD

Earnings Call Transcript 2018-Q2

[Jan Rindbo, Chief Executive Officer]

The end of second quarter marked the 1-year anniversary of the Dry Operator and Dry Owner as separate business units. And it's been a good first year for both, enabling NORDEN to be profitable despite one of the worst tanker markets in a decade. NORDEN realized an adjusted result for the period of $4 million, which corresponds to an EBIT of $8 million. This is an improvement from the minus $3 million result in the same period last year, especially if you consider that this year's quarterly result is much less impacted by old provisions. This is also reflected in the improvement of $27 million in operating cash flow compared to the same period last year. NORDEN's financial position also remained solid. At the end of second quarter, NORDEN's cash, liquidities and undrawn credit facilities accumulated to $353 million. And we used our financial strength to improve our competitiveness. We have analyzed and evaluated the effect of the new low-sulfur regulation for fuel coming into effect January 2020. And the question has been whether to comply by using more expensive low-sulfur fuel or by installing a so-called scrubber that can remove sulfur from the exhaust streams. The analysis shows that the regulation is likely to increase the cost difference between low- and high-sulfur fuel for a sustained period, making scrubbers an attractive choice for compliance. Therefore, NORDEN has secured installation of 26 scrubbers, which will be installed on both owned and long-term chartered vessels at a total cost of around $54 million. We consider the investment highly attractive with an estimated financial return of around 25% within the first 5 years. Turning to our business unit performance. Dry Operator benefited from the positioning of vessels to the Atlantic done in the previous quarter. Together with good combination of cargo and vessels and ongoing focus on cost and fuel efficiency, the outcome was an adjusted result of $8 million. Since initiation 1 year ago, the Dry Operator has been focusing on two things: build a strong performance track record and increase the scale of the business. And it has succeeded in doing both. Dry Operator has, during its first 12 months, increased the activity by more than 2,000 vessel days and generated a contribution margin of $57 million, equivalent to an adjusted result of $23 million. As an asset-light business, this is a very satisfactory risk-adjusted return, which highlights the profit and growth potential of this business unit. Our Dry Owner business has also delivered strong results during the first year. In the second quarter, Dry Owner generated an adjusted result of $3 million. And since the split of the Dry Cargo business, Dry Owner has in total generated an adjusted result of $27 million. The result is a reflection of stronger global economic activity and lower fleet growth but also constant optimization and focusing of the NORDEN fleet. The $8 million from the Dry Operator, together with the $3 million from the Dry Owner, outweighs the loss from the third business unit in NORDEN Tankers. The Tanker market is currently going through one of the most challenging times in a decade. Years where strong deliveries and low demand growth is a toxic cocktail for the Tanker market. And the rates in 2018 reflect this. The NORDEN Tanker fleet once again outperformed the market, this quarter by 4%, or what is equivalent to more than $550 a day. This performance, however, was not sufficient to prevent a loss. And the adjusted result for Tankers in the second quarter amounted to a minus $8 million. It is, however, worth noting that prices for vessels have not followed the spot rates down. This is partly driven by the expectations for market improvements towards 2020 when the global IMO sulfur regulation is expected to create additional demand for product tankers. But here now, we expect the very poor Tanker market to continue into the third quarter and no significant improvement in rates before 2019. So despite the Dry Operator delivering above expectations and Dry Owner being fully covered for the rest of the year, this cannot make up for the very poor market conditions in Tankers. On that basis, we adjust the expectations to the result for the year downwards. We are still looking profitable for the year. And with continued growth in the Dry Operator activity, a Dry Cargo market in still better shape and a Tanker market with growth potential, NORDEN is well positioned to the future. Thank you for watching.