Dampskibsselskabet Norden A/S

CSE:DNORD

Earnings Call Transcript 2021-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the NORDEN Interim Report Third Quarter of 2021 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jan Rindbo. Please go ahead.

[Jan Rindbo, Chief Executive Officer]

Thank you very much, and welcome to the presentation of NORDEN's third quarter results for 2021. Thank you for dialing in or following the presentation online. My name is Jan Rindbo, and I'm the CEO of NORDEN. Together with our CFO, Martin Badsted, we will today, be presenting our Q3 results. You can follow the presented slides on screen or by downloading the presentation from our website. We will refer to the slide numbers for those of you dialing in. Turning to Slide 2. You can see today's agenda outlined. We will start with presenting the main highlights of Q3, both on a group level and for each of the three business units. Following this, we will comment on the market outlook for dry cargo and tankers. Finally, we will present our full year guidance and summarize the quarter before we open up for our usual Q&A session. Please turn to Slide 4. NORDEN realized a profit of $65 million in Q3, which was mainly driven by exceptional Dry Operator results. This is the best quarterly result in more than 10 years for NORDEN. We're expecting an even stronger result in Q4, the Dry Operator having neutralized its position ahead of recent spot market declines. As NORDEN is actively converting rising dry cargo asset values to profit through vessel sales as well as adding TC capacity in Tanker Operator, we are sacrificing short-term operating earnings in Q4 in exchange for sales gains in coming quarters and tanker rate upside in 2022. NORDEN, therefore, narrows its guidance for the full year adjusted result to between $150 million to $200 million and remains on track to deliver the best annual result in 11 years. In addition, NORDEN is initiating a share buyback program of up to $40 million. Taking a closer look at our business units. Asset Management generated a profit of $8 million in Q3, which was mainly driven by profits from vessel sales amounting to $13 million. During the quarter, seven dry cargo vessels were sold. Combined with additional vessel sales made after Q3, NORDEN is expecting around $13 million in sales gains also for Q4 based on anticipated vessel transactions. With dry cargo market rates further increasing in Q3, this had a positive impact on the value of NORDEN's owned and lease fleet, which reached $1.4 billion. Based on the strong dry cargo market in Q3, NORDEN secured profitable long-term cover contracts, which will benefit our results in 2022. The extensive period and purchase optionality of NORDEN's lease fleet continues to increase in value, providing significant upside potential to our fleet portfolio. I will come back to this optionality in a moment. Dry Operator delivered a profit of $68 million during Q3, which was the best quarterly result ever for this business unit. NORDEN capitalized on significant dry cargo rate increases and high market exposure having secured TC capacity early in the year at much lower costs. However, this is not the only factor driving results. Dry Operator continues to identify arbitrage opportunities between geographies and vessel types based on customer demand, where, for example, cargoes migrating from container to dry cargo vessels has benefited our large position in Handysize. Having neutralized our position ahead of the recent spot market declines, Dry Operator is well positioned to deliver an even better result in Q4. In Tanker Operator, we generated a loss of $11 million in a market that continues to be impacted by the aftermath of COVID-19. Continued drawdown of oil inventories as well as competition from crude oil vessels effectively creates an oversupply of vessels in the product tanker market. However, we do believe that the market has...

[Operator]

Your participants are experiencing some technical issues. Please standby.

[Jan Rindbo, Chief Executive Officer]

All right. Sorry for that interruption. I'll just start from the beginning of Slide 7. So the large number of purchase options and period extension options and NORDEN's leased vessel portfolio are become increasingly attractive as market rates continue to increase. In the two box shown, we have summarized the two types of optionality where you can see the yearly average strike price level of each vessel type in our portfolio. At the end of Q3, NORDEN had more than 60,000 period option days, which corresponds to 165 full year extension periods. We had 71 purchase options with the majority on dry cargo vessels. NORDEN has 37 extension options on dry cargo vessels and 9 extension options on the tankers that are callable before the end of 2024. This optionality further adds to our risk reward profile as an asset-light business that can operate more resiliently in volatile markets while having significant upside potential in both dry cargo and product tankers. At this point, I will hand over to Martin, who will provide an update on the market outlook. Please turn to Slide #12.

[Martin Badsted, Chief Financial Officer]

Despite deep declines in dry cargo rates in recent weeks, we think the market will remain quite strong during 2022, still driven by inefficiencies, such as congestion and disruptions and further compounded by an increasing demand for dry cargo commodities. The key uncertainty here is the Chinese economy and the related dry cargo demand. Importantly, the supply outlook remains quite favorable with an order book, which is still at a historically low level of 7%, not least because container vessels have crowded out shipyard capacity in the coming years. The combination of limited supply growth and continued congestion and inefficiencies should lend support to dry cargo period rates and asset prices. Turn to Slide 10, please. If we look at the tanker market, we think it's bottoming out. Global oil inventories continue to be drawn down and are clearly now at levels that open up for more activity in the crude oil market, which is necessary for the product tanker market to gain strength. The energy shortages currently experienced around the world will also be a factor which, during the remainder of 2021 and early 2022, could lead to increased oil demand. In combination with larger commodity groups nearing pre-COVID-19 demand levels, this could start to gradually reduce the oversupply of vessels in the product tanker market. We expect this to support TC rates incrementally in coming quarters. The low order book of product tanker vessels continues to protect asset prices as the supply side is affected by the same factors as we see in the dry cargo market, which are that container vessel newbuildings effectively crowd out other newbuildings. Please turn to Slide 15. NORDEN narrows its guidance for the full year adjusted result to between $150 million to $200 million. This is based partly on an expectation of a very strong result in Q4 with Dry Operator having neutralized its position ahead of recent spot market declines. On the other hand, vessel sales and added TC capacity in Tanker Operator means we are sacrificing short-term operating earnings in Q4 in exchange for dry cargo sales gains in coming quarters and tanker market upside in 2022. With a strong foundation for returning cash to our shareholders, NORDEN is initiating a share buyback program of up to $40 million. This comes on top of our dividend policy where we will pay out minimum 50% of NORDEN's annual adjusted result. Asset Management expects lower earnings in 2021 compared to last year due to lower coverage rates on the tanker fleet. The long-term focus and high coverage of the business means that strong dry cargo market will only start to benefit earnings from 2022 and onwards when older contracts are gradually renewed with higher-paying cover contracts. The value of NORDEN's portfolio of owned and leased vessels is expected to be significantly higher compared to the end of 2020 based on increasing period rates and asset values. Dry Operator expects an annual adjusted results significantly better than the record result for 2020 as it expects to capitalize on high activity in a strong dry cargo market and deliver very strong Q4 earnings. In Tanker Operator, although the unit has operated with high coverage during the year, the historically weak tanker spot market, coupled with adding more TC capacity to build upside for next year, means Tanker Operator expects a loss the full year. Turn to Slide 16, please. At the end of Q3, the estimated market value of NORDEN's combined portfolio of owned and leased vessels amounted to almost $1.4 billion. When adjusting for cash, debt and other balance sheet items, this results in a net asset value per share of DKK 221. On top of this comes the long-term value generation from our two operators. When looking at the annualized earnings since both units were established, Dry Operator has now achieved $45 million on average per year in earnings, while Tanker Operator has achieved $5 million on average. This means the two operators combined are making approximately $40 million to $50 million in annual profit historically, which is equivalent to DKK 40 to DKK 50 per share when applying a low earnings multiple of 6. We, therefore, believe the ongoing value generated from our two operator units is important to take into consideration when assessing NORDEN's value and future earnings potential. I'll hand you over to Jan for some final remarks. Please turn to Slide 17.

[Jan Rindbo, Chief Executive Officer]

Thank you, Martin. To sum up, during Q3, NORDEN realized the best quarter result in over 10 years as Dry Operator delivered the best quarterly result since it was formed in 2017. NORDEN is expecting even stronger results for Q4, with Dry Operator having neutralized its position ahead of recent spot market declines. NORDEN is therefore narrowing its guidance to between $150 million and $200 million, and we remain on track to deliver NORDEN's best result in 11 years. NORDEN's risk/reward profile based on our asset-light business, combined with upside from our purchase and extension options, provides a strong foundation for returning cash to our shareholders. We are, therefore, initiating a share buyback program of up to $40 million, which comes on top of our dividend policy of paying out minimum 50% of NORDEN's annual adjusted results. And finally, we have generated significant value for 2022 in both Dry Operator and Asset Management. At this point, we will move to our Q&A session and open up for any questions that you may have.

[Operator]

[Operator Instructions] The first question comes from the line of Ulrik Bak from SEB.

[Ulrik Bak, Research Analyst]

On the Dry Operator, you commented that you've neutralized your exposure to spot rates in Q4. So maybe you can just elaborate a bit on that. So how large a share of your vessel base have you now fixed in Q4? That would be my first question.

[Jan Rindbo, Chief Executive Officer]

Thank you, Ulrik, for that question. So neutralized our spot exposure means that we have basically largely covered our market exposure for the fourth quarter. And we did that before the market rates went down. So with Asset Management having full cover for Q4, and Dry Operator having neutralized its position in dry -- on the dry cargo side, we have very little dry cargo market exposure left for this year to the spot market.

[Ulrik Bak, Research Analyst]

Okay. And that leads me to my second question. If you narrow your guidance range, but it's still fairly large looking in a historical perspective with a range of USD 50 million. So where do you expect that potential earnings volatility to come from. Should that all be from the Tanker Operator?

[Jan Rindbo, Chief Executive Officer]

Yes. So a lot of it comes from the exposure to the tanker market, where we still have an open position for this year. But I think it's also worth remembering that we are operating close to 500 vessels across the world. And we will make decisions on front haul and backhaul routes towards the end of the year. And that will have some impact on whether results -- whether some of these, for example, front haul rates are realized in the fourth quarter versus maybe in the first quarter of next year.

[Ulrik Bak, Research Analyst]

Okay. And 2022 and Q1, with that neutralized exposure in dry cargo. So how does your book look in Q1. Is it -- have you fixed trades on -- at a similar level as in Q4? And is the average profitability similar in Q1 versus Q4? Can you comment on that, please?

[Martin Badsted, Chief Financial Officer]

Ulrik, I don't think we can give you specific numbers, of course. What perhaps we can say is that to a large extent, we have also neutralized our Q1 for now, at least, in Dry Operator, but we still do have some exposure towards the sort of second half of 2022. So we've taken some of the market risk out of the near term where the rates have been very high, and instead, you can say, accepted some market exposure still to remain for the deferred period in '22 and '23. But we can't put numbers on it for now.

[Jan Rindbo, Chief Executive Officer]

I think, Ulrik, the only thing we can add is that when you look at the Asset Management business, then we have pretty much fully covered 2022 already at rates that are much better than '21. So we do expect much higher earnings in Asset Management from next year onwards.

[Ulrik Bak, Research Analyst]

Okay. But my question was more related to Dry Operator. How should I think about this profitability level when you constantly take decisions. Will the profitability level gradually decrease as time goes by because of the increasing rate environment we are in? Or how should I think about Q1 versus Q4 profitability in Dry Operator?

[Martin Badsted, Chief Financial Officer]

Yes. This is, of course, very difficult when the markets are so volatile. And we actually do change our position quite frequently. I would say, normally the best thing to do would be to look at the sort of the average performance where we have said this was $45 million on average for Dry Operator, where we have a period where both rates were quite weak in the beginning when we started Dry Operator and have been quite strong recently. So that is one anchor point you can start out from. And then I would say we -- coming out of a strong market here, we would probably be higher than average, if you will, going into 2022 in terms of what we have secured from the beginning of the year. But I don't think we can be more precise than that without actually giving you guidance for next year, which we haven't done yet.

[Ulrik Bak, Research Analyst]

Okay. That is very clear. And then maybe a final question on the activity level in 2022 versus 2021 in Dry Operator. Do you expect to increase with this historical CAGR of around, was it, 7%, you've been increasing over the past few years?

[Jan Rindbo, Chief Executive Officer]

I think that is a fair long-term guidance. We do expect that we will continue to grow the Dry Operator business. But of course, first and foremost, it's focused on profitability. So it also depends a bit on how the markets develop. There may be quarters where we will be lower on activity. But I think the long-term trend here is clear that we are growing Dry Operator, and we're growing it faster than the market.

[Operator]

[Operator Instructions] The next question comes from the line of Anders Karlsen from Kepler.

[Anders-Redigh Karlsen]

I was wondering if you could tell us a little about the reason, softness -- softness and softness, I mean, the dry cargo market is very strong, but there has been a softness recently. Any reasons behind that? Can you give us some light on that?

[Martin Badsted, Chief Financial Officer]

Yes. I would actually, I think, call it a little bit more than softness. I think we are seeing steep declines both in the spot and in the near term, forward rates for, call it, the balance of 2021. And I do think actually, that's very hard to give very precise explanations for what is going on just as it was very difficult to give precise explanations for why markets spiraled up to close to $40,000. So maybe some of these disruptions led to, you can say, the market getting a little bit ahead of itself on the upside and then suddenly into an air pocket here where we have suddenly sentiment changed quite rapidly around. And we do sense some nervousness in the market since this correction that we have seen recently, we believe, at least, is more severe than what we have seen earlier in the year. But I think the fundamental reason here is probably the uncertainty around China, co-imports, steel production and so forth is clearly growing. And China is doing a lot of different things to actually limit the tightness in the market.

[Anders-Redigh Karlsen]

Okay. A little bit on the Dry Operator. Can you shed some light on the split between the different vessel classes that you have had during the past quarter. Are you heavily weighted towards the smaller segments or towards bigger ships? And how is that going to be going forward?

[Jan Rindbo, Chief Executive Officer]

So in terms of activity levels, we are broadly evenly spread across the three types of Handysize, Supramax and Panamax. It varies a little bit. And it's not by design that we are, but we are operating 100-plus ships generally in all three vessel types. But then the exposure, of course, varies more. And I think it's fair to say that this year, we've had a larger exposure towards the smaller ships, where we've seen good spillover demand from containerships into dry cargo that have benefited especially the smaller vessel types. So that's, at least, looking back, how our position has been.

[Anders-Redigh Karlsen]

Okay. Then just a clarification. You said that you could expect stronger results from forward bookings in the dry segment. Did I read you right? And is that spot bookings that will take place later on in the quarter and into next year, that is not reflected in your guidance numbers? Or is that -- was that a misunderstanding from my side?

[Martin Badsted, Chief Financial Officer]

Yes. One part of it is related to the Asset Management business, where the sort of the business model is really to always be covered 1 to 2 years out. So basically, the rates that have been achieved for this year were based on 2020 forward rates. And now, during the year, we have basically covered 2022 and some of 2023 at the forward rates that have prevailed during this year. So much better rates, of course. So that is one thing. And you can actually see that from the capacity cover table that we upload to our website. The other thing then is Dry Operator that has been active recently in securing a lot of cover for -- especially its Q1 position, on top of, you can say, the neutralization that we talked about for the remainder of 2021. So -- and these figures, unfortunately, we cannot give you. So it's -- I know it's hard for you to estimate. But it is something, of course -- it doesn't belong in guidance for 2021. But it does, I think, indicate that we could have a good start to next year at least.

[Anders-Redigh Karlsen]

Okay. That's informative. And just lastly, in terms of you saying that yards are being filled up. If you talk to yards now, what kind of delivery window are you talking about on tankers and boat, please, if you can just elaborate a little bit on that?

[Jan Rindbo, Chief Executive Officer]

So generally speaking, we are now out in 2023 for the positions. We don't actually have active discussions ourselves at the moment. As you may recall, we did a newbuilding order last year but -- of ships that we're taking delivery of, I think, beginning of next year. We're very happy with those prices that we -- all of those ships have. And -- but now you are looking at, first of all, at much higher prices and you are looking at much later delivery. And I think actually the correction we're seeing in the market will further, I think, deter people from ordering a lot of ships in the short term. And that actually follows a year where despite the very strong rates we have seen, we have seen relatively little ordering. Usually, when we have such strong markets, we see a rush to order new ships. And we saw that, of course, in containerships. And -- but again, containerships seem to have filled up the yard slots, which is very positive for both dry cargo and tankers going forward.

[Operator]

[Operator Instructions] Dear speakers, there are no further questions at this time. Please continue.

[Jan Rindbo, Chief Executive Officer]

Okay. This concludes our presentation of the third quarter results for 2021. Thank you very much for your interest in NORDEN and for dialing in. Thank you, and goodbye.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day. Dear speakers, please standby.