Dampskibsselskabet Norden A/S

CSE:DNORD

Earnings Call Analysis

NORDEN Q3 2023: Earnings and Guidance Lift

NORDEN's Q3 2023 results were strong with a $99 million profit and 27% return on equity. Strong tanker markets and high coverage in dry cargo underpinned these results, despite weaker global demand impacting dry cargo spot rates. The quarter marked a successful start to integrating Projects & Parcelling, generating both commercial and cost synergies. NORDEN announced a DKK 10 interim dividend per share and a new $30 million share buyback program. Profit guidance for 2023 was narrowed to $380-$420 million, with expected decreased freight and trading earnings in Q4 and H1 2024 but high earnings in Assets & Logistics driven by robust coverage.

Strong Performance Amid a Challenging Market

NORDEN reported robust financial results in the third quarter of 2023, with a significant profit of $99 million and an outstanding return on equity of 27%. The success story unfolded with a strong tanker market, although the dry cargo market faced headwinds due to decreased global demand and easing congestion. While the spot rates in dry cargo softened, NORDEN's strategic initiatives protected it from the market's volatility. The company's integration of Projects & Parcelling has already begun reaping commercial and cost synergies, which speaks volumes about its efficiency and growth potential.

Shareholder Returns and Financial Prudence

In a move that resonates with shareholder-centric values, NORDEN announced an interim dividend of DKK 10 per share for Q3 and a new share buyback program worth $30 million. This decision was part of a broader strategy that has returned approximately $1.1 billion to shareholders since 2020, underlying the company's commitment to delivering value. The prudent financial management of NORDEN is evident in its focus on maintaining a high cash flow, impressive at $109 million for this quarter, which emphasizes the company's stable financial footing.

Strategic Portfolio Management

NORDEN's astute portfolio management is reflected in its EBITDA of $177 million for the quarter. This management approach includes strategic cargo coverage and a conservative outlook towards market risk. The Asset-light model has allowed the company to achieve a strong return on invested capital of 33%, a testament to the effectiveness of its business strategy and risk mitigation tactics.

Guidance Reflects Cautious Optimism

For full-year 2023, NORDEN has adjusted its profit guidance to a range of $380 million to $420 million, lifting the lower end from $360 million to $380 million. This fine-tuning indicates the company's high visibility into near-term earnings and a conservative but optimistic outlook. The quarterly performance of Freight Services & Trading may see declining margins in Q4 2023 and the first half of 2024, expected to be significantly below the 5-year average of $757 per day, excluding 2022. Assets & Logistics, however, are projected to maintain high earnings throughout Q4 and into the full year of 2024, driven by high coverage in both dry cargo and tankers.

Combining ESG with Innovation

NORDEN's commitment to sustainability is at the forefront, as evidenced by its ESG initiatives which include a 5% annual reduction in emissions, investments in biofuel startups, and emission reduction contracts. The company's forward-thinking approach not only aligns with environmental sustainability but also positions it as an innovative player in the industry, ready to adopt new technologies for cleaner fuel and operations.

Final Thoughts on Resilience and Prospects

Summarizing the call, the core narrative revolves around NORDEN's resilient performance in a fluctuating market and its sound strategies for shareholder returns, risk management, and ESG commitments. The company's adaptation to market changes and proactive initiatives, like integrating new acquisitions and focusing on sustainable practices, all reflect its readiness to maintain stability and explore growth avenues in upcoming quarters.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and welcome to the NORDEN Q3 2023 Results Presentation. My name is Elliot, and I will be coordinating your call today. [Operator Instructions]

I'd now like to hand over to Stig Frederiksen, Head of Investor Relations. The floor is yours. Please go ahead.

[Stig Frederiksen, executive]

Thank you very much, and thanks for listening in. Before I hand over the word to Jan, just to remind you our forward-looking statements. Please read what we have in here. And then I will give the word to Jan.

[Jan Rindbo, executive]

All right. Thank you very much and welcome to this conference call. NORDEN delivered a strong financial result in the third quarter of 2023 with a profit of $99 million and a return on equity of 27%. This was based on high coverage in dry cargo and a continued strong tanker market. We have seen a challenging dry cargo market during the quarter where spot rates have been down, and that is due to a weaker global demand and a more normalized congestion situation. And in tankers, the positive market continued, even though rates are softer compared to the last quarter.

During the quarter, we also had a successful start to the integration of Projects & Parcelling, where have we realized both commercial and cost synergies. We have announced an interim dividend of DKK 10 per share for the third quarter and also a new share buyback program of $30 million and all that will bring the cash return to around $1.1 billion since 2020. When we look at the guidance then based on the year-to-date profit and high near-term earnings visibility from the high coverage and also the derisking of the portfolio, our profit guidance for the full year 2023 is narrowed to between $380 million and $420 million.

I will now hand you over to Martin Badsted, our CFO, to go through some of the group financials.

[Martin Badsted, executive]

Thank you, Jan. So we continue to deliver strong financial performance and in line with our expectations for the quarter. And we continue to build our financial track record of delivering positive results that we have maintained since 2017.

EBITDA in the quarter came out at $177 million. Of course, that was lower than the [ fantastic year by 2022 ] and was impacted by a somewhat lower margins in dry cargo, lower spot rates in tankers and higher costs due to the fact that new tanker charters are taken in at higher [indiscernible].

As Jan said, the group profit was $9 million, (sic) [ $99 million ] and that is composed of $69 million from Assets & Logistics and $30 million in our Freight Services & Trading business unit, which corresponds to a margin around the historical average of $738 per day. We generated a decent cash flow of $109 million, which is before acquisitions and driven by a high cash conversion of the $99 million net income. Overall, that corresponds to return on invested capital of 33%, which is supported also by the Asset-light business model, leading to a lower invested capital as risk go down.

Please turn to Page #6. We continue to focus on derisking our portfolio by taking cargo, mainly [indiscernible] but certainly also on the tanker side. You'll see from the [indiscernible] on the right-hand side at the mid bars [indiscernible] show how many net open vessels we haven't tried. And the blue bars show how many net open vessels we have on the tanker [ decision ]. It is obvious from the top graph that we have [ a value business ] net exposure over the coming -- quarters with a strong [indiscernible] in the beginning, a small [ loan ] position towards the end of 2024. And that's in line with our market outlook. And we think the dry cargo market will remain fairly subdued in the near term, but we are quite attractive by the long-term outlook where we see as soon as macroeconomic headwinds turn to tailwinds, [indiscernible] will really have an impact in 2025 and onwards.

On the tanker side, we expect the margin to remain strong. And the reason for [ selling common here is ] mainly that we [indiscernible] that the upside is fully priced in and it makes sense to derisk the portfolio, while still gaining a lot of the earnings that are available in the market.

Please turn to Page 6 (sic) [ 7 ] , and then I'll hand you back to Jan.

[Jan Rindbo, executive]

All right. Well, the start of the integration of the acquired Projects & Parcelling activities have been successful, and we are seeing both commercial and cost synergies being realized. On the commercial synergies, we are seeing an improved capacity utilization of our [ own and charter feed ], and this is especially in the Handy and Supramax segments. And we're also seeing on, for example, procurement of bunkers and on the IT/administration area, we're seeing those as key drivers for the cost synergies that are being realized. And when we look at the numbers, then Projects & Parcelling operated more than 30 chartered vessels during the quarter and have reported an EBITDA of $7 million in Q3.

If we turn to the next page and focus on ESG, then NORDEN continues to work on new initiatives to reach our ESG targets and help our customers decarbonize their supply chains. In the third quarter, the emissions on an EEOI basis have been reduced by 5% a year, which is driven by higher fuel efficiency related to lower average speed and fuel consumption per tonnage miles.

In August, NORDEN announced the investment of a minority stake in MASH Makes, which is a Danish-Indian biofuel scale-up. MASH Makes' first biooil product is in late development stage and NORDEN expect to conduct the first trial onboard a vessel in early 2024. Also in the third quarter, NORDEN signed an emission reduction freight contract with the Canadian mining company Teck Resources, where we are committed to reduce their emissions by 25%.

If we move on to guidance. Then based on the year-to-date profit of $257 million -- $357 million and high coverage for the rest of the year, we are narrowing our guidance range to a full year profit of $380 million to $420 million. That means we are lifting the lower end of the guidance range from $360 million to $380 million, and this includes profit/loss from sale of vessels.

For Freight Services & Trading, expectations are that earnings and margins today in the fourth quarter of this year would decrease further compared to Q3 2023. And also based on the current market outlook, margins for the first half year of 2024 are expected to be significantly lower than the historical average level for the last 5 years, which is $757 per day when we're excluding the full year of 2022.

For Assets & Logistics, expectations are that earnings will continue at a high level in the fourth quarter of this year and stay elevated for the full year 2024, and that is driven by the high coverage across dry cargo and tankers.

With that, let's move to the final remarks. Just highlighting again strong financial performance, in line with our expectations and high level of coverage gives near-term high earnings visibility. On the market level, we expect a dry cargo market to perform in line with normal seasonality and lower growth in demand. On the tanker market, we expect that a near-term positive but exposed to high volatility and macro and geopolitical risks.

Integration of Projects & Parcelling is up for a successful start where we are realizing both commercial and cost synergies. Cash distribution to shareholders of $76 million announced here for the third quarter of 2023 through an interim dividend and a new share buyback program. And the profit guidance for the full year of 2023 is now upwards to a range of $380 million to $420 million. And the third quarter builds to our track record of more stable earnings and returns even in more challenging markets.

With that, we are now ready to turn to our Q&A session.

[Operator]

[Operator Instructions]

[Jan Rindbo, executive]

If there are no questions, then we will conclude the third quarter conference call. Thank you for your interest in NORDEN. Thank you, and have a good day.

[Operator]

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect.