Earnings Transcript for DNORD.CO - Q3 Fiscal Year 2024

Operator: Hello and welcome to the Norden Q3 Analyst and Investor Conference Call. My name is Elliot, and I’ll be coordinating your call today. [Operator Instructions] I would now like to hand over to Jan Rindbo, Chief Executive Officer. Please go ahead.

Jan Rindbo: Thank you very much and also a warm welcome to this conference call from my side. Let me start by sharing the business highlights here for the third quarter of 2024. So during the quarter, we were operating in market conditions that were weaker than expected for both dry cargo and tankers. However, in the Freight Services & Trading unit, we did see improving margins in the dry cargo activities, but that improvement was offset by weaker tanker spot rates. We continued to trade our assets actively, and during the quarter, Norden entered into agreements to sell 5 vessels at an – expected future gains of $25 million. 2 of the vessels sold were from declared purchase options that were in line with the NAV. Despite this recent spot market weakness in our markets, we continue to see good market fundamentals. And we also expect asset prices to continue to remain well supported by the low order books and limited yard capacity. And we are well positioned towards a structurally positive asset market through the extensive portfolio of purchase options that has significant value upside. I will now hand you over to Martin Badsted to go through the financial highlights.

Martin Badsted: Thank you, Jan. Net profit in the quarter was $25 million, which corresponds to a return on invested capital over the last 12 months of 15%. Looking into our two business units. Freight Services & Trading generated a net loss of $18 million. The activities in dry actually improved as expected, but we had a significant decline in the tanker spot market, impacting earnings. In Assets & Logistics, we made a net profit of $43 million, driven by high earnings coverage and a sublease gain related to the charter-out of a vessel. Our net asset value was estimated at the end of September to be DKK433 per share. And in line with our payout distribution policy, the Board has decided to pay back $21 million in the form of a DKK2 per share dividend and a new share buyback program of $12 million. Finally, we are narrowing our full year guidance for 2024. Now we expect a profit in the range of $160 million to $200 million and which is down from $160 million to $240 million. And that is on the back mainly of a weaker tanker market. Please go to the next slide. So this graph here shows you the contribution margin per quarter, stacked, where the red bars are the Assets & Logistics and the blue bars are the Freight Services & Trading. And we have talked about this on a number of occasions, that we feel we are in a little bit what you could call an owners market where especially asset prices and period rates are quite high. That is very good for Assets & Logistics, but it does provide some challenges for earnings in Freight Services & Trading. The good thing, we think, about Norden’s business model is that being active within both types of activities means that we can generate superior returns to shareholders over time even though these cost and revenue parameters are changing over time. Please go to Slide #7. We have actively managed our portfolio in line with market developments in the quarter. Overall, for dry cargo, as Jan said, we think the long-term fundamentals remain positive based on a historically low order book, high demolition potential and limited yard capacity. We do see short-term headwinds, however. And Chinese uncertainty has led us to reduce our exposure in dry cargo for the remainder of 2024 and 2025 both in the terms of selling 5 vessels, as was discussed before, whereof 2 were from declared purchase options, but also by concentrating our remaining exposure in the smaller geared segments which are less exposed to the Chinese economic development. In the tanker market, rates have actually declined almost throughout Q3. We still think some of this is seasonal. And we do expect rates to rebound towards the end of the year, but it will still be under high volatility. One element which has dragged down rates has been the switching into clean cargoes from the big crude oil tankers that we saw during the summer. That has basically had the effect that, even though demand has been quite okay, there has been sort of an artificial influx of new ships into the market that has cannibalized the rates available to product tankers. We think this effect is dissipating and will be part of the rebound of rates that we expect towards the end of the year. Now please turn to Page #8, where Jan will talk about our strategic scorecard.

Jan Rindbo: Thank you, Martin. So we are continuing to deliver on our long-term strategic objectives, confirming our focus on delivering long-term value to our shareholders, despite the market volatility. Looking at return on invested capital. Well, over the last 5 years, we returned 23% per year. And in the last 12 months, that number has been 15%. We continue to grow the business. And we have over the last 5 years, on average, grown 6% per year. In the last 12 months, we’ve had some headwinds, as Martin mentioned, in Freight Services & Trading, where the average margin has been negative $359 per day. However, looking at it over a longer term, we have generated a profit margin of $1,147 days – per day over the past 5 years, which is well above our target of minimum $500 per day. We have reduced our emissions measured by EEOI by 14% compared to 2022. So that is actually a significant reduction considering that we are operating a total of 500 vessels in our business. Total shareholder returns have been negative by 22% in the past 12 months, but again here looking at this over a longer period, we have over the last 5 years delivered positive returns of 38% per year on average. Moving on to guidance for the year. Based on the weaker tanker spot rates, we are narrowing the full year net profit guidance to the range of $160 million to $210 million; and that was previously from $160 million to $240 million. The full year guidance for the year includes gains on sale of vessels from already signed and agreed transactions of $83 million. By the end of October, we had a total of 1,800 open tanker days and 240 open dry cargo days for the balance of 2024 across both of our business units. In Freight Services & Trading, we expect that margins in the dry cargo activities will continue to improve, whereas margins in the tanker activities are likely to decline as a result of the currently weaker spot rates. For Assets & Logistics, earnings are expected to continue at a relatively stable level for the remainder of the year. And that is driven by the high coverage that we have in this part of the business. So moving on to Page #11 for the final remarks. I think the headline here is that we continue to focus on realizing the strong portfolio values that we see. We are, at the end of the third quarter, reporting an estimated net asset value of DKK433 per share for the Assets & Logistics portfolio. And that means that we continue to be strongly positioned towards a fundamentally positive asset market where we see limited yard capacity that is available and, at the same time, an aging global fleet. And here with the investments that we have made in our own vessels and our large portfolio of leased vessels with purchase options, we are well positioned to capture that upside. We have during the quarter signed agreements to sell in total 5 vessels. And that means that we are expecting to realize future gains of $25 million on these five sales alone. And then finally, our diverse business model, where we have both owner and operator activities across both tankers and dry cargo, will – that, we believe, will enable us to continue to generate superior returns to our shareholders over time, as evidenced by the strategic scorecard that we presented earlier today. That concludes the highlights from the management, so I will now go hand you back to the operator.

Operator: [Operator Instructions] First question comes from Ulrik Bak with SEB. Your line is open.

Ulrik Bak: Yes, good afternoon, Jan and Martin. A couple of questions from my side. First one is on the product tanker spot rates, which have been quite soft in Q3 and Q4, so far. So what makes you confident that these rates will indeed rebound as you mentioned in your prepared remarks?

Jan Rindbo: Well, I can start, Ulrik. And then I’ll let Martin add if he has anything further to comment on, but what – I mean the main change we have seen on the product tanker market during the third quarter is this switching of – for crude tankers to switch into clean cargoes and thereby taking away clean product cargoes for the product tanker fleet. And here we estimate that up to around 5% of demand has been moved over to the crude tankers. And when you take away such a big portion, then obviously that has significant impact on the markets in just one quarter, but it is also, in a way, what makes us confident that this will evaporate again because we are seeing the reversal of this switching now where the crude tankers are going back to the traditional crude trades. And therefore, over time, the product tanker market should sort of revert back to where it was before the third quarter. And on top of that, we, of course, also have the seasonal impacts where we’ve had a traditional sort of weaker seasonal demand in the third quarter. And now as we move into the winter season, then we do expect to see more demand. And then – and what typically happens in the tanker market is that – as we sort of move into November and especially December, that is typically when the market starts to pick up again, so that is what is giving us the confidence that, these negative issues that we’ve seen during the third quarter, they are of more temporary character.

Ulrik Bak: Okay, that is quite clear, but if we then switch to freight service and trading and also stay with the product tanker sub-segment, you are saying that you expect these margins in freight service and trading, the product tanker side – that they should decline before year-end, compared to Q3, so how does that, yeah, make sense compared to your expectations that product tanker rates should increase in Q4?

Jan Rindbo: So it’s mainly a timing issue. So, the declining rates during the third quarter has a lagging effect, and that’s why those earnings sort of spill into the fourth quarter. And if – and here at the beginning of the quarter, we’re still seeing relatively weak product tanker rates. And therefore, the improvement that will come in November and perhaps even more in December are coming basically too late to impact the quarterly earnings in the fourth quarter, so that improvement in the product tanker rates will have – actually have more effect into the first quarter of 2025 than in the final months of 2024.

Ulrik Bak: Okay, that makes sense. And then just I’ve been looking at the spot rates in product tanker and the time charter rate. And I note that time charter rate seemed to be higher than the current spot rate, which I guess makes it a difficult trading environment for Norden and the freight service and trading division, but is there any way that you can mitigate this negative delta or how are you minimizing those losses that you would otherwise have?

Jan Rindbo: Well – so first of all, it’s about timing, further chartering-in vessels in Freight Services & Trading and having patience to see maybe also 1-year time charter rates moving down a bit. And that is actually what we are seeing at the moment. Then the other tool in the toolbox is to take cover and charter ships out and – on higher-paying contracts that we’re also doing. And then finally there’s also a little bit of FFA, freight forward derivatives that can be used to take some cover. So that’s, in essence, the toolbox that we have available in the tanker operator part of the business.

Ulrik Bak: Okay. But how – I know Q3, you make a – it’s like flat development in earnings quarter-over-quarter, so just how should we look at this turnaround of this segment? It doesn’t sound as if it’s going to be in Q4, but how far should we look before we are, yes, breaking even or even positive earnings in this segment?

Jan Rindbo: Yes. So, if we talk about FST combined, so both dry cargo and tankers in FST, then clearly, on the dry cargo side, we feel that things are moving in the right direction. We are seeing margins gradually improve. And one of the challenging factors in dry cargo this year has been the high premium you pay for period tonnage. And we have not taken in additional period tonnage in any larger – to any larger extent in FST, on the dry side, so that is one factor that is helping us. We are basically focusing that business more in the short-term trading. We are also moving more and more into trades where we have higher margins. So, that is predominantly in the geared segments where we are carrying project cargo. We are carrying parcels. We are carrying more sort of niche type of cargo. So, our focus is also moving more in that direction. And that’s – these factors are pushing us towards better margins in – on the dry cargo side. And then on the tanker side, here we are more exposed to market developments because the toolbox is a bit – is smaller, but a recovery towards the end of the year should also help FST move in the right direction coming into 2025. So, yes, 2024 has been a challenging year for FST, but as Martin explained also on the call, this has also been a year where market conditions have favored the owner part of the business. And that’s been great for Assets & Logistics, and the other division. And – but I think that, with the weakness we have seen also in the dry cargo market now that some of these factors are starting to change again. And that is why we are confident, again going back to our long-term target of earning minimum $500 a day in FST. That we will move back in that direction and back into profits when we look into next year.

Ulrik Bak: Okay. That’s very clear. And then final question from my side, it’s on your updated guidance. I just want to clarify the different moving parts. So, you have increased the gains from vessel sales by – is it $22 million you see? And then you have also booked a sublease gain of $14 million in the quarter, both of which weren’t recorded in the guidance announced at Q2. Is that correctly understood?

Martin Badsted: Yes.

Ulrik Bak: Okay. So, it would be fair to say that, had these events not happened, then your guidance should have been $36 million lower of – the range should be moved $36 million lower than where it is today, is that fair, or could you quantify how much of these vessels would have generated in earnings in the time that you are now not owning them?

Martin Badsted: No, I don’t think we can quantify that, but it’s of course true that there is an effect that when you sell a ship, then you lose the operating earnings for the remainder of the year. But I think this is a recurring discussion that both sublease gains and sales gains are part of our business. And as you can see, they actually come quite frequently, so it’s not – I wouldn’t say that it’s a one-off that should be discarded. It is part of our way of making money, that when vessels increase in value, we take money off the table. And then at some point, we will reinvest when we see more attractive opportunities.

Ulrik Bak: Yes. Okay, alright. Thank you so much for all the answers.

Operator: [Operator Instructions] We will be reading some questions received on the webcast. Our first question is what five vessels were sold for a net gain of – sorry, what five vessels were sold for a net gain of 25 – sorry, ladies and gentlemen, we are receiving some technical difficulties. Bear with me one second. [Technical Difficulty] Ladies and gentlemen, thank you for your patience and apologies for the technical difficulties. Our first question is what five vessels were sold for a net gain of $25 million [ph]. Two were declared purchase options, so does that mean that three vessels from the owned fleet is sold and two long-time chartered vessels are bought through options and sold?

Martin Badsted: Yes, that’s correct.

Operator: Excellent. Our next question is, I noticed that there weren’t – wasn’t any fleet list in your Q3 fact book, when will you provide an updated fleet list?

Martin Badsted: We have an updated fleet list, so you are welcome to contact our IR team, and they can forward it to you.

Operator: Thank you. Our next question is, what if 2025 dry bulk picks up again, will you forgo most of the upside in this case?

Martin Badsted: No. You can say maybe there are some operating earnings that we will forgo if we do not change the – or add exposure for ‘25. But we have still a lot of owned ships and especially a lot of purchase options. So, if the market goes up, then we will benefit greatly from that part of the portfolio.

Operator: Our next question is, how long does it take to switch your trading position from short to long or other way around?

Martin Badsted: On the – in the FST side, the short-term activities, I will say, typically, in dry, we can change the book around very quickly. And that could be in a month or two months, whereas in tankers it’s much more difficult. As you – as Jan said earlier, the toolbox is a little bit smaller, so there I would say it probably takes at least six months to nine months.

Operator: And our next question is, do you have the split between dry and tankers with regards to the $18 million?

Martin Badsted: With regard to, I didn’t hear the last part of the question.

Operator: Do you have a split between dry and tankers with regards the minus $18 million?

Martin Badsted: No. Unfortunately, we don’t provide that.

Operator: Thank you. That’s all the questions we have received. I will hand back to you, Jan and Martin for any final remarks.

Jan Rindbo: Alright. Well, thank you very much. Thank you for joining this conference call. Thank you for all the questions. And thank you for your interest in Norden. We look forward to talking to you again at the next quarterly result. Thank you. Goodbye, and have a good day.

Operator: Ladies and gentlemen, today’s call has now concluded. We would like to thank you for your participation. You may now disconnect your lines.