NORDEN Dry Cargo split into 2 distinct business units; Dry Operator and Dry Owner.

▪ This marks an important step in NORDEN’s ambitious plan to increase both profitability and scale of its Dry Operator activities.

▪ Both Dry Cargo and Tanker markets expected to gradually improve in 2018 based on lower supply growth.

▪ Dry Cargo: TCE earnings 26% above benchmark mainly due to long-term coverage contracts. Portfolio well positioned to benefit from improving markets in Q4.
▪ Tankers: TCE earnings 16% above benchmark. Close to break-even in a challenging market.

Vessel values
▪ Dry Cargo: +4%
▪ Tankers: -1%

▪ Expectations for the adjusted results for the year are raised to USD -10 to 30 million (previously USD -20 to 20 million) as a result of higher expected Dry Cargo earnings.

CEO Jan Rindbo in comment: “NORDEN is well positioned to benefit from the recent significant improvements in the dry cargo market and raises the expectations for the overall full-year results of the Company. With a new focused operator platform for the short-term operator activity in Dry Cargo and a tanker business that continues to outperform the market and has increased the capacity at attractive levels, the conditions for an improved result for the year are now in place.”

Key figures and ratios for the group

Comments on the development of the group for the period
• Adjusted result for the period: USD 4 million (USD -12 million)
• Cash and securities at 30 September: USD 191 million (USD 294 million)
• Net commitments increased by USD 37 million


Adjusted result for the period USD 4 million

In the third quarter, NORDEN realised an adjusted result for the period of USD 4 million (third quarter 2016: USD -12 million). The result corresponds to an EBIT of USD -2 million (USD -13 million). The adjusted result for the period is impacted by reversal of tax of USD +4 million (fullyear effect USD +2 million).

NORDEN’s dry cargo activities generated an adjusted result for the period of USD 5 million (USD -8 million), corresponding to an EBIT of USD -2 million (USD -5 million). The dry cargo result reflects the significant increase of the market rates during the third quarter of 2017. In the tanker market, the rates remain at the low levels from the beginning of the quarter and the spike in rates due to Hurricane Harvey was short-lived. The adjusted tanker result for the period ended at USD -1 million (USD -4 million), corresponding to an EBIT of USD -1 million (USD -8 million). New Dry Cargo setup The third quarter of 2017 was the first full quarter following the Dry Cargo Department split into 2 distinct business units; Dry Operator and Dry Owner. The split enables NORDEN to act more focused as an operator and owner in the dry cargo market, respectively, and thereby supports efforts to increase the value creation of the 2 business units. The business units, preliminary result and other implications of the split are described in more detail on page 5.

Financial position
As expensive charter and newbuilding commitments are paid off, NORDEN is gradually allowing the cash position to normalise. At the end of the quarter, NORDEN’s cash and securities amounted to USD 191 million. To this should be added NORDEN’s share of cash in joint ventures of USD 6 million and undrawn credit facilities which totalled USD 225 million at the end of the quarter. In comparison, outstanding payments in connection with newbuildings and secondhand purchases constitute USD 205 million and are due for payment in the period 2017-2020, and overall NORDEN’s liquidity reserve remains adequate. Future payments to NORDEN for vessel sales amount to USD 24 million.

NORDEN’s net commitments calculated as total bank debt, T/C commitments and present value of outstanding payments on newbuildings less cash and future earnings from coverage increased by USD 37 million during the quarter to USD 877 million as a result of increased exposure in the Tanker segment and a reduction in cash due to payments on previous vessel purchases. The increase in net commitments occurred despite the signing of a long-term COA for the transportation of salt, concluded at the beginning of the third quarter.

Continued expansion of tanker capacity
During the third quarter of 2017, NORDEN has utilised the attractive time charter rates to continue the expansion of both long- and short-term tanker capacity. This translates into 2 long-term charter agreements of 2 MR tanker newbuildings scheduled to deliver in mid-2020 as well as short-term time charters of 4 MR tankers delivered during the third quarter of 2017.

In addition, the 2 secondhand MR tanker vessels purchased in the second quarter of 2017 were delivered to NORDEN during August, and both vessels are now operating in the Norient Product Pool.

Development of vessel values
The value of the vessels that NORDEN owned throughout the quarter increased by 2%. In Dry Cargo, the vessel values increased by 4% during the third quarter, whereas tanker vessels on average dropped by 1%.

Based on the valuations of 3 independent brokers, the market value of NORDEN’s owned vessels and newbuildings (including vessels in joint ventures) is estimated at USD 913 million at the end of the quarter. The theoretical value of NORDEN’s purchase and extension options is estimated at USD 36 million at the end of the third quarter.

The upward pressure on dry cargo values continued from the last quarter as rates and market sentiment increased, while tanker values have stabilised, although at a low level.

As usual, the Company has carried out an assessment of the development in the key impairment indicators such as short-term and long-term freight rates, newbuilding prices, financial performance and fleet values. Based on this, the Company has concluded that there are no changes in the assumptions which indicate a need for impairments or provisions or reversal of previous impairment charges or provisions.

Dry Cargo split
Dry Cargo split into 2 business units
As described in the interim report for the first half-year of 2017, NORDEN has continued the execution of its strategy Focus & Simplicity, which for Dry Cargo includes establishment of a new focused operator platform for the short-term operator activities by splitting the Dry Cargo business into 2 distinct business units; Dry Operator and Dry Owner. This marks an important step in NORDEN’s ambitious plan to increase both profitability and scale of its Dry Operator activities.

The Dry Owner and Dry Operator businesses did not previously operate independently, and figures for previous periods can therefore only be established at an indicative level.

From the start of 2014 to the initiation of the Dry Operator at mid-year 2017, the short-term activities are estimated to have generated a Contribution margin that corresponds to the allocated Overhead and Administration expenses. During the same period, the earnings in the long-term part of the Dry Cargo business have significantly outperformed the market conditions through the long-term cover secured by the organisation throughout the years.

In the third quarter of 2017, the Dry Operator generated a Contribution margin of USD 3 million, which amounts to an Adjusted Net Result of USD -2 million after overhead. The Dry Owner generated an Adjusted Net Result of USD 7 million during the quarter.

New setup and mindset
With the establishment of a specific operator arm, NORDEN wishes to increase the focus on the short-term market in the Dry Cargo business and increase transparency on the value creation hereof. The new Dry Operator will be distinctly different from the short-term operations previously conducted by NORDEN, as it will no longer be seen as an integrated part of the overall Dry Cargo business rather an independent setup with a neutral starting point. The focus on risk management, short-term market analysis and fuel efficiency will be enhanced, and NORDEN believes that there is a considerable value creation potential in the Dry Operator, and it is expected to grow significantly from its current size. With individual financial reporting for the Dry Operator and Dry Owner, the split also entails a new mindset with more empowerment and accountability delegated to employees in the organisation.

Dry Operator handles NORDEN’s short-term dry cargo activities. The objective of Dry Operator is to provide outstanding customer service and utilise the close customer contacts and regional offices to create value through logistical optimisation of vessels and cargoes, exploiting arbitrage opportunities, focusing on fuel efficiency and taking short-term freight trading positions. Within defined exposure limits, Dry Operator can be either long or short and thereby be able to generate positive earnings regardless of market direction and market level.

The Dry Owner part of NORDEN will include all activities related to owned vessels, vessels chartered in for longer periods as well as long-term cover contracts. Hence, the Dry Owner segment will contain NORDEN’s overall cyclical market exposure within dry cargo, and the objective of Dry Owner is to create value over a cycle through timing, identifying and negotiating attractive deals and competitive technical management.

Financial setup
Full P&Ls will be in place for both the Operator and the Owner starting from Q1 2018.

All vessel capacity within Dry Owner which is not covered on long-term time charter or cargo contracts will be chartered to Dry Operator at market rates. With regards to administration costs, they have been split into the 2 units based on estimated share of the organisation involved in each activity.

Even though the split represents a new business model for NORDEN within the dry cargo segment, the new setup does not lead to a change in the legal status of NORDEN’s business entities.

Segment information

Dry Cargo

• Adjusted result for the period USD 5 million (USD -8 million)
• Earnings 26% above market benchmark
• Market improved through strong demand growth and no supply growth

In the third quarter of 2017, the Dry Cargo business realised an adjusted result for the period of USD 5 million. This was an improvement compared to the third quarter last year, when the adjusted result for the period was USD -8 million. The result marks the first positive net result for the Dry Cargo business of NORDEN since the second quarter of 2015.

The positive development has been driven by significant improvements in the overall market conditions. The adjusted net result of the Dry Operator was USD -2 million, as the focus in the Dry Operator during the quarter has been on positioning the portfolio towards expected improvements in the market. This has been done by moving vessels into the Atlantic, increasing the exposure and securing a significant amount of optional capacity. With these actions, the Dry Operator is well positioned to get the most out of the continued market improvements in the fourth quarter of 2017.

During the quarter, NORDEN has entered a long-term COA with Empremar for the transport of salt from Chile to the US East Coast.

Market improvements
The dry cargo market has been improving since June, and during the third quarter the Baltic Dry Index increased by 54%. Within Supramax, the average market rates were 9,525 USD/day, and thereby 35% higher than during the third quarter of 2016, while Panamax rates with an average of 10,102 USD/day were 76% above levels seen in the same period of last year. Overall, NORDEN’s earnings in Dry Cargo were 26% above the market benchmark, and over the last 4 quarters NORDEN has on average generated extra earnings of USD 878 and USD 973 per core fleet day within Panamax and Supramax, respectively.

Chinese growth
The market improvement is a result of continued strong Chinese imports of commodities, and while iron ore and coal are still the main drivers, many of the minor bulk commodities have also enjoyed strong growth rates. The Chinese economy continues to exhibit strong activity levels, most notably the apparent steel demand which in the third quarter is up around 14% compared to last year. Parts of this may, however, be driven by stocking up throughout the value chain in preparation for the scheduled shutdown of sections of the steel producing capacity during the winter months for environmental reasons.

Rebound in coal trade
The coal trade has had somewhat of a revival in 2017. China’s imports have been significantly higher than last year and while steps have been taken to increase domestic production, the general high activity levels in the economy and a slow hydro power production has supported continued strong imports. It is, however, not only China that has been importing higher volumes of coal. Other countries have also increased their imports, many driven by the overall improved economic situation, most notably South Korea where imports are up 19% year-on-year.

Strong grain season
Grain exports are one of the most important trades for the Supramax and Panamax vessel types, and especially the soya bean volumes out of Brazil have been strong this year. The key export area for soya beans normally switches from South America to North America during the third quarter, but this year the Brazilian exports have remained elevated longer than in previous years.

Termination of Handysize pool
NORDEN will phase out the dry cargo Handysize pool by year-end but maintains the growth ambitions as Handysize operator. NORDEN currently operates more than 60 Handysize vessels primarily within the Atlantic and the Americas with support from the offices in Rio de Janeiro, Santiago, Annapolis and Copenhagen, and NORDEN expects to further grow this business organically over the coming years. In line with the strategy, NORDEN will be exiting Handysize ownership over time, and the basis for operating the current Handysize pool has therefore changed.

Limited fleet growth provides basis for improving markets
Deliveries have been slowing considerably through 2017, and despite low scrapping levels, fleet growth was only 0.3% in the third quarter. The full-year estimate for supply growth in 2017 continues to be around 3%, but the vast majority of this growth has already been delivered. Looking towards 2018, supply growth is expected to be just 1% – the lowest growth rate since 1999. Low supply growth forms the basis for continued improvement of the market conditions in 2018 – despite potentially lower demand growth in 2018 than in 2017.

Looking further ahead, the order books remain limited, and while ordering has picked up in 2017, low fleet growth is expected to continue into 2019.

At the end of the third quarter, the Dry Cargo Department’s coverage for the rest of 2017 was at 76%, which corresponds to 2,912 open ship days. NORDEN has utilised the strong fronthaul market at the beginning of the fourth quarter to capture the value built through positioning of vessels during the third quarter, and at the end of October there were 800 open days. For 2018, 43% of ship days have been covered at an average level of USD 12,177. From the annual report 2017 and onwards, the capacity and coverage tables will only cover Dry Cargo Owner.

• Adjusted net result for the period USD -1 million (USD -4 million)
• High level of inventories reducing effect of weather disturbances
• Lower fleet growth supporting gradual improvement

Adjusted net result for the period USD -1 million
In a challenging third quarter market, NORDEN’s fleet of product tankers realised an adjusted result of USD -1 million, which is an improvement compared to the same period last year, where the adjusted result was USD -4 million.

Despite high inventories which continued to put pressure on rates, NORDEN’s TCE earnings for MR and Handysize were USD 14,464 and USD 9,375, respectively, during the quarter. NORDEN’s tanker business thereby outperformed the market benchmark over the past 4 quarters with 18% and 12%, respectively.

During the first half of 2017, NORDEN took advantage of the time charter rates to increase capacity, and this was also the case in the third quarter where the Company entered into 2 long-term and 4 short-term charters for MR tankers.

Limited market effect of hurricanes
Even though global inventories have slowly been decreasing since the first quarter of 2017, high inventories continued to put pressure on the market during the third quarter. The recent hurricanes accelerated the draw on inventories, but not to an extent that resulted in other than very short-lived improvements in regional markets.

This was also the effect of Hurricane Harvey, which overall proved to have little impact on the realised result of the quarter, as existing inventories quickly accommodated the lack of seaborne oil supply caused by the hurricane. Harvey did, however, have an impact on the product tanker market as the hurricane incentivised the move of vessels to the Atlantic from the Pacific supporting rates in the Pacific.

Fleet growth in 2018 lower than in 2017
By the end of the third quarter, the product tanker fleet has increased by 4.7% with most of the increase on a dwt basis being LR1 and LR2 vessels. Scrapping during the first 3 quarters of 2017 accumulated to 0.5% of the product tanker fleet.

Looking ahead, NORDEN expects a seasonal improvement of markets in the fourth quarter of 2017 to especially benefit Handysize rates. Global oil inventories are decreasing towards their 5-year average, and with IEA forecasting oil demand to grow 1.4% in 2018, the basis for a gradual improvement in rates continues to be in place.

The order book for 2018 is currently indicating fleet growth of around 3%, which is significantly below the expected strong growth in 2017. Scrapping prices are also increasing, which could have a positive effect on the overall scrapping going forward.

At the end of the third quarter, 26% of ship days for the rest of 2017 had been covered corresponding to 3,125 open ship days. For 2018, NORDEN is 93% spot exposed as 7% of ship days have been covered at an average level of USD 14,063. After the quarter, NORDEN has entered 2 short-term time charter-out contracts and hereby increased the cover. The overall cover levels, however, remain fairly low in a historical context in anticipation of improving market conditions.

Outlook for 2017

NORDEN raises expectations
NORDEN raises its expectations for the adjusted results for the year to USD -10 to 30 million (previously -20 to 20 million).

In Dry Cargo, the increase in rates has continued, and NORDEN has actively positioned vessels to benefit from a strong fourth quarter. Therefore, expectations for NORDEN’s Dry Cargo segment are increased to USD -10 to 15 million (previously USD -25 to -5 million). Expectations for Tankers are narrowed to a range of USD 0 to 15 million (previously USD -15 to 15 million).

Risks and uncertainties
At the end of October, Dry Cargo has about 800 open ship days, which gives rise to a change in earnings of about USD 0.8 million at a change of USD 1,000 per day in expected T/C equivalents. Dry Cargo earnings are furthermore sensitive to any counterparty risks and changes in the rate level between regions and vessel types.

Earnings expectations in Tankers primarily depend on the development in the spot market. Based on about 2,500 open ship days in Tankers at the beginning of November, a change of USD 1,000 per day in expected T/C equivalents would mean a change in earnings of approximately USD 2.5 million.

Management’s statement
The Board of Directors and the Executive Management today reviewed and approved the interim report for the third quarter of 2017 of Dampskibsselskabet NORDEN A/S.

The interim report is prepared in accordance with the International Financial Reporting Standard IAS 34 on interim reports and the general Danish financial disclosure requirements for listed companies. In line with previous policies, the interim report is not audited or reviewed by the auditors.

We consider the accounting policies applied to be appropriate and the accounting estimates made to be adequate. Furthermore, we find the overall presentation of the interim report to present a true and fair view.

Besides what has been disclosed in the interim report, no other significant changes in the Company’s risks and uncertainties have occurred relative to what was disclosed in the consolidated annual report for 2016.

In our opinion, the interim report gives a true and fair view of the Group’s assets, equity and liabilities, the financial position as well as the result of the Group’s activities and cash flows for the interim period.

Furthermore, the management commentary gives a fair representation of the Group’s activities and financial position as well as a description of the material risks and uncertainties which the Group is facing. Hellerup, 9 November 2017

Source: Hellenic Shipping News.