The Directors' Report
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The operating results for 2009 were overshadowed by the effect of the verdict regarding the retroactive tax imposed by the Norwegian Government in 2007. On February 12 2010 the Supreme Court in Norway ruled this retroactive tax for years 1996 to 2006 as unconstitutional, and therefore illegal. Consequently the taxation was illegal as at 31 December 2009 and, the consequence for Odfjell is that related previous tax provisions and taxes paid in a total amount of USD 110 million is being booked as tax income in year 2009. This tax ruling was most welcome for an industry generally hard hit by recession and for Odfjell especially, restoring our equity ratio to a more reasonable level of 34%. The Department of Finance however, has stated that it will contemplate the ruling and evaluate how to relate to it. There can be no assurance therefore that the total deferred tax of NOK 1,150 million equalling USD 199 million (including then the fund for environmental investments) will remain completely untaxed in the future. Odfjell’s consolidated 2009 pre-tax result came to a profit of USD 26 million compared to USD 146 million in 2008. The after tax result was a profit of USD 121 million compared to USD 163 million in 2008. The 2009-results were impacted by the abovementioned USD 110 million tax income, while the 2008-results were enhanced by USD 86 million of non-recurring items related to capital gains and taxes. Gross revenue decreased by USD 212 million, to USD 1,264 million. Total assets were USD 2.7 billion, up from USD 2.6 billion at the end of 2008. From our shareholders’ point of view, 2009 proved a mixed bag. Within the extreme volatile financial environment of the year, during which shipping was a shunned sector by investors, our A- and B-shares posted a notable increase of 19.5% and 11.1% respectively. They lagged, however, the Marine Index’s rise of 25.5%. The market capitalisation of Odfjell was NOK 4.5 billion (USD 776 million) as at 31 December 2009. The 2009 pre-tax result for Odfjell was impacted by weak shipping markets causing losses for our parcel tanker business, which on the other hand were offset by strong results from our tank terminals and the compensation award of USD 43.8 million from the arbitration with the Russian state-owned shipyard Sevmash. The pre-tax result was negatively impacted by a write-down and restructuring charges related to our facilities in Odfjell Terminals Maritime BV by an amount of EUR 8.5 million (USD 12.4 million). The arbitration case in Stockholm against the large Russian state-owned shipyard Sevmash was decided at the very end of 2009. Basically the shipyard failed to deliver to us 12 ships contracted for in 2004. Whilst winning our main point, that of Sevmash being guilty of wilful misconduct, nevertheless we were seriously disappointed about the damages awarded, only USD 43.8 million. The cost of the arbitration was apportioned 75% as against Sevmash. The year started on a quiet note as the activity in most trades and segments remained negatively influenced by the financial crisis. More chemical tankers had to be traded in the slower clean petroleum product (CPP) market, as activity and nominations under our key parcel tanker contracts were below normal. However, our results held up reasonably well the first half of 2009, helped along by lower bunker prices. The last two quarters however became very difficult all around. Our tank terminal business turned in another solid result in 2009, with added storage capacity and strong demand for tank storage and associated services at most locations. Fleet renewal continued into 2009 by our taking delivery of two newbuildings, fully stainless steel parcel tankers each of about 33,000 DWT. These ships are not owned by us, but on long-term charter from Japanese owners. Our tank terminal projects and expansions progressed in 2009, and the new terminal in Oman, where we have a 30% ownership, has become fully operational. Our small green field project in Iran is delayed, but with expected start-up first quarter 2010. New capacity also became fully operational in Houston, Rotterdam, Korea and Singapore. The Annual General Meeting (AGM) held 5 May 2009 elected Terje Storeng as a new Director of the Board in place of Reidar Lien, who had announced his resignation. The Company would like to acknowledge and thank Reidar Lien for his valuable contributions on the Board since 2001. Accordingly the Board consists of B. D. Odfjell (Chairman), Ilias A. Iliopoulos, Marianna Moschou, Terje Storeng and Irene Waage Basili. The AGM approved a 2008 dividend payment of NOK 1 per share, equal to NOK 87 million (about USD 0.15 per share, equal to USD 12.3 million). The dividend was paid out 19 May 2009. In November Mr. Jan A. Hammer was appointed President/CEO following an interim period from May 2009. BUSINESS SUMMARYWe remain committed to our long-term strategy of enhancing Odfjell’s position as a leading logistic service provider in terms of storage and ocean transportation of specialty bulk liquids. By focusing on a safe and efficient operation of a versatile and flexible fleet of global and regional parcel tankers, jointly with cargo consolidation at our expanding tank terminal activities, we aim to further enhance our competitive position by offering improved product stewardship to our customers. The fleet is operated in complex and extensive trading patterns and, our customers expect and demand the highest standards of service. Critical mass enables efficient trading patterns, as well as fleet utilisation. |
PARCEL TANKERS
Gross revenue from our parcel tanker activities was USD 1,021 million. Earnings before interest, tax, depreciation and amortisation (EBITDA), was negatively impacted by reduced volumes, lower freight rates and still high bunker costs, and came to USD 73 million. The operating result (EBIT) was a loss of USD 6 million, despite capital gains, and the aforementioned arbitration award of USD 45 million, including refund of legal expenses. Total shipping assets at year-end equalled about USD 1.4 billion. Time charter income expressed in USD per day fell by about 19% compared to 2008.
Our average cost of bunkers in 2009 was USD 420/ton (including compensation related to bunker escalation clauses and hedging), compared to USD 461/ton the preceding year. Operating expenses were stable, while general and administrative expenses were somewhat lower than in 2008, partly due to costs savings and the stronger average USD/NOK exchange rate. One ship planned for recycling in 2010 was impaired by USD 3 million as book value was higher than then expected scrapping value.
Net financial expenses for 2009 were USD 35 million, compared to USD 52 million in 2008. The decrease is caused by lower interest rates and gain on financial instruments, instruments not qualified as hedging. The average USD/NOK exchange rate in 2009 was 6.29, compared to 5.66 last year. The USD weakened however substantially against the NOK from 7.00 at year-end 2008 to 5.76 at 31 December 2009.
Year-end 2009 our parcel tanker fleet consisted of 78 ships over 12,000 DWT, of which 42 were owned. In addition we operated 18 smaller ships, of which 12 are owned.
Odfjell’s newbuilding programme now comprises contracts for a series of six 9,000 DWT stainless steel chemical tankers being built at Chongqing Chuandong Shipbuilding Industry Co. Ltd in China, which will be delivered in 2011-2012, at a combined total price of USD 180 million. These ships will be operated in our regional trades in Asia and Europe, and will add to and replace some smaller vessels currently trading within these regions.
In 2009 Odfjell entered into an agreement with its Saudi-Arabian partner National Chemical Carriers (NCC) to bare-boat charter three 37,000 stainless steel parcel tankers for ten years with purchase options. The three ships are MT NCC Jubail (1996), MT NCC Mekka (1995) and MT NCC Riyad (1995). Furthermore, Odfjell entered into three to six-year time charters for three ships that earlier were owned by NCC. These ships were MT Bow Baha (24,728 DWT/1988), MT Bow Asir (23,001 DWT/1982) and MT Bow Arar (23,002 DWT/1982). The time charter agreements for the MT Bow Asir and MT Bow Arar were later cancelled, and replaced by our selling and short-term chartering back from the new owners the MT Bow Hunter (23,002 DWT/1983) and the MT Bow Pioneer (23,016 DWT/1982). We also acquired MT Bow Victor (33,190 DWT/1986) with 17 stainless steel cargo tanks and 14 coated cargo tanks. MT Bow Victor is a sister vessel of the MT Bow Viking (1981).
In June 2009 Odfjell signed a 50/50 joint venture agreement with NCC to establish a company in Dubai, to be named NCC Odfjell Chemical Tankers JLT, with the purpose to commercially operate our respective fleets of coated (IMO 2/3) chemical tankers of 40,000 DWT and above. The ships will be traded in the chemicals, vegetable oils and clean petroleum products markets on a world-wide basis, with emphasis on the growing production and export from the Middle East region. The new company started operations early 2010 with 15 vessels and a total capacity of nearly 660,000 DWT. The plan is to grow the fleet to 31 vessels and a total capacity of close to 1.4 millions DWT over the next three years.
In combination and synchronisation with our worldwide transoceanic services, our regional business activities encompass four different geographical regions. Asia represents of course a strategically important area for our business, with significant new chemical production expected to come on stream in the years to come. Therefore our largest regional operation naturally is in Asia, where we employ 12 ships within several trade lanes, covering the Singapore – Japan/Korea – Australia/ New Zealand ranges.
Odfjell’s engagement in intra-European trades has been operated and managed from Hamburg through the joint-venture Odfjell Ahrenkiel Europe (OAE). As from January 2010, and amicably agreed with our partner Christian Ahrenkiel KG, we took over and relocated the commercial management to Bergen. Odfjell’s commitment to regional European trade continues, with the goal to strengthen and further develop our presence and services in this area.
In South-America, four Brazilian flagged ships are employed by our wholly owned company Flumar, carrying chemicals primarily along the Brazilian coast. Finally, we have a 50/50 joint venture in Chile with CSAV. We currently employ one Chilean flagged vessel, for coastal transportation of sulphuric acid mostly.
Our type of shipping is one of the most challenging within the marine industry. During 2009 our ships transported more than 700 different products, comprised of some 6,000 individual parcels. Unlike other ship types for example container ships, our ships have to call a number of customer-dictated berths, even within one and the same port. Such operations are both time-consuming and costly, thus impacting negatively our operating results. Our aim is therefore increasingly to consolidate the loading and the discharging. We believe a future successful consolidation of cargoes, combined with more time-efficient port operations, will benefit our customers as well as us.
During 2009 our ships performed well as far as customer approvals (vetting) are concerned. The system is increasingly cumbersome for chemical parcel tankers, which have become subject to too many inspections etc. An adjustment of the vetting regime is long overdue.
Odfjell continues to work with rule makers to enhance safety by participating in efforts to promote more consistent regulations for inerting of chemicals with low flash point.
TANK TERMINALS
Gross revenues from our expanding tank terminal activities came in at USD 248 million, EBITDA was USD 109 million and EBIT was USD 68 million. At year-end 2009, the book value of total tank terminal assets was about USD 691 million, an increase from USD 634 million by the end of 2008.
Odfjell’s existing tank terminals are located in Rotterdam, Houston, Singapore, Onsan in Korea, Sohar in Oman, BIK in Iran, and Jiangyin, Dalian and Ningbo in China. Additionally we have a valuable cooperation agreement with a group of tank terminals in South America.
During 2009 the expansion of our tank terminal activities continued with successful commissioning of new tank farms in Oman. The expansion of an additional bay in Houston was successfully delivered on budget. The new total capacity is 320,600 cbm. The expansions in Singapore were completed during 2009, and the green field project in Iran is now scheduled for start-up early 2010. In August, Odfjell Terminals (Korea) successfully commissioned new tank bay expansions of totally 80,000 cbm, slightly ahead of schedule. The new total capacity is 251,000 cbm. Furthermore, the Oman terminal was awarded two long-term contracts for an additional 425,000 cbm, scheduled for completion in 2011. In Rotterdam, we concluded the commissioning of the new quay wall, adding valuable berthing capacity to the terminal.
In 2008 Odfjell acquired AVR Maritiem, which was renamed Odfjell Terminals Maritiem B.V. (OTM). The principal business activities of the company were jetty services and waste handling. The most important element at the time of the acquisition was the excellent mooring facility for Odfjell Tankers’ board to board operations in the Rotterdam harbour. The waste handling activity of OTM has been affected by the worldwide economic crisis, which also negatively impacted overall shipping activities within the port of Rotterdam. In order to avoid future losses, it has been decided to discontinue the waste handling activity at OTM, as per the end of 2009, and to decommission the related equipment. The plan is to consolidate the land lease contract and the large jetty into OTR. The accounting effect of the discontinuation was a non-recurring pretax charge of EUR 8.5 million (USD 12.4 million) as a combination of redundancy costs and a write-off of fixed assets. After tax the effect is EUR 6.3 million (USD 9.2 million).
The strategy of Odfjell Terminals is to continue its growth along major shipping lanes, and at important locations for petro-chemicals, refined petroleum products, bio-fuels and vegetable oils around the world. Odfjell Terminals is investing in emerging markets thus enhancing the development of ship/shore infrastructure for safe and efficient operations in such regions.
2009 RESULT
Gross revenue for the Odfjell Group came to USD 1,264 million, down 14% from the preceding year. Earnings before interest, tax, depreciation and amortisation (EBITDA) were USD 182 million compared to USD 286 million in 2008. Operating result (EBIT), including a net of USD 30 million capital gain on assets, impairment and the arbitration award, came to USD 61 million compared to USD 198 million in 2008, then including capital gains of USD 53 million.
The net pre-tax 2009 result came in at USD 26 million, compared to a pre-tax profit of USD 146 million in 2008. Taxes in 2009 were an income of USD 95 million, compared to an income of USD 17 million in 2008. The 2009 tax income is due to the aforementioned reversal of tax provisions and taxes paid in 2007 and 2008 as a result of the Norwegian Supreme Court’s decision that these taxes for the years 1996 – 2006 were unconstitutional. Our 2009 cash flow was USD 176 million, compared to USD 272 million in 2008.
Operating expenses were stable, while general and administrative expenses were somewhat lower than in 2008, partly due to costs savings and to the stronger average USD exchange rate. Net financial expenses for 2009 were USD 35 million, compared to USD 52 million in 2008. The decrease was caused by lower interest rates and gain on financial instruments, instruments not qualified as hedging. The average USD/NOK exchange rate in 2009 was 6.29, compared to 5.66 last year. The USD weakened against the NOK from 7.00 at year-end 2008 to 5.76 by 31 December 2009.
The parent company, Odfjell SE, has implemented simplified IFRS for the accounting year 2009. In this connection the reporting currency has been changed from NOK to USD as USD is the functional currency for the Company. The parent recorded a profit for the year of USD 100.2 million. The Board recommends that the profit is allocated to Other Equity. The main part of the profit relates to contributions from subsidiaries. Given the uncertain times going forward, the Board does not recommend a dividend for 2009. At 31 December 2009 total distributable reserves were USD 485.3 million.
At year-end 2009 the Odfjell A-shares traded at NOK 52.00 (USD 9.03) up 19.5% compared to 43.5 (USD 6.22), a year earlier. The B-shares traded at NOK 50.00 (USD 8.69) up 11.1%, compared to NOK 45.00 (USD 6.43) a year earlier. A 2008 dividend of NOK 1.00 per share was paid in May 2009. Adjusted for the dividend, the A- and B- shares had positive yields of 21.8% and 13.3% respectively. By way of comparison, the Oslo Stock Exchange benchmark index increased by 64.8%, the marine index increased by 25.5% and the transportation index increased by 30.1% during the year. The market capitalisation of Odfjell was NOK 4.5 billion (USD 776 million) 31.12 2009.
The Annual General Meeting will be held this year on May 4 at 16:00 hours at the Company’s headquarters.
The long-serving Chairman of the Board, Mr. Bernt Daniel Odfjell (72) has informed the Board he wishes to step down as Chairman at the Annual General Meeting in May. In his place the Board will recommend to the shareholders that his son Laurence Ward Odfjell is elected as the new Chairman. Laurence Odfjell is currently President of Odfjell Terminals, which position on an interim basis will be taken over by President/CEO Jan A. Hammer.
According to § 3.3 in the Norwegian Accounting Act we confirm that the accounts have been prepared on the assumption of a going concern.
FINANCIAL RISK AND STRATEGY
Our financial strategy is to be sufficiently robust to withstand prolonged adverse conditions, such as long-term downcycles in our markets or challenging financial conditions. Odfjell has an active approach to managing risk in the financial markets. This is done through funding from diversified sources, maintaining high liquidity or loan reserves, and by systematically monitoring and managing the financial risks related to currency, interest rates and bunkers. The use of hedging instruments to reduce the Company’s exposure to fluctuations in the abovementioned financial risks limits the upside potential from favorable movements in respect of these same risk factors. The Company also closely monitors the risk related to the market valuation of the hedging instruments and the associated effect on the equity ratio.
The single largest monetary cost component affecting our time charter earnings is bunkers. In 2009 it amounted to more than USD 237 million (58% of voyage cost). A variation in the average bunker price of USD 100 per ton equals about USD 60 million or a USD 2,300/day change in time charter earnings of the ships in which we have a direct economic interest. A certain portion of our bunker exposure is hedged through bunker adjustment clauses in the Contracts of Affreightments. As per 31 December 2009 we have entered into hedging through swaps and options of about 42% and 10% respectively of our total 2010 and 2011 bunker exposure.
All interest-bearing debt, except debt held by tank terminals outside the US, is denominated in USD. Bonds issued in non-USD currencies are swapped to USD. Interest rates are generally based on USD LIBOR rates. A certain portion of the interest on our debt is fixed, either through fixed rate loans or through long-term interest rate swaps. With our current interest rate hedging in place, about 30% of our loans are on a fixed rate basis. In order to reduce volatility of the net result and cash flow related to changes in short-term interest rates, interest rate periods on the floating rate debt and interest periods of liquidity, are managed to be concurrent.
The Group’s revenues are primarily in US Dollars. Only tank terminals outside the US and our regional European shipping trade derive income in non-USD currencies. Our currency exposure relates to the net result and cash flow from voyage-related expenses, ship operating expenses and general and administrative expenses denominated in non-USD currencies, primarily in NOK and EUR. Our estimate is that a 10% strengthening of the USD versus the NOK and EUR will improve the pre-tax 2010 result by roughly USD 15 million; assuming no currency hedging being in place.
Our currency hedging at the end of 2009; by which we have sold USD and purchased NOK, covers about 84% and 22% of our 2010 and 2011 NOK-exposure, respectively. Future hedging periods may vary depending on changes in market conditions.
LIQUIDITY AND FINANCING
The Company’s cash reserves including available-for-sale investments, which are low risk, and highly liquid bonds, continues strong. Cash and cash equivalents and available-for-sale investments as of 31 December 2009 was USD 185 million compared to USD 193 million as of 31 December 2008. Available drawing facilities were USD 62 million at year-end 2009 and nothing in 2008. Interest bearing debt increased from USD 1,500 million by year end 2008 to USD 1,576 million per 31 December 2009. Net interest bearing debt was USD 1,391 million as per 31 December 2009. The equity ratio was 34% as per 31 December 2009 and the current ratio was 1.4. Since our fleet consists largely of speciality ships, which are operated in a market still with limited relevant sale and purchase activity, we have not attempted to calculate value-adjusted shareholders’ equity. The Company should be evaluated based on earnings multiples, rather than based on asset valuations.
During 2009 we entered into five long-term secured bank facilities, in a total amount of USD 139 million. They are all for general corporate purposes, of which USD 83 million were drawn as per 31 December 2009. In July, our subsidiary Oiltanking Odfjell Terminal Singapore Pte Ltd signed a SGD 200 million syndicated term loan facility with DBS Bank Ltd, Calyon, and Overseas-Chinese Banking Corporation Limited as mandated lead arrangers. Proceeds from this six-year facility will be used to refinance existing loans and to finance the Company’s expansion project on Jurong Island. In December Odfjell SE successfully completed a NOK 500 million (USD 88 million) unsecured bond issue with maturity date 4 December 2013. The outstanding debt under the bonds was swapped to USD. The bond issue was combined with an offer to repurchase other outstanding bonds due in 2010 and 2011. Following the repurchase, Odfjell SE’s outstanding debt on these bonds is NOK 108 million (USD 18 million) out of NOK 300 million (USD 52 million) bond due in 2010 and NOK 62 million (USD 9 million) out of NOK 400 million (USD 69 million) bond due in 2011.
The proceeds from the bond issue were used for general corporate purposes.
DnB NOR Markets acted as the sole arranger of the new bond issue as well as for the buy-back of outstanding bonds.
In 2009 we repaid about USD 103 million by way of regular instalments on our mortgage debt and USD 167 million including repurchase of bonds.
The Company’s loans are generally long-term and provide for regular payment of instalments. There are no major refinancing needs prior to 2011 when part of our bond debt matures. Furthermore, all major investment commitments are fully financed.
At the expiry of the Total Return Swap (TRS) between Odfjell SE and DnB NOR ASA, Odfjell Chemical Tankers AS, a 100% owned subsidiary of Odfjell SE, acquired 819,500 Odfjell A-shares at NOK 36.00. Furthermore, Odfjell SE terminated its TRS agreement with DnB NOR Markets for 1,679,500 Odfjell A-shares and 2,322,482 Odfjell B-shares. Simultaneously all shares were acquired by Odfjell SE at a price of NOK 51 for the A-shares and NOK 45 for the B-shares. In December, Odfjell SE acquired the above 819,500 A-shares from Odfjell Chemical Tankers AS at a price of NOK 51 per share.
Accordingly Odfjell SE now holds 2,499,000 Odfjell A-shares and 2,322,482 B-shares, equalling 5.6% of the share capital and 3.8% of the votes. These are referred to as our treasury shares.
KEY FIGURES
The return on book equity before the retroactive tax effect was 1.4% and return on total assets 2.3%. The corresponding figures for 2008 were 18.6% and 9.5%, respectively. Return on capital employed (ROCE) was 3.6% in 2009.
Earnings per share before retroactive tax effect amounted to USD 0.13 (NOK 0.82) in 2009, compared to USD 1.56 (NOK 8.82) in 2008. Earnings per share after the retroactive tax effect amounted to USD 1.42 (NOK 8.93) in 2009 and USD 1.95 (NOK 10.98) in 2008. Cash flow per share was USD 2.06 (NOK 12.93), compared to USD 3.25 (NOK 18.39) in 2008.
As per 31 December 2009 the Price/ Earnings ratio (P/E) was 71.5 and the Price/Cash flow ratio 4.3. Based on book value the Enterprise Value (EV)/EBITDA multiple is 12.1 while, based upon market capitalisation as per 31 December 2009, the EV/EBITDA multiple was 11.7. Interest coverage ratio (EBITDA/Net interest expenses) was 4.1, compared to 4.4 last year.
HEALTH, SAFETY AND ENVIRONMENT (HSE)
Odfjell has over the years developed a “Corporate Quality Management Manual” that jointly with our manual for “Corporate HSE Expectations”, describes how we shall all work to comply with the high standards that we aim for. Stringent safety and environmental requirements guide all our operations. Training of personnel working on board, at terminals and ashore is our proactive way of ensuring that we possess the required competence. During 2009 our mariners received more than 12,500 training days. Most were held at the Odfjell Academy at Subic Bay, Philippines. In addition to this comes 4,500 training days at the terminals.
Training and Performance Record Books for our seafarers were introduced some time ago. Now we continue the strategy of linking competence assessment, skill gap analysis and conduct of ‘tailorfit’ programs that will close identified skill gaps through shore based and/ or on board training.
The production and launching of our new e-learning course “QHSE in Odfjell” was a main achievement in 2009. This course is mandatory for everybody working in Odfjell.
Operating units have approval to ISM code (ship management), ISO 9001:2008 standard (terminals) and ISO 14001 environment standard. New in 2009 is that the Odfjell Terminals (Korea) and Odfjell Terminals (Dalian) acquired OHSAS 18001 certification.
In line with the environmental standards, the various units have comprehensive annual plans for environmental protection. Current focus areas for Odfjell Terminals encompass air emission, vapour recovery, energy efficiency and waste water treatment. Odfjell Tankers focus on energy conservation, and for 2009 the optimization of ship speed has reduced our fuel consumption with about 22,000 tons. In the autumn Odfjell started to use an advanced weather routing service for all sea voyages above five days. This has already yielded significant fuel savings.
Odfjell Tankers’ Environmental Council monitors our Company’s impact on the environment. In 2009 the council submitted its first internal report with main results presented herein as well as on the web.
There were no incidents with fatal consequence for Odfjell personnel during 2009. On board Bow Pilot one seafarer got a serious burn injury. There have been contact incidents concerning some ships and some situations with ignitions in engine rooms have resulted in increased alertness.
On board a time chartered vessel an officer regretfully lost his life in a cargo tank into which he should not have entered. Odfjell is concerned about this fatality and is looking into tank entry procedures, which are already very strict.
Lost Time Injury Frequency (LTIF) on board and ashore is slightly down from last year.
ORGANISATION, WORKING ENVIRONMENT AND JOB OPPORTUNITIES
Odfjell strives to develop an inspiring and interesting work environment both at sea and ashore. We carry out employee satisfaction surveys at the headquarters in Bergen and other larger offices, and we do ergonomics inquiries. Also implemented is a programme for improved health care for seafarers, with focus on exercise and a healthy diet. The work environment is considered good.
Odfjell aims at being an attractive company to work for. Gender-based discrimination is not allowed in recruitment, promotion or wage compensation. We maintain our policy of providing employees with equal opportunities for development of skills and to provide new challenges within our Company. Out of about 230 employees at headquarters in Bergen, 68% are men and 32% women, whilst the corresponding global figures (about 930 employees in our fully owned onshore operations) are 76% and 24% respectively. Recognizing that we employ relatively few women, we endeavour to recruit women to ship operations, chartering and ship management, and we also promote life at sea as an attractive career.
Compared to last year the recorded absence rate at headquarters was stable at 3.5%. For the Filipino mariners the absence rate was 1.4% and for European mariners 3.3%.
The Board takes this opportunity to thank all employees for their contributions to the Company’s progress during 2009.
STATEMENT ON SALARY AND OTHER BENEFITS TO THE MANAGEMENT
FOR 2010 AND 2011
It is Odfjell’s policy that Management shall be offered competitive terms of employment in order to ensure continuity and to enable the Company to recruit qualified personnel. The remuneration is structured so that it promotes the creation of value for the Company. The remuneration shall not be of such a kind or magnitude that it may impair the business or the public reputation of the Company.
A basic, straight salary is normally the main component of the remuneration. The remuneration may however consist of a basic salary and other supplementary benefits, hereunder but not limited to payment in kind, incentive/recognition pay, termination payments and pensionand insurance schemes. The Company does not run any share option schemes, nor other benefit programs as mentioned in the Public Limited Companies Act section 6-16 subsection 1 no. 3. There are no specific limits regulating the different categories of benefits nor the total remuneration of Management.
Remuneration to Management in 2009 was in compliance with the above guidelines.
The total remuneration to the managers in the Executive Management Group in 2009 was NOK 11.3 million. This amount is comprised of fixed and variable remuneration as follows;
- Fixed remuneration 94%
- Variable remuneration 6%
Variable remuneration was awarded in 2008 and paid out in 2009. The award was based on a discretionary evaluation system extended by the Board.
Please also see Note 8 to the Odfjell Group accounts for more details about the remuneration to the Management in 2009.
WORLD SHIPPING CONTEXT
The financial crisis that struck the world during the second half of 2008 led to the worst recession in the post WWII period. World GDP shrunk by 1.2%, and industry output fell sharply. Global demand and trade were in decline, which had a dramatic impact on the shipping markets. Unprecedented governmental intervention in most countries, particularly in the OECD area and in China, aimed at reducing uncertainty, increase confidence and thus, to stabilise the finance sector, proved sufficient to steer the world economy clear of a 1930s-like depression and, during 2009 the negative trend was halted and to some extent even improved. Still, there has been no immediate recovery for the shipping industry, although oil tankers and to some extent also dry bulk experienced slightly stronger markets towards the end of the year. For the third major shipping segment, container vessels, both volumes and earnings remain negative. Rising bunker prices added to the burden for all ship-owners, and much attention was put on slow-steaming and other fuel-saving initiatives.
The deteriorating freight market and bleak outlook in most shipping segments rapidly affected the rate of both new ordering and vessel recycling. After quite an order boom in 2007 and first half of 2008, the shipyards suddenly were faced with an almost complete stop in new ordering. During the autumn and winter some dry bulk and large tanker owners again returned to the yards with a few orders, whilst the drought in new orders for container ships and chemical tankers has remained. Several owners have also cancelled or intend to cancel orders, although not to the same degree as predicted this time last year. Some orders are also being converted to other types of vessels. This has led to a substantial decrease in the orderbook relative to the current fleet and, although the influx of new tonnage the next few years will still greatly outweigh outphasing of overaged tonnage, the imminent oversupply of new tonnage seems less threatening than one year ago. Several yards are struggling with weak finances, some reportedly even on the brink of bankruptcy.
The weak freight markets, and the adverse supply/demand balance seen from a shipowner’s point of view, have also increased the activity in the ship recycling industry. As more ships have been sent to the recycling yards, mainly in India, Bangladesh and Pakistan, recycling prices have remained fairly low, although somewhat rising towards the end of 2009 as a result of stronger metal prices. The active recycling market is expected to continue well into 2010, not least to take care of the remaining single-hull tankers that hardly will be able to trade any longer.
General analyst consensus suggests that there is room for cautious short or at least mid-term optimism for the shipping industry. World GDP growth is forecasted to reach 3-3.5% in 2010, a remarkable recovery after last year’s contraction. Not surprisingly the rapidly developing economies in China and India continue to “fuel” the world with growth rates of 8.5% and 8% respectively. In the OECD area the growth outlook is far more moderate at 2.1%, with Europe and Japan in particular lagging behind.
Several factors indicate that global trade will continue fairly strong also the next few years. Optimism and risk willingness has returned, and low interest rates, increasing asset prices and unspent demand (following the down¬turn both among consumers and corporations) all contribute to enhance economic activity. However, there are also a number of challenges that could well jeopardise continued recovery. The large-scale government efforts have been costly, and many countries will hardly be able to offer similar rescue operations if a new crisis should occur. The interest rates in most countries are now so low that further cuts will only marginally contribute to boosting the economy. Slack in many industries will limit corporate investments, and high unemployment combined with the outlook for a jobless recovery both in the US and in Europe will curb household consumption and demand. Renewed bank losses could potentially lead to restrictive credit practices that limit a continued upswing. There is also fear of the Chinese economy heading towards a rather hard landing, which will have a quite negative impact on the world economy as a whole.
THE CHEMICAL MARKET
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2009 proved a difficult year for the world chemical industry, in spite of which prices of chemicals surged towards the end of 2009, see graph on this page. The financial crisis hit many key user industries hard (consumers of basic chemicals), particularly automaking and construction, and many producers facing reduced demand had to scale down activities. In addition there was an industry-wide destocking at the end of 2008 and into the first quarter of 2009. Demand for most chemicals then fell to five-year lows, and commodity prices dropped considerably. Inventory restocking during the second and third quarter gave some boost to the chemicals demand, and a general recovery towards the end of the year seemed to increase activity considerably. Nevertheless, the year as a whole was disappointing. Since the financial crisis struck following the summer of 2008 the world chemical industry has cut more than 80,000 jobs. The downturn in the chemicals markets led to tough and volatile market conditions for most chemical tanker owners/ operators, with no increase of volumes to be transported along most trade lanes. Chinese demand kept up the movements into the Far East, but return voyages proved difficult to secure as a result of low demand both in Europe and in North America. Following several years of large-scale contracting of new tonnage, 2009 was another year of rapid fleet growth. The chemical tanker fleet as a whole had a net growth of 9.2%, and the core fleet grew by 8.9%. Although less than the growth experienced in 2008, this was more than what the market could absorb. There was a substantial overcapacity in most areas, and freight rates dropped. As an added burden the clean petroleum market took a hard beating, with vessels making even negative time charter earnings in some trades. Due to the poor market and the adverse cost trends several owners faced financial difficulties, and some strived to limit their market exposure through selling units or by putting ships out on charter to third parties. Towards the end of the year some shipping companies got some relief through year-end inventory clearances. There are some indications of a market recovery with somewhat stronger demand as we enter the new year. The market decline, and predictions of a substantial short- and mid-term tonnage overcapacity, has led to basically a complete halt in ordering of chemical tankers, and the size of the orderbook relative to the trading fleet looks far less daunting than just a year ago. This is particularly the case for the deep-sea core segment, where the orderbook at year end was 26% of current fleet. For stainless steel tankers the equivalent ratio was 23.5%, and the orderbook for the short-sea tonnage below 13,000 DWT ships constitute less than one sixth of the present carrying capacity. There have also been several cases of order cancellations, although not at the rate that was generally anticipated at the beginning of the crisis. In most cases the cancelled orders are so close to completion that these ships most likely will be delivered anyway. The poor freight markets, and the steadily tightening age and vetting requirements, by authorities and customers alike, has made many old units gradually more difficult to trade. As a result, several owners chose to sell such ships for recycling, and demolition of chemical capable tonnage doubled compared to the previous year. Unless the market shows dramatic improvement this year, demolition will most likely remain high also in 2010. However, the build-up of overaged tonnage is fairly small compared to the current orderbook and thus, the fleet will continue to have a substantial net growth also this year and next. But the stop in new ordering has at least curbed the rapid fleet expansion the next few years. Assuming that all ships scheduled for delivery in 2010 will actually be delivered, and that ships will be phased out at the 30 years’ mark for European built tonnage and at 25 years for units delivered from Asia, the deep-sea chemical carrier fleet will grow by 3.7% this year, the core fleet by close to 10%. In comparison, forecasts from renowned analytical sources suggest world GDP growth not to exceed 3-3.5% this year and UK shipping analysts Drewry Shipping Consultants predict a growth in chemical tanker demand at a modest 1.7% in 2010. Hence, although most certainly there will be more delays from the shipyards, there hardly is any immediate outlook for any rapid improvement to the current supply/ demand balance. However, in the mid-term period to 2012 the situation is more promising. Based on current orderbook and outphasing of overaged tonnage according to the assumptions made above, the average annual chemical fleet growth will be only 2.5%, or 4% for the core fleet. This is below most forecasts for generalized petroleum tanker demand. On the other hand, there is now ample capacity available for new orders, at least for delivery in 2012 and beyond, so unless the shipowning community show restraint in ordering of new tonnage, any improvement may prove temporary. |
COMPANY STRATEGY AND PROSPECTS
As a leading niche player, we strive to provide safe, efficient, and cost-effective parcel tanker and tank terminal services to our customers worldwide. Besides clear operational and commercial benefits from close cooperation as between our shipping activity and our tank terminals, we consider tank terminals a stabilizing factor in the overall financial performance of the Company, as their earnings are less volatile than that of our shipping activities. Importantly, Odfjell strives to stay competitive and flexible with a modern, versatile and adequate fleet of vessels, adjusting to changing trade patterns through organizational nimbleness.
On the shipping side, 2010 started on a slightly more positive note, especially for clean petroleum products, acids and exports of basic chemicals from the Middle East Gulf. Disposal of older units will allow us better utilization, enhancing the average results for the rest of the fleet. Deliveries of newbuildings will continue, and the net supply will increase also in 2010, although ordering of new tonnage has significantly diminished. Recycling of ships will likely accelerate, and we also expect to see some of the new ships contracted for delayed or not even delivered. Competition remains tough, impacting especially our older tonnage in certain segments. We have seen new operators entering some trade lanes, which has affected freight levels negatively. The rise in bunker prices continues to be a concern, and may hamper the hoped for recovery of our time charter results, although part of our 2010 exposure is hedged at attractive levels. We expect a continued challenging market, whilst we believe that fourth quarter 2009 should represent the bottom.
We expect tank terminal results to remain strong, on the back of a successful expansion programme and strong demand for storage space as well as a solid contract base.
STATEMENT OF RESPONSIBILITY
We confirm that, to the best of our knowledge, the condensed set of financial statements for 2009, which has been prepared in accordance with International Financial Reporting Standards (IFRS), gives a true and fair view of the Company’s consolidated assets, liabilities, financial position and results of operations, and that the Annual Report includes a fair review of the information required under the Norwegian Securities Trading Act section 5-6 fourth paragraph.
