BACKGROUND AND EARNINGS
Eimskip continues to grow; 2016 was our seventh year of growth in volume of liner services, up 5.9%, and our forwarding services volume was up 4.8%, which was quite an achievement given the competitive pressures. This reflects the niche nature of our liner services in the North Atlantic and our worldwide specialized reefer forwarding services. We also benefitted from the strong Icelandic economy and had good results from Norway and the Faroe Islands. In 2016, we had record revenue of EUR 513.9 million and EBITDA of EUR 53.5 million, which on a normalized basis was up 23.7%. Our net earnings amounted to EUR 21.9 million, up 23%. Eimskip provides vital services connecting our customers with the major markets in Europe, North America and all over the world through our forwarding division. Our customers rely on our dependability and the quality of our services. These are guiding principles, as is continuous improvement, as shown by our investment in infrastructure, systems and team members.
ACQUISITION GROWTH AND BALANCE SHEET
We set out last year to use our balance sheet to make strategic acquisitions, strengthen our sailing system and continue renewing our vessel fleet to better serve our customers and create value for our shareholders. We have recently closed two strategic acquisitions in the forwarding business: first Extraco, in Rotterdam, in October 2016 and then Mareco, in January 2017, for a total of approximately EUR 29 million. Both are based in our existing markets of the Netherlands and Belgium, and both have strong niche positions in the reefer cargo market that will supplement and add expertise in different international markets and commodities. These are accretive asset-light acquisitions that will diversify geographic sales and EBITDA, provide excellent balance to our liner business and free cash flow. In each of these acquisitions, the founders have retained an equity interest because being a part of our network is attractive. We intend to continue to grow, integrate, share best practices across our forwarding business and to look for additional niche acquisitions. In 2016, if you pro forma for Extraco and Mareco, revenues in forwarding services represent 36% of Eimskip’s total revenue, up from 26%. On a pro forma basis, 27% of total revenue will come from Europe, up from 15%.
In January 2017, we signed a vessel sharing agreement with Royal Arctic Line which includes the purchase of two vessels at a cost of approximately USD 64 million; we anticipate financing about USD 45 million at attractive rates over a ten-year period or longer. These two 2,150 TEU vessels will be built to Polar Code, fitted with scrubbers, be very fuel efficient and meet the highest environmental standards. This will allow us to service Greenland with Royal Arctic Line in a vessel sharing agreement that will lower the cost per TEU for both carriers and better serve our customers. These vessels are also a part of our fleet renewal program and will help our reliability and quality of service. Together with Royal Arctic Line, we will open new markets for export and imports to and from Greenland and should grow inter trading within our sailing system. This is a strategic transaction that helps connect the nations of the North Atlantic.
In November 2016, we announced the acquisition of Nor Lines, subject to the approval of the Norwegian Competition Authority (NCA). The NCA is challenging this acquisition and we do not know what the outcome will be. The challenge arises in part from a narrow definition of the marketplace. Three of the five vessels currently operated by Nor Lines were previously built and operated by Eimskip in the same market.
The net effect of these acquisitions and ordering new vessels will be to increase the leverage of the company and give us a pro forma equity ratio of below 60%. We anticipate growth both internally and externally. We are continuing to look at additional strategic acquisitions that will add diversification in our markets and allow us to better serve our customers. We are also continuing to look at purchasing recently-built second hand vessels for use in our trade. In February this year, we purchased the Sophia, a 698 TEU vessel built in 2008, at an attractive price, to replace the Brúarfoss, which was built in 1992. After net proceeds from the sale of Brúarfoss we will have spent approximately USD 3 million. There should be other opportunities to buy attractively priced second hand vessels in 2017. Our strong financial condition will allow us to take advantage of these opportunities.
The Board, in keeping with its dividend policy, is recommending a raise of the dividend to ISK 6.80 per share, an increase of 4.6% in ISK terms that represents a 50% payout of net earnings for a total dividend payment of ISK 1,269.1 million. Due to the strengthening of the Icelandic krona, the total dividend was equivalent to EUR 11.0 million which was up 27.7% in Euro terms. The Board has also approved to change the Company’s dividend policy to allow for higher dividend payout of between 10% and 65% of net earnings, as opposed to the previous 10-50% of net earnings. This will give the Board greater flexibility in deciding on the appropriate dividend level according to circumstances.
Eimskip intends to increase shareholder value by growing the earnings and cash flow of the company and by paying a growing, sustainable dividend.
CONNECTING THE COMMUNITIES OF THE NORTH ATLANTIC
I would like to thank all of our customers and shareholders for their continued support. Our customers are our lifeblood, and we strive to provide them with the most efficient and effective solutions to their needs with great service and systems. We are enthused by our vessel sharing with Royal Arctic Line and expanding our sailing system in the North Atlantic. We continue to invest in our infrastructure and systems to better serve our customers and our team members. The new vessels we have ordered set new environmental standards. We are also conscious of the need to minimize our ecological footprint — these are all things that we know are important to our customers, the communities we serve and to us.
In addition to our long tradition of dependable service, we are active in the communities we serve and we support many cultural and communal projects. The welfare of the communities we serve, our customers, our team members and the environment are all important to us.
I also say a big thank you to our management team led by Gylfi Sigfússon and all of our team members in Iceland and all over the world for achieving our record year. It is important for Eimskip to provide an enthusiastic and innovative workplace that encourages team input and spirit to better performance. Eimskip is a part of the infrastructure that makes up our North Atlantic market and we seek to help provide the best and most consistent transportation and logistics services to the communities.
Our forecast for 2017 is positive. We are projecting EBITDA of EUR 57 to 63 million with continued volume growth in Iceland, though the seafood strike in Iceland that ended in mid-February will affect the first quarter results. There is a positive outlook for the Faroe Islands and Norway. We also expect growth in our forwarding business due to the recent acquisitions and rising international freight rates.
The recent announcements by the Icelandic Government of the lifting of capital controls are very encouraging and a great achievement. This will be good for the Icelandic economy.
President and CEO's Address
2016 WAS A RECORD YEAR FOR EIMSKIP
Eimskip’s revenue in 2016 amounted to EUR 513.9 million and grew by 2.9% from the previous year. The Company’s operating profit for the year, EBITDA, amounted to EUR 53.5 million, an increase of 18.3% from the previous year. Eimskip’s balance sheet at the end of 2016 remained solid and strong, with low leverage and total assets amounting to EUR 391.7 million, net debt of EUR 41.6 million and a 62.2% equity ratio. The Company’s cash flows remained strong: net cash from operating activities grew by EUR 11.3 million or 30.3% from 2015 and cash and cash equivalents amounted to EUR 39.5 million at the end of the year.
Transported volume in the Company’s liner services in the North Atlantic grew by 5.9% compared with 2015, with good growth in transported volume related to Iceland and Norway. Transported volume in the Company’s forwarding services grew by 4.8% from 2015, due mainly to increased transportation through newly acquired companies and organic growth. Intra-Asian business is also strengthening due to greater diversification in commodities and growth in Intra-Asian trade.
FORWARDING AN IMPORTANT SOURCE OF REVENUE
Eimskip’s freight forwarding services now contribute 26% of its total revenue and 21% of its EBITDA. Reefer forwarding services have been growing constantly over the past years, driven by organic growth, new markets and commodities and by acquisitions. Emphasis has been placed not only on reefer trade, but also on dry cargo and project cargo. Eimskip’s forwarding services are an asset-light business that is offered in cooperation with various deep-sea lines outside the Company’s sailing system. The freight consists mainly of frozen or chilled seafood, meat, fruit and vegetables. The trade lanes have grown from being mostly transport services between China and Europe/US, mainly transporting fish, to being an Intra-Asian business with a more even balance of imports and exports into and out of Asia, opening up new market trade lanes with a broader range of commodities, such as meat, fruit and vegetables, into new markets, such as Africa and South America.
ORGANIC GROWTH AND STRATEGIC ACQUISITIONS
The emphasis in the Company’s forwarding sector has been on growing organically but also on acquisitions that will bring more diversity into the commodities handled and open up new trade lanes. In 2016, Eimskip acquired a majority share in the specialized forwarding company Extraco in the Netherlands which will strengthen its niche in the forwarding market. Extraco’s office will be relocated in Eimskip’s headquarters in Rotterdam to secure the synergies that were planned with the acquisition. In January this year, Eimskip also acquired a majority share in Mareco, a Belgian freight forwarding company that will give Eimskip access to new commodities and new markets in Africa and South America.
Last year, Eimskip signed a letter of intent with Royal Arctic Line, the national carrier of Greenland, to explore the possibility of joint construction of larger ice class Polar Code container vessels to optimize operational economies of scale, reducing operational costs per TEU as compared with the use of our current vessels. The intention is also to connect Greenland better with the rest of the world and to share capacity. This will allow for growth in business between Iceland, Greenland and the Faroe Islands, allow Greenland to have more variety in sourcing imports and enable its exporters to export directly to other Scandinavian countries instead of exclusively to Denmark. Eimskip also signed an agreement in November to acquire the Norwegian shipping and logistics company Nor Lines, which serves Norway with five vessels, trucking services and terminals. Eimskip is waiting for the final conclusion of the Norwegian Competition Authority; in February the authority issued a notice of an objection regarding the acquisition.
Eimskip’s capital structure is strong and well prepared for future investments and opportunities, both in the North Atlantic and around the globe. The Company is constantly reviewing and optimizing its sailing system, listening to the needs of its customers and monitoring market trends, seeking ways to reduce vessel and container fleet costs and improve utilization of its transportation system.
During the last five years, Eimskip has been focusing on its vision by investing in organic growth. This has been done by adjusting the sailing system through investments in vessels, equipment and IT solutions and by building up infrastructure to create value for customers. At the end of February 2017, changes were made to the sailing system which will increase capacity to and from Europe and North America by 7-11%. A new Red Line was added to strengthen the services in Scandinavia and services to and from North America on the Green Line will be increased with transshipments in Reykjavík and more frequency and additional capacity. Weekly coastal services are now offered to support increasing activities in Iceland, served by the Gray Line which also serves the Faroe Islands and the UK.
The Company will continue to follow its vision, but will also look for external growth opportunities and diversification of business, just as it did in 2016 with dynamic strategic acquisitions. To follow up on the successful additions last year, and as part of its strategy, Eimskip is currently looking into potential mergers and acquisitions that will fit its vision and create operational synergy and increase shareholder value.
Positive developments are taking place in the North Atlantic transportation market, covering the area from Northern Norway to North America. We are expecting increased volume to and from Iceland in 2017 and also volume growth to and from the Faroe Islands. The outlook for Norway in the coming years is also positive. Trans-Atlantic services are growing and the focus is on increasing frequency and capacity. In Iceland, projects in the silicon industry are moving forward and the salmon industry is growing, which is something that our future sailing system needs to take into account.
MISSION, VISION AND STRATEGIC PRIORITIES
Eimskip’s mission is clear: to be a leading transportation company in the North Atlantic with connections to international markets and to be specialized in worldwide freight forwarding services. The Company’s vision is simple: to reach excellence in transportation solutions and services. The main strategic priorities for the year 2017 are to integrate Eimskip’s global team of employees, to continue the investment strategy for external growth and to integrate companies so as to ensure maximized synergy and optimize the sailing system and utilization of the vessel fleet. Future environmental requirements are included in this vision, concern for social responsibility and reduction of our ecological footprint. The intention is also to implement strategic procurement processes to reduce costs and to better integrate IT and processes to optimize our service excellence.
Our values are Achievement, Cooperation and Trust and these are our guiding principles in our behavior towards the Company’s stakeholders.
ROLE IN THE NORTH ATLANTIC
Eimskip plays a very important role in the North Atlantic, operating a strong and dependable sailing system. The Company is proud to be a niche carrier in the Arctic and to be able to serve the communities in the North Atlantic. The service network spans from Northern Norway, through the Faroe Islands, Iceland, Greenland, Newfoundland and Labrador, Nova Scotia and the northeastern states of the US through the port of Maine. Eimskip is aware of its responsibility in connecting countries in the North Atlantic and aims to live up to it in its daily operations. Eimskip’s future is bright and full of opportunities and I therefore look forward with confidence to working with our dedicated employees in the 20 countries that we serve with our own offices and with our almost 70 associates worldwide. Our intention is to keep on growing through our strong asset base, which is intimately linked to our liner system in the North Atlantic. We will also grow through our freight forwarding service network, through diversification in commodities and trade lanes and through strong acquisitions. I have great faith in the team spirit of the Eimskip group and know that we have the capacity to achieve good results and increase shareholder value in the coming years.
Board of Directors
MARC JASON SMERNOFF
ALTERNATE MEMBER OF THE BOARD
Marc was born in 1973 and lives in the United States. He is the Executive Vice President, Chief Financial Officer and Chief Administrative Officer of Americold Realty Trust. From 2004 to 2014 he was Director of Private Equity of The Yucaipa Companies. Marc was Manager of Transaction Services at KPMG from 2003 to 2004 and an Associate of Investment Banking at Wells Fargo Securities, LLC from 2000 to 2002. He was Manager of Corporate Finance at Ernst & Young, LLP from 1997 to 2000 and a staff Accountant of Assurance & Advisory Business Services at Ernst & Young, LLP from 1995 to 1997. He has previously been a Board member of Eimskipafélag Íslands hf., Digital On-Demand Inc., La Canada Flintridge Educational Foundation and Americold Realty Trust (board of Trustees). Marc has a Master’s degree in Business Administration from the UCLA Anderson School of Management in 2005 and is a Certified Public Accountant. He furthermore holds a Bachelor’s degree in Business Economics from the University of California, Santa Barbara, which he took in 1995. Marc has been on the Board of Directors since 23 September 2009. He does not own shares in the Company but is not independent of Yucaipa Funds, which own in total 50.6 million shares in the Company.