IMSK - Preliminary results 2008

The I.M. Skaugen Group (IMSK) reported a net pre-tax profit of USD9 million in 2008 (USD 20.5 million in 2007). The result on an EBITDA basis was USD50.2 million in 2008 (USD 40.2 million in 2007). However the 4Q08 results itself is not acceptable as much of our operations were affected by the financial crisis, both directly and indirectly. We achieved a net pre-tax loss of USD12.8 million in 4Q08 (USD1.9 million in 4Q07). The result on an EBITDA basis was USD3.4 million in 4Q08 (USD7.2 million in 4Q07).

 

For 4Q most notably the increased idle time in our operations were a result of cancellations of nominations by many our major customers in Norgas and thus increased idle time that affected the results. We also have had write-downs of USD3.5 million on the value of financial assets due to the side effects of the financial crisis and we have reserved for potential losses on sales of three ships to be built by SMC.

 

In the first three quarters the Norgas results were driven by high fleet utilization on the back of strong exports out of the Middle East to Asia and Europe. The underlying driver was an advantage in feedstock prices and strong demand based on a strong growth in the global economy. We experienced an increased demand in ton miles due to long haul business arising from a structural shift in the petchem industry. Producers with strategic access to cheaper feedstock like Ethane will be able to provide favorably priced petchem products to markets such as Europe, South East Asia and possibly the US The utilization level contributed to accelerated earnings throughout the first 3 quarters of the year.

 

In the last quarter of the year, the negative global financial situation affected the petrochemical industry, and subsequently the utilization of the Norgas fleet. The demand for most derivates fell substantially in Q4 due to very rapid "destocking" process further enhanced by the dramatic fall in crude oil, naphta and petchem product prices. The steep decline in prices made most downstream producers and traders fearful of holding any inventory as the asset values declines. In addition there were challenges related to trade finance issues. In this period our key customers cancelled many nominations and orders, and less volume than anticipated was exported under our COA-contracts.

 

The financial turmoil has led to an accelerated production capacity shut down throughout the petrochemical industry, but only in "high cost regions" - such as Europe and USA. A lot of new petrochemical and refinery projects are cancelled or delayed indefinitely and most of these, if not all, are outside the North Africa/Middle East regions where all projects are still firmly planned for execution. This accelerated capacity shut - down process will probably help to drive the migration of the business more rapidly to the lower cost regions like the North Africa / Middle East regions; the process that we have advocated and built our strategy upon.

 

Skaugen China Holding, our China-based activities (our businesses in China are now organized under this legal entity).

 

Skaugen Marine Construction (SMC), our shipbuilding organization, has in 2008 made a proof of concept by completing the "build and sell" program of the 3 Summergas ships of which two out of three were sold in 2008 (one sold in 2007). The ships so far sold achieved acceptable returns. With the ships now under construction we have experienced cost increases (on the Wintergas and Multigas - series). The shipbuilding activities in China are susceptible to price changes of components, labor as well as fluctuations in exchange rates. Our situation mirrors many shipyards in this area; they all suffer from the same issues that we are struggling with on cost. For our case the main problems we have encountered stems from the engineering and the design process. The delays have caused delays in purchases and made us suffer from the rapid cost increases in this industry. Due to the cost escalations, USD4.3 million has been recorded as potential loss related to the sale/ leaseback contracts for the three ships in the Wintergas - series.

 

However, we believe that the "cost curve" has peaked, and that we now see possibilities of some reduced costs overall related to both "hardware" and "software". In line with the other companies in the IMSK group, SMC has focus on all cost items including reopening talks with suppliers.

 

Shenghui Gas & Chemical Systems is an integral part of our new building program. When I.M. Skaugen bought 50% of the company, we also saw the growth potential in the company in addition to being an essential part of our new ship construction activities. Revenues have increased more than six times and EBIT has increased almost trebled since 2006. The company has during 2008, on 100% basis, shown significant financial progress with a turnover of USD55 million in 2008 (increase of 76 % from 2007), on the back of production capacity increases. Net profit for 2008 was USD5 million (USD3.6 million in 2007).

 

During 2008 we have carried out a turn around process in SPT, which has improved financial performance substantially. The pillars of the transformation process has been to achieve better profitability on our contracts, implementation of a global marine support service incl. LNG related projects, and cost reductions throughout the organization.

 

IMSK share at Oslo Stock Exchange The IMSK share on the Oslo stock exchange will finish the year down about 37%. We would like to highlight that our stock has performed better than the indexes and our peers:   Enskilda Nordic Shipping               : -55,1% Enskilda Norway Shipping             : -60,6% OSE Transport Index                       :-61,2%   The same trend was in 4Q08, where IMSK closed 10% down, compared with:   Enskilda Nordic Shipping               : -36,4% Enskilda Norway Shipping             : -35,6% OSE Transport Index                       :-31,3%   Outlook The "visibility" for the macro economic environment for 2009 in general, and the business environment in special, are however quite "low" and for many of our businesses we are in "unchartered territory". Under these circumstances we have decided the following proactive measures to safeguard our financial performance;   Not to pay any dividends for year 2008 in the spring of 2009. The Board considers this a temporary suspension of our dividend policy based solely on the macroeconomic outlook that we consider unclear. Implement cost reduction programs throughout the organization in order to roll back to the greatest extent possible the last years increases in OPEX and administration costs. Reduce capital expenditures (CAPEX) where possible.   IMSK has a business based on high contract coverage with the most reputable customers that we have serviced for many years. We have a fully financed new building program at Norgas, and we have SPT that is "back on track" again with profitable performance and Shenghui is growing in profitable segments. Norgas has contracts with the most efficient companies in the most competitive regions in the world. Norgas is the preferred petrochemical transportation partner in the Middle East-region, and Norgas increased the contract coverage in this region also in 4Q - at acceptable rates. We see cargo nominations increasing in 1Q09 vs. 4Q08 for Norgas and thus we enter the year with a somewhat better outlook with less idle time for the company.   To reduce refinancing risk in 2009, IMSK has also during 2008 bought back a total amount USD55 million in IMSK03 (maturity June 2009), and completed a new Bond Issue IMSK05 (maturity Sept 2011). As a result of this the total amount of debt due in 2009 for IMSK is now only USD13 million and we have sufficient liquidity to repay this amount.   IMSK has a solid contract coverage for 2009 and we estimate that about 70% of our revenue base is covered with contracts, and as such we feel that the uncertainty for 2009 is reduced. We are working to secure even more coverage and have efforts to secure or improve margin of these contracts.   At time of publishing we see that the 1Q09 will be better in performance compared to 4Q08 for IMSK.   I.M. Skaugen SE Board of Directors   If you have any questions, please contact: Bente Flø, Chief Financial Officer, on telephone +47 23 12 03 30/+47 91 64 56 08 or by e-mail: bente.flo@skaugen.com. This press release is also available on the Internet at our website: http://www.skaugen.com.     Listed on the Oslo Stock Exchange under the ticker code IMSK, I.M. Skaugen SE (IMS) - is a marine transportation service company engaged in the hassle-free transportation of petrochemical gases LPG and LNG, marine transfer of crude oil and LNG, and the design and construction of smaller and specialised high quality vessels.   We are a fully integrated shipping company that designs, builds, owns, mans and manages our own ships. IMS customers are major international companies in the oil and petrochemical industry, whom we serve worldwide from our presence in Bahrain, Freeport and Houston (USA), Oslo and Stavanger (Norway), Singapore, Sunderland (UK) and Nanjing, Shanghai, Taizhou, Zhangjiagang and Wuhan (China). We also operate recruitment and training programmes in St. Petersburg (Russia) and Wuhan (China) for the crewing of vessels.   IMS employs approximately 1,700 people and currently operates about 35 vessels worldwide. The fleet comprises petrochemical gas and LPG carriers, Aframax tankers and lightering support vessels, barges and tugs.   We have a comprehensive newbuilding programme in China, of which three 3,200cbm LPG vessels are delivered and sold; three purpose-designed combination carriers with LPG/Ethylene/VCM and Organic chemicals carrying capability; and up to ten advanced 10,000-12,000cbm LNG/ LPG/Ethylene gas carriers, with delivery from 2009 and onwards. IMS has invested and built up internal resources and infrastructure in China to ensure innovative and flexible vessels at lower cost. During 2008 we also completed our latest fleet renewal programme for SPT, with the delivery of six new purpose-designed and -built Aframax tankers on a long-term bareboat charter.