Board of Directors Report
Imarex ASA (“Imarex”) is a public limited liability company incorporated and domiciled in Oslo, Norway. Imarex’s shares are listed on the Oslo Stock Exchange.
Over the last two years, Imarex has put significant efforts into a thorough review of the company’s strategic opportunities. On 22 March 2011, Imarex announced the sale of its wholly owned subsidiary Spectron Group Ltd. to Marex Group Ltd. for a cash consideration of approximately GBP 95 million. Spectron constituted Imarex's OTC segment and is one of the world's largest energy intermediaries. The freight broker desk, formerly operated as the International Maritime Exchange, was part of the sold unit. The sale was completed on 13 May 2011.
Furthermore, Imarex announced on 17 February 2011 that it had entered into an agreement to sell its market analysis business Nena, for a total consideration of approximately NOK 14 million. The sale was completed on 31 March 2011.
Imarex’ core business after the sale of Spectron is the clearing of freight and seafood derivatives through NOS Clearing ASA (NOS). NOS is the leading provider of clearing services to the freight industry and the only clearing provider in the seafood market. Within seafood, Imarex also owns Kontali Analyse, a leading global fishery and aquaculture analysis company, and the seafood exchange Fish Pool (41% ownership). Imarex is strategically well positioned with a highly scalable business platform.
The clearing house is located in Oslo. Kontali is located in Kristiansund and Fish Pool in Bergen.
Business in 2011
2011 was a year of big change for Imarex. Throughout 2010 and 2011, Imarex put significant efforts into a restructuring and thorough review of the company’s strategic opportunities. Both processes led to considerable changes within the Group.
Focus in 2010 was to sharpen the operations within two core business areas - the OTC and Clearing segments and to streamline these segments and downsize the corporate headquarter. These processes were implemented successfully and the streamlined organisation started to yield improved operational efficiency and better financial results in the last part of 2010. The refocused OTC segment quickly attracted interest from other players in the market and Imarex decided to divest Spectron in March 2011.
The clearing house, NOS, strengthened its leading position in the freight market through 2011. However, the markets NOS operates in were challenging. The physical freight market experienced a difficult year with low prices and oversupply in important segments. Total market volumes in the freight derivatives market were somewhat reduced from 2010 to 2011. Despite a reduction in market volumes, NOS increased volumes both in dry bulk and tanker and thereby grew the overall market shares. The market for seafood derivatives, having a “breakthrough” year in 2010 experienced further growth in 2011.NOS launched new markets in 2010 for Swedish el-certificates and iron-ore and both of these markets had growth in 2011, although still at low volumes. Towards the end of 2011, NOS launched a clearing service for OTC foreign exchange contracts. Through the clearing service, NOS’ members have access to one of the world’s major liquidity pools to trade various foreign exchange contracts electronically. The first trades were executed in the fourth quarter of 2011.
Kontali consolidated its position in fundamental market analyses on aquaculture and fisheries in 2011 and performed in line with 2010.
Significant Events after the balance sheet date
There have not been any significant events after the balance sheet date.
Outlook
Imarex’s main markets, freight and seafood, are historically cyclical and volatile. Over time we expect the underlying physical markets to return to balance with increased hedging and trading in financial contracts, but it is difficult to estimate when the markets will pick up.
NOS has a dominant position within the market for clearing of freight derivatives. This market is still characterised by high competition and the business level reflects the challenging period in the underlying physical freight markets. Continued growth in demand, in particular for iron-ore and coal from the Far East, is expected to contribute to balance in the dry segment, but the picture is mixed in the tanker market due to the current overcapacity. Despite this, tanker FFA volumes are expected to remain relatively stable for the year.
NOS and Fish Pool are well positioned to benefit when volumes in the salmon market increase from their current low levels. Still only a fraction of the underlying physical salmon market is traded financially. Imarex remains confident that this market will grow significantly in the long term, while the short term development is uncertain.
NOS had the initial launch of the clearing service for OTC foreign exchange trading at the end of 2011. This is the first such offering in Europe. NOS is co-operating with, and obtaining liquidity from, a major global bank for this service which is offered to existing and new clearing members of NOS. The first trades were executed in Q4 2011.
Imarex continues to monitor regulatory developments, most recently EUs proposals for “EMIR”, “MiFID II” and “MiFIR” as well as the “Dodd-Frank Act” in the USA. Imarex’s general view is that the future regulatory landscape will favour standardisation and clearing, but the impact on the industry and overall business level remains uncertain.
Imarex continues to evaluate strategic opportunities and will consider pursuing those that can create shareholder value.
Risks
Market risks
Future results will depend on transaction volumes in the market and the Group’s market share. Transaction volumes have historically varied significantly from month to month and quarter to quarter, depending on sentiments and volatility in the underlying markets. The Group’s income is also exposed to future prices in the maritime freight derivatives markets, as a portion of the fees are determined as a percentage of the underlying contract value.
While the Board of Directors believes that the Group’s income will grow over time, variations should be expected between reporting periods. The clearing business of NOS is scalable and can grow volumes with limited growth in expenses, while it has limited potential for further cost reductions if volume decrease. The Group competes in a global market and future income will therefore also depend on its continued ability to compete effectively. Imarex believes the structure of certain derivatives markets will change and is actively seeking to monitor and participate in such processes.
As mentioned above, the global regulatory developments in the industry create uncertainty forward. Imarex’s general view is that the future regulatory landscape will favour standardisation and clearing, but the impact on the industry and overall business level remains uncertain.
Foreign exchange rate risks
The Group’s functional and reporting currency is Norwegian kroner (NOK), while significant parts of both revenues and expenses are nominated in foreign currencies - mainly the US dollar (USD) - and are exposed to risks associated with changes in foreign exchange rates. The Group has a further exposure to pound sterling (GBP), as GBP 3 million of the proceeds from the Spectron sale is held in escrow until 31 March 2013. From time to time, the Group enters into foreign exchange contracts to mitigate parts of its exposure to foreign currency exchange rate fluctuations, but have no such instruments at the end of 2011. At the end of 2011, the Group held around 96 % of its consolidated cash and cash equivalents in NOK. Please refer to note 24 of the financial statements for further details.
Interest Rate Risk
The Group held approximately NOK 426 million in cash and cash deposits at the end of 2011 and no interest bearing debt. All cash is held in various bank deposits while cash equivalents is short-term, highly liquid money market and covered bond funds that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Both are at a floating rate or fixed interest rates with interest fixing up to twelve months. The cash and cash equivalents are held mainly in NOK. Interest cost on interest bearing debt in 2011 was NOK 3.0 million.
Credit and Counterparty Risk
The Group has deposits in different banks and is exposed to losses if the banks should be unable to fulfil their payment obligations.
The Group is exposed to credit risks related to the clearing business in NOS. This risk is managed by strict membership criteria and margin deposits made by the members to cover margin requirements for the open positions each individual member has with NOS Clearing ASA.
NOS serves as a counterparty/guarantor in contracts associated with significant risk. To manage this risk, the company estimates the value of investor portfolios under different price scenarios. Based upon these analyses, investors are required to put forward security in the form of cash or bank guarantees. The margin required is estimated on a continuous basis, and accounts are controlled on a daily basis.
MF Global UK Limited, a General Clearing Member with NOS, was taken under administration by the UK FSA on 31 October. On the same day, MF Global Holdings Ltd. filed for Chapter 11 protection under the US Bankruptcy Code. NOS declared MF Global UK Limited to be in default on 1 November. MF Global UK Limited had only client positions with NOS and all positions were successfully transferred to other General Clearing Members or closed down. NOS did not incur any losses as a result of the default.
Prior to this default, there has been no clearing member obligation default since 2004. NOS has never defaulted on its obligations towards its members.
The clearing fees are deducted from the members’ collateral, who are required to hold sufficient margins for the trades, and are then exchanged from USD to NOK at the prevailing exchange rate. Other income is invoiced directly to subscribers to research and information services. The company believes that the credit risk towards these parties is limited.
In January 2012, NOS entered into an insurance agreement against member defaults of up to USD 30 million, with a first loss retention of USD 40 million.
Liquidity risk
Imarex’s prudent capital management ensures that the Group holds sufficient capital to fund current and planned activity. It is also a primary objective of the Group’s management to ensure that it maintains a strong credit status and healthy capital returns in order to support its business, maximise shareholder value and support the Group’s strategy.
The Group’s capital structure management is naturally dependent on economic conditions, and the Group may return capital to shareholders or issue new shares. Following the Group’s restructuring and based on the new strategy the Company has a dividend policy that will result in annual dividends in the range of 50% of its distributable earnings. As a consequence of non-recurring items related to sale of Spectron and Nena in 2011, the distribution to shareholders in 2011 and 2012 is primarily driven by repayment of capital subsequent to these transactions.
The sale of Spectron allowed a substantial repayment of capital to Imarex’ shareholders and a distribution of NOK 38 per share (a total of NOK 568 million) was approved by the shareholders in the annual general meeting on 9 May 2011 and paid out subsequent to the lapse of the creditor notice period in the middle of July 2011.
The Group monitors its capital with a particular focus on the capital of the regulated clearing house NOS. NOS has satisfied all capital requirements as stated by law and by supervisory authorities through the reporting year. Externally imposed capital requirements are likely to change if the scope of activity should change significantly.
NOS’s equity at the end of 2011 stood at NOK 250 million. A total of NOK 267 million is held in cash and cash equivalents. Equity in NOS is incorporating a declared group contribution to other group companies of NOK 8.9 million.
Group cash and cash equivalents decreased from NOK 556 million at the end of 2010 to NOK 426 million at the end of 2011. Approximately NOK 2.8 million is restricted cash, mainly related to withheld tax deposits. Of the holding company’s cash of NOK 137 million, NOK 0.7 million is restricted.
As part of the Spectron transaction, Imarex has retained responsibility for general warranties that lapse 30 June 2012. The warranties are customary and cover matters such as assets, shares, leases, employees, IT and tax. Imarex has further agreed to keep 20 percent of the purchase price (i.e. approx. 19 million GBP) as free cash in the group during the warranty period. This amount is the cap for Imarex’s liability under the warranties. 3 million GBP of the retention amount is kept on an escrow account in the warranty period. To cover the SPA’s tax warranties, Imarex has agreed that these 3 million GBP held in escrow, shall be kept in the group until 31 March 2013.
Imarex has so far not received any claims under the warranties and the intention is to distribute an amount equal to the “released” cash subsequent to expiration of warranties 30 June 2012, see further details below.
The Group had no used or unused bank overdraft facility at 31 December 2011. The Group’s liquidity is considered to be good.
Please also refer to Notes 12, 24 and 25 for further information.
Financial Accounts
The annual accounts for 2011 have been prepared on the basis of a going concern. The assumption is based on the company’s financial status and forecasts for future income. The Board confirms that there is basis for continued operations.
The Group’s operating revenue from continued operations for 2011 was NOK 71.8 million, NOK 9.2 million down from the previous year.
Clearing experienced a decrease of revenues of NOK 4 million from 2010 despite increased volumes both in freight and seafood, caused by increased competition and reduced average clearing fees. The other main reason for reduced revenues for the Group were discontinued revenues from other businesses closed down during 2010.
Operating loss for 2011 was NOK 8.1 million, which was a significant improvement from a loss of NOK 118.4 million in 2010. Operating results in 2010 was negatively impacted by non-recurring items and restructuring provisions related to the reorganisation of the Group. The most significant item was non-cash goodwill impairments of NOK 88.9 million, while other elements included in continued operations were change of Group CEO and streamlining the corporate headquarters.
The restructuring of the Group was the main reason for significant cost reductions from 2010 to 2011. The Group continued its cost reduction programme during 2011 and reduced headcount further within continued operations. The result before tax was reduced by net financial losses of NOK 0.4 million in 2011, compared to financial losses of NOK 6.0 million in 2010. Result before tax was a loss of NOK 8.5 million, compared to a loss of NOK 124.3 million in 2010. The OTC segment and the market analysis business Nena were presented as discontinued operations from the beginning of the year 2011 and had a positive result contribution of NOK 124.0 million for the full year 2011, mainly caused by the Spectron sale in Q1.
The holding company Imarex ASA’s net profit for the year was NOK 80.3 million, compared to a loss of NOK 0.6 million in 2010. The strong result was caused by the profit on sale of Spectron of NOK 92.4 million. Total equity in Imarex ASA was NOK 435.8 million at 31 December 2011.
The market capitalisation excluding 150 000 treasury shares at the end of 2011 was NOK 257 million (2010: NOK 860 million before repayment of capital of NOK 568 million), whereas the Group equity was 559 million at the end of 2011, down from NOK 1 008 million in the previous year. The main reason for the reduction of book equity was repayment of capital of NOK 568 million subsequent to the Spectron sale, partly offset by comprehensive income of NOK 118 million. A market capitalisation below the equity book value is an indication of a possible impairment of goodwill and identified intangible assets. The group has conducted impairment tests for goodwill and identified no further impairment need beyond the impairments recognised in 2010.
The Group’s short-term liabilities at the end of 2011 were NOK 183 million, of which NOK 167 million is related to open interest in the clearing house.
Group cash and cash equivalents decreased from NOK 556 million at the end of 2010 to NOK 426 million at the end of 2011. The main reason for the NOK 129 million reduction in liquid funds, despite the strong net positive cash flow from sale of subsidiaries of NOK 629 million, was the repayment of capital to shareholders of NOK 568 million and repayment of interest bearing loan of NOK 189 million. The holding company held NOK 137 million in cash and cash equivalents.
Distribution of results in Imarex ASA;| The company’s accounts show a profit for the year of |
NOK 80 317 000 |
| The Board of Directors proposes the following allocation of the result: |
|
| Transfer to other equity | NOK 80 317 000 |
The Group’s result was a profit of NOK 118 million.
Imarex intention is to distribute the “released” cash upon expiration of the representations and warranties from the Spectron sale at 30 June 2012. The Board is therefore proposing to the annual general meeting a repayment of paid in capital of NOK 8 per share, totalling NOK 119,518,928. This is incorporated in the balance sheet of the parent company, Imarex ASA, at 31 December 2011 as a reduction of Paid in Capital and a current liability while this is not a liability as defined under IFRS and hence not incorporated in the group accounts. Free equity, adjusted for the proposed repayment of capital, as defined under the Norwegian Public Limited Liabilities Company Act is NOK 379.9 million.
The Board of Directors is of the opinion that the company’s equity post this distribution is sufficient to ensure ongoing operations and does not know of any other issues which could influence the assessment of the company. No issues that could influence the assessment of the company, except those mentioned in the section on significant events after the balance sheet date, have arisen after the end of the accounting period.
Research and development
The Group has developed software systems for clearing in the subsidiary NOS Clearing ASA. The software developed is used in the Group’s clearing operations. The total recognised amount related to development and licenses in the balance sheet statement at the end of 2011 is NOK 1.7 million, while nothing was incurred in 2011.
Working Environment
The working environment is considered to be good. The Group’s leave of absence due to illness totalled 446 days in 2011, which equals approximately 3,1% of the Group’s total working days. Leave of absence due to illness in the parent company totalled 146 days in 2011, which equals approximately 11,7% of the total working days in the parent company. No actions have been made which have an impact on the working environment.
The Board of Directors is of the opinion that the company’s work place environment is of a satisfactory standard and that the risks associated with the physical working environment at Imarex are minimal. No accidents or injuries occurred during the year.
The number of employees in the Group was by the end of 2011 reduced by 201 to 47 compared to the end of 2010.
Equal Opportunities
The Group aims to be an employer where all employees are treated equally regardless of gender, religion, ethnic background or nationality.
At the end of 2011, the holding company, Imarex ASA, had 5 employees, of which 3 are women. The Group had 47 employees, of which 36 % are women. Women are represented in most of the Group’s departments and the ratio between men and women will continue to be monitored. The Group has a policy of equal salary for equal work, implying that men and women will have the same salary in the same position, all other factors being equal.
Imarex seeks to balance the ratio between men and women within the overall organisation.
Imarex and its environment
The company’s activities do not pollute the external environment to any significant degree.
Board of Directors
In the Annual General Meeting 2011 the present Board of Directors was elected.
Helene Jebsen Anker, Ingrid E. Leisner and Per-Ola Baalerud are independent Directors.
Articles of Association
The company’s Articles of Association have not been amended in 2011.
Shareholder Issues
The company had a total of 431 shareholders as of 31 December 2011. The total number of shares outstanding was 15 089 866. The company owned 150 000 treasury shares. The shares are listed on Oslo Børs.
Report on corporate covernance
A separate report is issued discussing the principles and practices related to corporate governance. The report is disclosed on the company`s website (www.imarexgroup.com) under Investor Relations.
Oslo, 21 March 2012
The Board of Directors of Imarex ASA
Christian Due |
Helene Jebsen Anker |
David Shuler |
Per-Ola Baalerud |
Ingrid E. Leisner |
|
Geir Olsen |
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