Braemar Plc (BMS) Earnings Call Transcript & Summary

Good morning, and welcome to Braemar Plc Half Year Results Investor Presentation for the 6 months ended 31st of August 2022. [Operator Instructions]. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Nick Stone, CFO. Good morning.

Thank you very much, Paul. First thing, just to say to everybody, and thank you for joining us. James Gundy sends his apologies. He's currently in Australia. We've had a great couple of years down there in the Dry Cargo market. And James is on a long overdue trip to go and visit the offices there and meet-and-greet some of the clients and employees that we've got. So Tris and myself will take you through the presentation. And as Paul says, we'll do our best to answer the questions at the end. Moving on then. Just our introduction for the year. Our results, as you have seen, are very strong and significantly ahead of our original expectations. We've had revenue and fixture volumes growing, and we've seen profits doubled. We'll talk a little bit about the reasons for that on the coming slides. But the success is in many ways due to the focus on our core strengths in the business. As you know, the business has been simplified. We carried out a number of diversifications over the last couple of years and now have a very clear strategy based around the ship broking core of the business. And in doing that, we've increased our scale in this area. We've increased our global reach and some elements of diversification within this call. In addition, we have rebranded during this period just to ensure that we have a very clear delineation between what was before and what is now. So trading results then, revenue was up 46%, underlying operating profit up by 0.96%. And much of a focus over the last couple of years has also been on strengthening the balance sheet, and it's very good to see that in bank terms, we have net cash at the end of the period to just under GBP 2 million. And this compares to a net bank debt of around GBP 20 million, 18 months previously. We're continuing to increase our transaction volumes. And although we have a strong market in the sense of the shipping markets and also a strong tailwind in terms of foreign exchange. Our -- the great majority of our revenue is owned in U.S. dollars. And therefore, in sterling terms, we've got some benefit from that. Nevertheless, the growth in terms of revenue in dollar terms, so stripping out the foreign exchange is 36%. So 10 out of that 46 is what has come from the foreign exchange impact. We will also -- you'll see on the coming slides, very strong operating cash flow in the period and we've continued to operate a progressive dividend policy. And in fact, the dividend has doubled from the last half year from 2p to 4p. So the financial summary then, just a bit more color on some of these numbers. Revenue for the period GBP 69.4 million sterling, up 46% from the 47% the year before. Underlying operating profit of GBP 10.9 million, up 95% from the 5.6% the period before. And in previous years, we've had some significant differences between underlying operating profit and our reported statutory profit. You'll see that the statutory profit is only GBP 400,000 lower than the underlying operating profit, the difference being the charge to the income statement and certain acquisition-related items, including the acquisitions of Naves, which is now our Corporate Finance business and Braemar Atlantic, which is at the core of our securities business and it's trading very strongly. Reported profit up by 114% in the period. I mentioned operating cash flow in the period GBP 12.3 million compared to the operating profit of GBP 10.9 million up by well over 200% in the period before where it was only GBP 3.8 million. Dividend we covered doubled and if you look at the market expectations for dividend for the full year, you will see that it's expected to be about 12p for the full year. So moving to the more traditional 1/3, 2/3 split between interim and final. Last year, the full year comparison was 9p. Net bank debt now, in fact, cash, GBP 1.8 million the previous balance sheet was at GBP 9.3 of net debt. Forward order book is another one of the KPIs we look at very carefully, $55.5 million which is up from 50% at the period end. And the forward order book is revenue that we have secured in terms of contractual obligations, but not yet recognized because the revenue recognition point hasn't yet arrived. I mentioned just now that the forward order book is one of the key performance indicators we monitor. You can see the others on this next chart. Revenue and revenue per head is in dollar terms. So you can see the strong growth even without the benefits of the foreign exchange tailwind. You can see that our underlying operating profit margin is growing at the same time. The forward order book, although it was about the same, the 12 months previously has grown since the last year-end and is moving in a positive direction, as you can see from the chart. Now the next one is the total leverage ratio that we measure on an annual basis. And whilst there was net cash at the end of the period through -- we do have some seasonal debt when we pay bonuses and the ratio was under [ 1:0.5 ] of EBITDA. What we had said previously is that we'd start paying a dividend again once the annual average was below 1.5x. So very comfortable to know that for the period. We'll, then move on, and Tris will talk a little bit about what's going on operationally in the various depths.

Thanks, Nick. So looking at the pie chart for the first half of this year, I think it would be good for you to have a little bit of color on what the actual revenue growth has been in new sectors in sterling terms. And you can see the diversity of the business there on the pie chart but I think something that obviously is working very well in Braemar is that we're still able to deliver positive revenue gains after such a good year last year and first half of this year. So just to break down some numbers, sale and purchase in sterling terms, we've seen a 36% increase year-on-year for the first half of this year. Deep Sea Tankers is up over 90%, Specialized Tankers in excess of 55%. Offshore Energy Services, up 10%, Dry Cargo at 61%, Securities is 47%. The earnings is set to the type of behind adherence is probably as a result of dual fruition, which we expect to happen in the second half of this year is corporate finance is down considerably. Just to give you a little bit of detail of what's going on in those individual sectors. I think the sale and purchase remains very active still, we see a lot of activity in the secondhand market. There are still some big asset plays going on in ownership. I think, obviously, most recently, in the last few months with the pending sanctions coming on to transport Russian oil products, we're seeing a repositioning of ownership of various fleets ahead of that change. I think we still see the secondhand market being particularly busy because the new build availability yard shortages is switching that asset play into the secondhand market. And we expect that to continue moving forward. Deep Sea Tankers rates have gone from over a year ago, being in negative territory to at the height of the Russia-Ukraine crisis in the Baltic. Rate has been in excess of $300,000 a day. It did normalize somewhat to below $100,000 at some time but I think, again, with the impending squeeze that's happening on the sanctions that are going to impose as of December 5, again, a real move of a lot of products and the limited supply ships out there, which the -- net result of that is some of the rates pushing back into the $200,000 a day. I think also of note here, aside from the knock-on effects of the Russia-Ukraine crisis, U.S. Gulf to China rates on VLCCs and backing up around $14.5 million a day. And another area of extreme activity and high rates is the U.S. down to the Caribbean. Specialized Tankers, LNG and LPG again, not long ton miles being been achieved by our desks. Obviously, LNG in particular, because of the ongoing shortages of gas. You're seeing rates that have moved from being down at $20,000 a day back up to an excess of $300,000, $400,000 a day. And I mean, again, a restricted supply of vessels means that in the short term, we're not expecting that to change. I think an interesting example of the diversity that we have in the businesses are Dry Cargo and [indiscernible]. If you look at last year, it was all about capes and some of our larger vessel sizes. We saw extreme volatility in that space with rates peaked up at $85,000 a day on capes to falling below $10,000 a day. We still achieved plus 60% revenue growth in Dry Cargo. I think that's a good reflection of the diversity that we now have from our scale compared to other brokers. And Nick briefly touched on it, but we've been very active in Australia and Asia on the smaller vessel sizes, particularly handymaxes, which I think you've seen switch year-on-year of last year in Dry Cargo, the long runs, et cetera, from Brazil to China, we're keeping this very busy, but now obviously very busy in Australia and Asia. Securities, we have continued growth in revenue. Our JV, GFI is nearly 20 years old. The desk still goes from straight to strength, producing record revenue numbers month-on-month. Again, attributable to extreme high volatility in that space, longer tenure of transaction taking place, the drive of a debt that we invested in 4 years ago, continues to grow. [ Event ] strength is larger than that with many new growth coming in. We invested in technology, which has continued to enable us to grab market share. So even with rates fall in the natural that Dry Cargo sector, our actual transaction growth is increasing. Likewise, we've seen a real pickup in the activity for our physical coal business, which forges in Security sector. Again, security supply in Europe, in particular, and the niche that we have in that space has meant that we've been very active on physical deliveries and [indiscernible] which is doing good. So moving forward, we generally expect the activity that we have in Tankers, S&P, Dry Cargo, Securities, all of our departments are ready to continue in the foreseeable future. I think that's as a result of a number of factors in that the shipping market seems to be in a period of flux in the post COVID, Russia-Ukraine, we are seeing a redraw of the great global trade groups that shipping is using. We're being forced to have more active spot markets and more thought to try and secure supply moving forward. I think that pre-COVID across a lot of the different sectors that we deal in, we have [indiscernible], what I would call virtual pipelines existed where chips were on long-term charter. It was very hard to sort of to break into that space and to be such a necessity spot transaction. I think given the changes that we have seen post COVID and Russia-Ukraine that generally, we're seeing people having to find different ways of moving products around, which means that there's a readjusting position in many different sectors, and we expect to see that continue. I think moving further ahead as of 2024, we're going to see shipping fall into the EU ETS. I think we'll see continued regulation come into our space. Shipping really has had a bit of a pushback on which direction was the chain to take in [indiscernible], new orders and choosing their propulsion systems that they want to use. So I think if in the next year or 2, we could perhaps see some normalizing as a result, hopefully, Russia-Ukraine perhaps coming to an end and or COVID, post-COVID things normalize somewhat. I think shipping has an impending deleverage and the regulatory changes from environmental pressure are going to force change on the supply of what we transport products around them. Just briefly touching on Securities. We have invested heavily in Dry Cargo in the past number of years. I'm sure, some of you have seen that most recently, we've divested a little bit in some natural gas. We have the opportunity to take a team of 10 brokers, which very much fits with our profile of seeing the synergies from products that we're transporting and the overlap and ability for us to diversify somewhat into the underlying products that we're actually carrying on the ships that were charging for people. Nat gas is a very obvious products for us to get involved in. We saw the synergies between coal and dry [indiscernible] and Dry Cargo department. And we're certainly in the setup of the nat gas sets, we're already seeing synergies between that and our LNG chartering debt which as you can see that we've increased revenues a total of -- overall revenue from 3% in '18, '19 to 12% in '22, '23, which I think we'll be able to return single-digit growth over the next few years for sure, maybe not double digit, but it depends on what other products we get involved in. So opportunities for growth. I think we -- the most obvious areas that we have grown and continuing to see opportunity grow in Europe. We opened an office in Geneva 3 years ago. I mean, the addition of that clean Tanker business in Geneva has certainly contributed massively to the Tanker revenues that we've just been talking about. Since opening the office, we've been able to put more people from Dry Cargo into that space. We're now going to move to people to sale and purchase in to that area. We're also looking at the opportunities that we may have to transfer some of our derivative business to Geneva. We also opened an office in Athens, which initially was an outpost sort of purchase. We've since diversified into Containers and Dry Cargo. And I think these are all sort of showing that once we move a team into a new geographical area, generally, we have a follow-through from our other sectors, one obviously going to be there seeing an opportunity based on the clients that are in that space at the moment. I think another good example of this is in the Middle East, which initially post COVID, there's a bit of a shift from the Middle East to Singapore. I think we're now seeing possibly as a result of the Russia-Ukraine crisis that we moved back to the Middle East. A lot of our competitors and our customers are certainly increasing the number of personnel that they have in Dubai and other areas in the Middle East. That's probably as a result of the repositioning of ownership that we were talking about earlier as a result of Russia-Ukraine. And also the general perception that any new refining capacity that's going to come to the market in the next 3 to 5 years, a considerable portion of that will come from the Middle East. So it's seen as a real area of growth, which obviously, we look to capitalize on. Real -- another sort of opportunity for us moving forward in North America, I briefly touched earlier on how busy the U.S. Gulf and whether that's U.S. Gulf to China and/or U.S. Gulf down in Caribbean, very busy space at the moment on all vessel sizes. We have been able to successfully start the team of specialized brokers in Houston. It's very much an area that we want to focus on and continue to grow. We're actively speaking to people. And we hope in the next year to formalize some partnerships and our acquisitions that will enable us to grow that business in North America. So I think in summary, moving forward, we still see huge opportunities in all of the sectors that we're in. I think that we've reached the size where we have that scale as we were talking about earlier in the Dry Cargo market, we still -- if 1 sector was very good for us a year ago on the large vessel sizes because of that diversity now we're able to have substantial induces of revenue from other sectors and the Dry Cargo. We do foresee rates in most of the sectors that we deal in, remaining high over the next 12 to 24 months. We've briefly talked about the remaking of trade routes and certainly with the complicated sanction structure that we're going to have to navigate over the next few months. We see that as a positive for our business. Again, a knock-on effect is the growth in ton miles which I haven't really sort of touched on that too much so far. But I mentioned environmental changes and the confusion over likely fuel for propulsion. I think the general perception is that in the short-term, we will see slow steaming and that's something which could be beneficial to us as brokers with vessels on time charter. New build capacity we touched on, still very, very low with minimal shipyard capacity for new builds up until 2025. That's not changing. And again, ESG is -- will be closing chains on [indiscernible] moving forward.

So then -- thanks, Tris. What does this mean for the outlook for Braemar. Clearly, the story that you've heard and the messages we're trying to give, the current year is looking very positive for us. And we expect that training will continue to exceed our original expectations for the year. During this period, we've invested in more internal resources, some in support infrastructure as well as bringing in new brokers and new teams because we recognize that if Braemar is to grow over the coming years, we need to make sure that the team is fit for purpose for that growth. We've made no secret of our target to double the underlying operating profit of the business. That was first put out there in October '21, so just over a year ago. And what that looks like is an underlying operating profit of GBP 18 million. Now if you see the forecast for the business for the current year, and they are available on our website from forecast from Sancos and from Edison. You'll see that they actually are forecasting more like GBP 20 million for the current year. But from our point of view, we do have a strong benefit of the foreign exchange impact on current year's results. We've estimated that at around GBP 5 million of the profit. And therefore, when looking at this from a like-for-like basis, we would measure ourselves assuming that's what we deliver at around GBP 15 million rather than GBP 20 million. So GBP 15 million compared to the target of GBP 18 over a 4-year period is obviously still very strong progress. But we -- as I say, we're looking to do this on a like-for-like basis, and therefore, won't quite have achieved our goal yet. Free of bank debt for the moment, I mean Tris has talked about our ambitions to grow. And you might also have seen in our statement that we renewed our banking facilities with HSBC. HSBC have been very supportive over the recent years, particularly through COVID and we're very pleased to have been able to renew our facilities, which does give us the ability to spend some cash on bringing new teams or small acquisitions in. So it doesn't necessarily mean we'll be free of bank debt over the coming years, but we're clearly going to manage it very carefully and make sure it never goes to the sort of leverage ratios that we had 2 or 3 years ago. We are, as we said, continuing to achieve fixture volume growth. So yes, the markets are strong. The foreign exchange is supportive, but we're also growing the volumes of business we do underlying that. Our new brands, and you may have seen that Braemar Shipping Services Plc has now become Braemar Plc which sort of reinforces the change in the strategy and the focus on the core. In terms of, therefore, where the business is looking at, we continue to grow the team. We have a very experienced team, James isn't here with us. But if you have heard him in these presentations before, has been a leading ship broker for many years and is leading the team by example, and continuing to broke and it's very supportive of bringing in additional broking resources. Our sectorial diversification within ship broking, and you can see from what Tris told you earlier, pretty much all the markets have grown across the last 6 months and therefore, we are in a particularly strong position but the diversification across those markets will help when inevitably wanting to might have a sort of downturn in terms of performance. Our performance, therefore, through the business cycle will benefit from that diversification. And our stronger balance sheet will enable further growth and potentially some M&A as we go forward. There are some other slides in the appendix. If you look at our website, we published some data on the shipping markets. We don't necessarily plan to go through those, but are now therefore ready to take your questions.

Fantastic. Thank you very much indeed for the presentation. [Operator Instructions] I'd like to remind you that recording of the presentation, along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. Nick and Tris, you can see we've had a number of questions come through from investors today. If I may, just ask you just to click on that Q&A as it is more appropriate to do so, just read out the question and give your response, and I'll pick up from you at the end.

Okay. Well, I've got one to my right here. So the first one is around use of cash, which I will answer. The second one, it's around how technology is impacting the business, which I'll then encourage Tris to answer afterwards. So the question around use of cash is our strategy for more deals. And by that, I assume sort of M&A or team deals or distributions. And I think what we do plan to do is to do a bit of both. We touched on earlier that we will keep our dividend moving forward. I think if you look at the expectations for next year within the analyst forecast, you will see that there's a roughly 3x cover between our earnings and our dividend, and I think that's something you might therefore expect to see maintained going forward. But clearly, we -- the business does generate significant cash when everything is going well. And therefore, we're in a strong position to be able to use that to bring teams in. Tris has mentioned one that we've already achieved, and there are others that we are looking at as well as sort of small bolt-on M&A deals. So this is, as I hope is clear, a growth story. But one that is supported by a sensible dividend strategy at the same time. Tris, the next one was how is technology investment impacting the business?

Yes. So I think for us specifically as a company, we have obviously a different approach to Clarksons. Clarksons operate to some extent as a technology business within a ship broker. They're trying to -- they have successfully grown new revenue streams by providing software to the shipping market. That's not something that we want to do. We try to form strategic partnerships with other businesses, other technology providers. We don't see us as being a creator of technology. And I think sort of a good example of that is obviously we formed partnerships with different technologies who were able to deliver a successful trading and data platform for our Dry Cargo team, which is certainly reap benefits and being a successful partnership to date and will continue to be. So I think with the rest of our charter invests, we look to find solutions that will improve their workflow and basically just keep them at the head of the pack in the forest, the value added that they can -- they have as brokers and that we're not getting that behind by other technology disruptors in our space. I don't think we see technology at the moment as a potential threat to the way that we execute business. But I think, obviously, with the -- this huge [indiscernible] plus of transactional data that we have frames us in a very good position to provide that value added. It's just having the right platform to our brokers to access it and making sure that the other technology challenges out there are not going to -- are not going to have that edge that we have from that kind of transaction data, but it's not something that we're -- we don't have huge budgets to spend on technology. It's very much -- we look to enhance our business rather than diversified to becoming a technology business.

The next question is around speeding up our growth opportunities and how I'm interpreting it is are we constrained by people or capital? I'll give my thoughts first and then let Tris answer it. I mean, this business is all around people. And in order to grow the business in a way that we are setting our stall out to new, which is new teams, bolt-on acquisitions. It's more about finding the right people and the right acquisitions than needing a significant additional capital. And I think that's also reinforced by Tris's answer to the last question around technology investment.

Yes. And I think just sort of I think what Nick is saying. I think when we're looking at acquisitions, we worked a fairly tight formula of what we're comfortable with. And we certainly would be -- we only look to acquire or whether it's businesses or teams, they're going to have a direct impact on our bottom line from the completion.

Next question is, will Braemar be affected by the Russian sanctions and how the sanctions also the spot freight market in 2023? I think part of the message we've been giving over this last period is that the sanctions have increased the ton miles in the markets in a number of sectors. And therefore, increase the demand and reduce the supply of available ships. So it clearly is, at the moment, having a benefit -- beneficial impact. The spot freight market in 2023, I guess it rather depends on what happens.