Braemar Plc (BMS) Earnings Call Transcript & Summary

Welcome to the Braemar Interim Results Webinar. [Operator Instructions] This webinar is being recorded. I now hand over to James Gundy, CEO; and Grant Foley, CFO; and Tris Simmonds, COO, will join us for the Q&A as well. Over to you, James.

Good afternoon. Welcome to the half year results for Braemar. Obviously, myself is James and Grant, as said earlier. Thank you, Grant. We can move forward. So I'm hoping you know a bit about the business and what shipbroking does. If you haven't -- if you don't, then please ask us questions afterwards on the Q&A. So for us today, it's just giving you -- highlighting the first half results. You can see from the screen, it's $76 million compared to $74.9 million, slightly improvement on the revenue, highlighting very clearly that our diversification story and trying to create the business more immune towards cyclical movements is definitely proving correct. The underlying operating profit is $7.9 million, up from $7.6 once again, as we've mentioned to you that we're really pushing through the business there, what we're delivering. Net cash is GBP 3.3 million, up from GBP 3.1 billion. Please bearing in mind that we've been -- over the last couple of years, we bought businesses with our own present debt, and we've obviously proved those businesses are now enhanced in to the business and actually enhancing to what they were doing when they were sole brokers. The revenue per head is GBP 181, slightly down. But at the same time, as you can see, it's a very strong revenue per head from where we've been. Forward order book, GBP 80.9 million at 6 months. which is enhanced again from the 2024 previous year. I can safely say that's been increased again since that -- since the half year, since the 31st of August. Dividend, I'd say it's progressive. It's 4.5 interim, up 13%. Look, for those that know us and some of those that don't know us, when I came in as CEO in January '21, I had a very clear strategy to strip out the noncore businesses, sell those, reduce the debt, which at the time was GBP 20 million plus and concentrate on shipbroking and shipbroking enhancing business is basically part of our, as I say, diversification story. And on top of that, that complements its various desks. So -- and on top of that -- sorry, so from proving that, ourselves, we feel now that we can potentially move to another level, and we have potential pipeline deals that we are looking at. But I can assure you as a management team, we aim to do some of the complements the business that we feel that we will be enhancing for the business as well. The positive market drivers, very much we're believing in the shipping forward markets and all the various sectors I've been doing this since the '80s, and I've never really seen markets like what we've seen in the last 2 or 3 years and the drivers of what's happening today. Increasing scale is obviously, seriously important for us. So we have some 17 offices around the world, 1 in South Korea just opened recently. We now have a very strong footprint to increase that platform from where we are today. And as I mentioned earlier, we have very clearly stated our progressive dividend policy introduced in FY '22. Thank you. Over to Grant.

Thanks, James. So if we start with the income statement, revenue at GBP 76 million, 1% ahead of the previous period. Within that, investment advisory performed well, 19% to GBP 14.8 million, and that was really driven by our sale and purchase desk. Risk Advisory or Securities, and just as a reminder, our Securities business does not take balance sheet risk. We are an agency-only broker. Our Securities business continued its growth, up 16% to GBP 11.5 million, and that was really driven by our drive forward freight agreement or FFA desk as well as the Natural Gas desk, which we brought on board at the end of 2022. Offsetting this, chartering revenue was 5% lower, and that was really driven by tankers, although the acquisitions that we made with Southport Maritime and Madrid Shipping Advisors at the end of 2022 continued to perform well. Operating costs were up just 1%, and we can now see the operational leverage coming through. I've talked about that before, but we can see that underlying operational leverage coming through and operating profit before acquisition-related items, up 5% to GBP 7.9 million. We have a lower level of exceptional items in this period. So statutory profit before tax at GBP 3.6 million is GBP 1.7 million or 89% above the same period last year. Underlying earnings per share, 14.55p, 2.88p lower than the prior year, and that's just due to a higher tax charge in this period. We had deferred tax assets in last year's numbers. And as James has said, in line with our progressive dividend, we've declared an interim dividend of 4.5p. So as we saw, looking at the revenue mix, for the FY '24 full year results, the strategy of diversifying across shipbroking and Securities is building a more diversified business, which is delivering sustainable revenues and profits. And you can see that the first half, second half mix compared to last -- first half compared to last year broadly unchanged looking at the desks from a percentage standpoint. And again, geographically, you can see how the Southport acquisition in the U.S. now is contributing as well as Securities now at 15% of revenue. We had this chart at the full year as well, but it's an important chart to me because it really does show this diversification strategy coming through and how when one sector may be slightly weaker, we have that balanced business, which can offset that. So as I said, revenue has grown 1% to GBP 76 million, but with quite a different mix. That weaker charter room revenue, which is driven by tankers, what we've seen is average commission per fixture or voyage has increased, and that's really driven by some of the geopolitical events that we've seen where ships are taking longer routes. The Red Sea, they're not going through the Red Sea, so they're taking longer routes. that's driving up the average commission that we're earning per voyage, but we fixed a lower number. So the volume of fixtures was lower. This was offset by an improved performance in investment advisory, and that was really sale and purchase, where revenues grew by 25%. And we saw increased activity across new build and secondhand sales there. Corporate Finance remains subdued. As you know, a lot of our Corporate Finance business is raising debt and debt restructuring for shipowners. There's a lot of cash that owners are currently having. So there was less activity there, but we've got a few mandates that we expect to close in the second half and have a better revenue performance in the second half from our Corporate Finance business. As I said, Risk Advisory continues to grow, up 16% from the prior period, 15% of group revenues now, and that's double the revenue that we achieved in FY '22. So we continue to see very strong growth in the securities business. And since the strategy of focusing on shipbroking and Securities was implemented at the start of FY '22, revenues have increased from GBP 47.4 million to GBP 76 million in this half. So that's an increase of 60%. Total operating costs remain very well controlled, up just 1% from the prior period. Overall staff costs are up 2%, and that's really as we continue to invest in our staff. Travel and entertaining was lower in this period and professional fees were up by GBP 0.3 million, and that was as expected as we're working with our legal advisers to establish organized trading facilities or OTFs in the U.K. and in Europe and Madrid. And we believe that these -- once we establish these, we can see further growth in our Securities business. On liquidity, as James said, we maintained a positive cash position, up slightly from the previous period. We've repaid -- you can see the borrowings have reduced during the period. So we've repaid some of the debt. And it's worth remembering, as James highlighted, I was looking back FY '20, the business had GBP 20 million of net debt. So we've really improved the cash position in the business over those years, and we've bought some business, i.e., Southport and Madrid. So finally, on the KPIs. As I said, revenue up 1%, so GBP 76 million. Revenue per head still remaining strong, GBP 181,000 versus GBP 184,000 in the first half of last year. And as many of you know, we are a dollar earner. Our revenues are dollars. If you look at that in dollars, revenue per head is $227,000, and it was $228,000 last year, so broadly unchanged. Operating profit margin, 10% this year and 10% for the same period last year, but it's actually 10.5%, just under 10.5%, and it was 10.1% last year. So we're seeing operational leverage come through and improving that margin. And it's important that we've built -- as we continue to scale the business, we have that platform to support that growth. So as we bring more brokers or businesses on board, we can grow our revenue and we can focus on maintaining cost control, and that will drive that operating profit margin going forward. Forward order book, GBP 80.9 million at the period end, up 20% from where it was a year earlier. Now that forward order book, that covers chartering and sale and purchase deals that are going into the future. That goes all the way out to 2039. It's very broadly split 50-50 between chartering and sale and purchase. And within that $80.9 million, $28 million of that will land in the second half. And as James said, we've seen further strengthening in the forward order book, and it was $85 million at the end of September. We've talked about net cash and as we said, dividends 4.5p. I'll now hand back to James. Thank you.

Thank you, Grant. Okay. Market outlook from our perspective at Braemar. Okay. So this slide here is basically emphasizing where the new building order book was from 2004 to present day. The biggest issue was when the market collapsed in 2010, for example, '09 and '10. Yes, there was a financial crisis end of 2008 when the markets collapsed, but there have been so much overbuilding in 2004, '05, '06, '07, '08, as you see from that chart. Predominantly, that was done in dry cargo tankers on the offshore market. But -- and as you can see, that ordering started to subside hugely because of all the problems of the banks, over lending, et cetera, et cetera, et cetera. Plus we saw some 20% of shipyard capacity cut from the market, thus basically creating more issues if you were to boom market again to try to reorder. We have seen the market return slightly its rates. But this time, we're seeing a different color as far as what's being ordered. And there's been a huge ordering on the container market as that fleet was very much aging. We've seen a huge amount of LNG as we start to see the LNG market new builds coming on with Qatar and Mozambique down the line. And we've seen obviously tankers coming back, but not really in any one singular sector. So we feel quite confident. And thus, we used to call the shipping fleet, we used to sort of say max 15 years of age, we start to see the ships sort of wean out of the market. But now they're going to 20 years, and it's amazing how many ships are now over 20. So we do expect that to even correct itself forward orders books of ships. On the right-hand side, you'll see the Braemar Index. What we're trying to highlight here is all sectors of shipping and where they are in the cycle. And as you can see at the moment, it's still very strong. Yes, we saw tankers come off, then we saw containers come off, but then we saw the Red Sea close and we saw the container rates go back up again and dry cargo come back. So it's a bit of a mixture. And our job really is to make that business more resilient and more immune to any of these market swings so that we can still maintain our numbers. We can move forward. So the summary here from myself as a CEO is that good revenue performance, clearly demonstrating our diversification story is benefiting us. The average commissions are up, but offsetting gets weaker fixture numbers. We maintained our net cash. We've maintained -- we've obviously said that we would have a progressive dividend, and you can see that's up by 13% on the interim. The outlook of shipping, as I said to you, is positive for many factors in the world. I mean, the markets move around so much, whatever is going on in the world today and being so unstable at the moment is certainly helping in the shipping market. We're seeing far more ton miles, which means ships are doing longer voyages. So that's obviously enhancing our revenue position. The strong forward order book. For those who aren't quite sure what the forward order book means, it means it's business that we've booked out as far as 2039. And what's amazing is we can come into the first part of the year on day 1 with quite a few large percentage of our revenue already booked, which obviously makes it easier for Grant to put together our budgets for the whole year. Pipeline, look, I can certainly say that we are looking at deals. I can also tell you clearly, we've turned down deals. The reason for potentially turning deals down is because -- they either weren't enhancing enough or we saw too much of a big overlap or in some cases, we felt that the consideration of that purchase wasn't falling down to the second generation was a succession of that business. And I think clearly you see that we're still very confident in our FY '25 numbers speaking in light of the market. Thank you.

Thank you. So we go to Q&A now, please.

[Operator Instructions] So we've got a few questions. Your ambition is to double the operating profit from 2021. But it's not clear by when. I think you say sustainably, but when does sustainably mean?

So we went out in -- when James became CEO at the start of 2021, there was a stated aim that we would double underlying operating profit, which was $8.9 million at the time by 2025. So this current financial year was the objective to get to $18 million. Now everyone who's followed the numbers will see that actually, we achieved that early. We achieved $20 million in FY '22, $18 million in FY '24. And the market has us -- I think the consensus range is somewhere between 17.4% and 17.8% because we did take a slight hit on the national insurance increase. So that was outside of our control. Of course, we're a people business. And so a big chunk of our cost base is wages and salaries, and so we have to have that. So it was really -- the target was set to achieve in FY '25. We have achieved it early. And what we are saying is we want to ensure that we have a baseline, if you like, sustainable profitability going forward, which is based on that number.

And you talked about operating leverage. What's the highest operating margin that you think you could achieve going forward as revenue builds?

Yes. Look, we would look to go into the low teens, I think, is where we can realistically start to target as we bring into that -- as we bring in more revenue, I'd like to see our operating profit margin increase over time, but it's really dependent upon getting more scale in the business and bringing increased revenues into the business. And then I think we should start to see that ticking up to the low teens. And then you'd expect that to sort of improve as more revenue comes in the business because we have that platform for growth that we've established and you can start to see it coming through here. Operating costs well controlled. We are now in a position, James has sort of started talking about it where we want to either make key hires or acquire other businesses and bring in that scale to the business because we have that platform for growth.

And there's a few questions about the FT article on Russia. Are you happy to comment on that?

Yes, 100%. So I think, first of all, when the FT came with the article, we had conversation we made very clearly that there was nothing of any wrong doing. I think you can see that in the article, you've read the article. For your guidance, in these transactions, you've got banks, you've got lawyers doing escrow, everyone is doing their KYCs. We have a very, very strict and strong KYC department. I think from previous issues before, I think zero tolerance on that. So it comes through as far as my desk if there's any kind of issues. In that situation, those transactions, yes, we admitted that we did some transactions at the time and still of today, those parties involved in that transaction are not sanctioned, okay? What we became, we became suspicious in the summer of '23 that some of these ships were coming out of the marketplace and falling what we thought into the shadow fleet to trade primarily Russian business. So we stopped doing those business transactions. Six months later, the government came out and said very clearly that irrespective of KYC clearance, if you, as the broker are suspicious that, that ship will fall into that shadow fleet, then you have to report that or stop trading those deals. So as far as we were concerned, we were ahead of the curve in that. So we had no problem with it. And as I say, there were banks involved, lawyers involved. And still today, those parties involved in those trades are not sanctioned.

I just -- I'll add to that, that we have a very dynamic live KYC process where we use various systems out there from other software providers and what have you there where we have over 1,000 counterparties in that system that we check any changes in status on individuals, corporate entities or ships that we may have transacted with. And if we have any reason to believe that their activity would suggest that they could become or have become part of the dark fleet, then we'll no longer trade with them.

And we have turned business away because we're not comfortable with some of it. So we have a very, very strong compliance area.

And it has affected potentially some of our revenue by being -- having such a strict KYC department.

And moving on completely separately, what are you looking for from acquisitions?

I think you can see the growth opportunities. And I think that you can see that there is a large part of the business that we can fill in into a shaded area. So for us, it's very much about looking for businesses that complement. I think what I can say, first of all, is the business is consolidating for many reasons. One of the fact is the business moves towards more of a -- I wouldn't say regulated, although we have a regulated part of our business, but it's moving more towards that because our clients are assisting them more, as we said about the KYC, et cetera, et cetera. But so from our perspective, we see potentially brokers that see -- smaller brokers that will become a cost factor to them. So for them, it's easy to go into a bigger group whereas that cost then gets spread across many factors of the business. So there is that. Of course, we wish to make sure that it's enhancing from a CEO who put together the Braemar and ACM acquisition you see in 2014, which is quite complicated and also included a lot of overlap. We're taking our experience from that and looking for business that fill those gaps without potentially any kind of overlap and enhancing to the bottom line as we save costs throughout the business. And I think -- I mean, Grant, anything else you'd want to add to that at all or Tris?

Yes. I mean I'd really just to say, I think from this slide, the big takeout is that once you've established a big enough footprint, it becomes easier to leverage that in either the same geographies with the same products or new products that we're not involved in. And a good example of that is we didn't have a presence really in the Americas prior to doing the transaction with Southport. Since then, we now have 2 offices in Houston, an office in -- 2 offices in Florida. We're just about to open an office in Connecticut. We've got a small presence on the West Coast now. Once the footprint is established, it becomes so much easier to see the other opportunities that you may not have seen before. And I think the same thing as well with Korea in that they're very much driven by the new build business and the S&P business that we're doing in Korea that we opened an office specifically for that. But in the same time as doing that, we're moving into the container space as well, which is something new for us in Asia Pacific.

And I would just add to that, that looking at this chart, you can see that there's a lot of white space there that we can go for. There's lots of opportunities. But just to echo what James said earlier, we have a very disciplined approach when we look at opportunities, making sure that really what we're looking for is 1 plus 1 equals 3 or more and that they're enhancing and being part of the Braemar Group, it's the information that we have, the sheer scale that we have. And of course, we've got that platform that I talked about so that they are significant. And we've seen that. This is a management team that did the Southport deal, did the Madrid deal. Those business are both significantly enhanced by being part of the Braemar Group.

Great. And what's your view on a Trump presidency and how you can benefit from it? What do you think has changed? And how can you position for that?

Tris has a U.S. passport, he can answer that question.

I mean we kind of -- we had our first presentation on, obviously, the day the results were coming in. So we tried to position ourselves somewhat to answer that. And I think the reality is that it being his second presidency, we have an idea of how that may affect global trade and shipping. The most obvious one being a potential further tariffs being imposed on Chinese goods. Definitely last time we saw some rerouting of Chinese goods via South America and also China sourcing some of its products from South America rather than North America. I think undoubtedly, a real feature perhaps of this administration will be that Trump will be taking a tougher stance on Iran with sanctions. And most readily for us in shipping, we expect to see more sanctioned tankers because of that, which really, as James has been talking about before, we're already dealing with a fairly tight market. If we're taking out another 100-plus tankers because of Iranian sanctions, then we're tightening that market even further, which we always talk about not wanting to benefit from what are bad geopolitical things going on in the world, but that can only enhance rates in our view.

And I'll add to that, as I sort of mentioned earlier, we -- our revenue is U.S. dollar-based, and we probably expect to see a strengthening of the dollar, I think.

And how much are Houthi rebels still affecting the global shipping market? And do you think it will get any worse?

I mean, well, I guess that's an interesting question because Trump says he's going to go and sort the whole world out. But at the moment, yes, we're seeing -- and it goes back to our KPI where you're seeing that we're doing less fixtures, but the revenue per fixture is higher because obviously, most of the fleet now is rerouting. Ships can come into -- through the canal and down the Suez Canal into the top of the Red Sea and come back. But going around the bottom into -- through past Yemen, that's becoming a bit of a no-no area. So we are seeing obviously more traffic going around the Cape, which is creating longer voyage and shrinking the fleet because of the obvious factor of -- and we're seeing obviously higher freight rates, which is obviously an advantage to us. At the moment, we don't really see anything really changing in the short term, sadly. I mean, I don't want to sit here and say we're profiteering out of atrocities. But at the moment, that's a key -- this area is a key factor. That's how it works.

Yes. Thank you very much. And that's the end of questions. James, do you have any closing remarks?

Obviously, first of all, want to thank you for taking time to listen to our half-year results. We thank Grant with the finance team, making sure it's important for us to get our accounts out on time. And I think that's one key factor how that's changing from previous years. So that's a massive tick box for us. And I think that -- yes, I think glad to hear that they're positive and we have achieved a lot in the last 4 years. I think you can see that where the business is and where it was and where it is today. And it's something that we fully understand. So be assured that things that we will look at, we will do on the basis we understand what is right for the business. But thank you very much for taking time this afternoon.

Great. Thank you very much, James, Grant, and Tris. And to everyone listening, you'll be taken to a feedback page on today's presentation. If you could complete it or you'll get a follow-up e-mail sometime later, we'd be really grateful if you could take a few minutes to complete. Many thanks for joining. This is the end of the webinar.