Braemar Plc (BMS) Earnings Call Transcript & Summary

Hello, and welcome to this edition of Edison TV. My name is Andy Murphy. And with me this morning is Grant Foley, the Finance Director of Shipping Services Company, Braemar. Welcome to the show.

Thanks very much. Thanks for having me.

I've got some questions that broadly fit into 4 categories, so I'll crack on straight away. The first section is all about resilience in the shipping industry. It's a long-term growth industry. So I was wondering whether you could sort of paint how that works for Braemar in a global sense.

Yes. So if you think about the shipping industry, 80% of the world's goods are moved by shipping. Just over 11 billion tonnes of goods were moved by vessels last year. So if you think about GDP is forecast to continue to grow, oil demand is forecast to continue to grow. So the underlying fundamentals for demand for shipping remain strong. And so we believe that there are good reasons to believe that the demand is going to continue to grow, which obviously bodes well for a ship broking business like us where we are moving. We are arranging the movement of those goods for our clients.

Under the current management team, Braemar has refocused the business on broking activities. Why was this action taken? And how has it improved the quality of the growth story? And how has the refocused activities increased the resilience of the revenue and the profit streams of the business?

Sure. So looking back, Braemar had a number of divisions. There was the shipbroking division, and there was a technical division and the logistics division. At one point, I think the business has 1,200 people. And the logistics and the technical division were quite low margin. So when James became CEO in 2021, the decision was taken to divest those and really focus on the shipbroking business, which is by far the higher margin part of the business. So the focus within shipbroking has been to diversify, but to diversify within shipbroking and our complementary securities business. And so what I mean by that is to grow out those desks, so grow each of the tankers, S&P offshore, all the desks that we offer and grow our securities business. And what that's doing is it's providing a more resilient revenue base. So whilst the rates move up and down, but they don't all move in the same direction. So what we've seen is strong performance from tankers offsetting a weaker performance in dry cargo in the '24 numbers. In the '25 numbers, we saw an overall weaker chartering performance, but we saw a stronger sale and purchase performance. So having that wider breadth across the ship broking space is providing that resilience and provide more resilient profit going forward. So it's really important that we continue to invest in our people. We look at M&A to continue to diversify within shipbroking. And of course, on the securities business, that's now 15% of group revenue, and we continue to invest in that. We've just got a U.K. organized trading facility. We're applying for a European organized trading facility. So that's going to allow us to trade more product for our clients and continue to build out that resilience.

Okay. Great. Just moving on to the next section, which relates to the new 2030 targets. Could you talk about the key aims of direction of travel of those targets? What are the key targets? And how did the Board arrive at those specific targets in question?

Yes. So we last set our targets in 2021. And the target there was we wanted to double underlying operating profit by 2025. Now we actually did that in '23. We did that in '24. We fell slightly short in 2025, and that was really because we had a much weaker chartering performance in the second half, and that was really rate driven. So we're time to reset our targets, but we wanted to do a more detailed approach to what we did before and I'm just saying now we're going to double. So we launched a new strategic framework as part of our FY '25 results. And that's really -- there's 3 pillars around that. The first is diversification, and that's really just what I talked about earlier. That's diversifying within the shipbroking space and continuing to build that resilience. The second is consolidation. We believe that the ship broking market is -- continues to be very fragmented, and we believe that presents us opportunities to acquire other businesses and to consolidate and grow the business. And the third is operational excellence. And what I mean by that is focusing on the key areas of the business and ensuring we are as efficient as possible. We focus on building a platform to support that growing business. So we've invested in our IT systems, in our finance, in our compliance infrastructure. So as we continue to build the business, we can start to see our operating profit margins grow. So on the back of those 3 pillars, there's really 4 targets that we've set for 2030. The first is that we want to achieve revenues of GBP 200 million. The second is that we want to grow our securities business, continue to grow our securities business so that it generates GBP 30 million of revenue by 2030. The third is to increase underlying operating profit margin to 15%. And then the fourth is to keep our net debt to less than 1.5x EBITDA. So how did we get there? Well, if you look back, in 2021, the business was generating about GBP 84 million of revenue. In 2025, it was GBP 142 million. So we've grown the business significantly there, and we're going to continue that momentum. So with the revenue of another GBP 60 million. Our securities business, we're very proud of that. I think it's a good success story. In 2021, that was about GBP 7.3 million. In 2025, it's GBP 22 million. So we've seen strong growth there, and we continue with that momentum. We've just recently got our approval to operate an organized trading facility in the U.K. We have applied for a European organized trading facility so we can trade with European clients. So we're excited about the continued growth that we can see in the securities business and get that to that GBP 30 million. And then when we think about our operating profit margin, in '21, we were at 9%. We're focused on those efficiencies, and we've grown that top line. So we're seeing more of that margin come through. So as we move towards those higher revenue targets, we believe that we can get towards that 15% underlying operating profit margin. And of course, just good balance sheet management and keep a robust balance sheet and that net debt less than 1.5x EBITDA.

There are a number of short-term milestones within that 2030 time frame. How confident are you achieving these? And how far down the path to that 2030 target do the year 1 targets get you?

Yes. Look, they start to get us on the direction to achieve those. So again, there's 4 targets there. The first is hire 10 new brokers during the course of this year. The second is to open in a new jurisdiction. The third is to complete a transaction. And then the fourth is to what we call globalized tanker ops. So if you think about that, the first is hire 10 new brokers, and that really fits into that diversification part of our strategic framework to continue to build the resilience, and we've made some hires there already. So we're feeling pretty confident about that target. And if you think about that, our average revenue per head, and that's everyone across the business is around GBP 340,000. If you bring brokers in and they're generating that, you bring 10 of those in, then 10 the next year, then 10 the next year, that's going to give you significant progress against that target. The second is opening in a new location. We've got a number of things in the pipeline at the moment. So we're pretty confident that we're going to deliver on that. The third is a complete transaction. Importantly, we've looked at lots of transactions over the last 18 months, but we've maintained our discipline, and we will continue to do so. When we look at transactions, we're not just going to buy any business. It needs to be complementary. It needs to fit. And of course, it needs to be at a sensible valuation. So that's a big part of that, but we're continuing to look at some of those. And then on this globalization of tanker ops, we've recruited a new guy to head up that on a global basis, and it's already making good progress. So we're going to start to see those efficiencies coming through on tankers, and we can push that out across other areas of the business. And that's really looking at processes, systems and ensuring that we are as efficient as possible in that space.

Great. Just want to move the discussion on to the sort of growth and recovery that's been coming through. Can you talk a little bit about sort of the global fleet in general? It's getting larger, it's getting older. So how does that help Braemar? And adding on to that, at the end of May, the company was talking about some green shoots of recovery in charter markets. There's been quite a lot of political or geopolitical turbulence since then. How is that rate situation playing out?

Yes. So first of all, if you think about the global fleet, you're right, the fleet is increasing in size over recent years. So there's more ships to fix. So you can get more fixtures out of that. But the fleet is getting a lot older. So if you look at the number of vessels now that are over 15 years old, which is typically a sort of cutoff where you would have seen ships being recycled at that sort of level in the past, yes, they are lasting longer, but nonetheless, they are aging. And so what we're going to see now is a number of ships that will just have to be recycled. So you're going to see ships come out of the global fleet. And the yards themselves are pretty much at capacity. So post the GFC, a lot of capacity came out of the yards, then they're pretty full. And so whilst we're going to see ships leave the fleet, they're not going to come in at the same rate that they're exiting. So of course, that actually bodes quite well for rates as you're going to see a bit of a squeeze on the supply side from a vessel standpoint. And so that looks pretty positive for rates in the medium and long term, too. And if you think about rates, yes, you're right, when we gave our results, we said that we've seen some improvement. We had an unusual situation in the second half of last year, particularly in tankers, where you typically see a second half improvement in rates, but actually, we saw rates drop in the second half, and it was lower lower demand and mild winter really contributed to those factors. We've seen it improve a bit as we announced our results. And they've been pretty stable really. You've seen some spikes and then they've come off when there was the conflict, the Israel, Iran, you then saw rates spike, but then the case was announced and rates came off. So really, we've seen more of a stabilization of rates post the results.

Okay. Just thinking about the M&A opportunities that the company has. Obviously, Braemar is strong in certain lines and perhaps other opportunities lie in other places. So how does the company decide which opportunities in the M&A world to pursue? And how do you make sure these transactions are successful long term?

Yes. If you look at the business, we are by no means the finished article. There are definitely gaps, both geographically as well as on certain desks. And so when we're looking at M&A opportunities, it's really about where does it fit into these gaps? Does it address some of the gaps that we've got. And so we're thinking fit those gaps, we want it to be complementary. And what I mean by that is when we do a deal, we want that business to grow by being part of the Braemar Group, but we also want Braemar to benefit from having those in the group too. We want it to work both ways. And we've seen good examples of that in the transactions that we've done over the last couple of years where they've benefited from being part of Braemar and the information and being part of a larger group, but we've also benefited from having the information flows that they've got and Southport Maritime is a good example of that. So we're looking at that. We want minimal overlap, of course. But we also want to be able to bring those businesses in and provide the support and the infrastructure to allow them to continue to grow. So we want to see the revenue growth on both sides, so 2 plus 2 equals 5 or 6, but we also want to ensure that we get some cost synergies coming through as well by really focusing on what I've already talked about, which is that platform that we have for growth and to support the businesses as they go forward.

Following off on that M&A discussion there, you introduced a leverage target of 1.5x, you mentioned it earlier on. Is that target a target that you would effectively go to and then pay down. So it's not a -- it's a peak as opposed to sort of a mandatory target you want to achieve. So it's a point in time and then you would look to pay down.

Exactly, yes. Yes. So there may be opportunities what we want to that we want to go for. So we would see that go perhaps to that sort of level, but then we would then start to see that come down. And also say just to finish off around the success of M&A, which I did mention, ensuring success by obviously doing that due diligence, being very clear around what we expect, but also making sure that we have a very clear integration plan as well, and we hit that on day 1 and try and get these businesses integrated with the Braemar infrastructure as soon as possible. But yes, to come back to that, we would expect to see it perhaps hit that level. But then as the free cash flow start to come off of those deals, we start to see that reduce again.

Okay. The company recently reset the dividend payment. Could you describe the circumstances around this and how you arrived at that decision and how shareholders will benefit longer term?

Yes. So we looked at the dividend. So the dividend went up 160% from '21, it's 12p up to 13p in 2023. And we looked at it, and we think we're in a position now where we can just get better returns for our shareholders with our capital. So really, when we think about what we want to do, first of all, we want to keep a robust balance sheet, and we've talked about that. The second thing we want to do is continue to invest in talent because that's going to generate long-term returns. The third is M&A. But of course, we do want to maintain attractive returns to our shareholders. So what we've done is we've reduced the dividend. So we paid a 7p dividend for the full year. And that's still just over a 3% yield, which we believe still is attractive to our shareholders, but we also launched a share buyback. So total return to shareholders for the year had been maintained. And really, that comes -- that reduction of the dividend really means that we have more capital to invest in the business because we believe that talked about the fragmented market, the opportunities that we believe are out there. And so rather than make that return to shareholders now, we believe that investing that capital in M&A individuals will actually generate greater medium, long-term returns for our investors.

Great. Final question. Obviously, this sounds like a fantastic story, growth story, new strategy. It's all quite exciting. But as ever, things could go wrong and sometimes they do. So when you're thinking about your 2030 targets, what do you consider to be the biggest risks to achieving those targets for Braemar?

Yes. There's always -- as you said, there's always risks to everything. I think, first of all, there's a macro risk. You could see we're seeing a weakening of the dollar at the moment where own the majority of our revenues are dollar-based. So we're seeing a weakening of the dollar, which presents a bit of a challenge. Then there's -- we see geopolitical events have a big impact on shipping, something could happen there. Now we can't control those. We -- obviously, we can partially hedge our U.S. dollar exposure, but we can't control geopolitical events. So really, the focus there is just increasing the number of ships that we're fixing. We can control that. So by investing in our people, growing our teams, doing M&A, we can grow there. I think the second thing is we're a people business. So you can't get away from that. We need our brokers. That's how we generate our revenue. And so that presents a risk if you lose people or you can't recruit where we want to recruit. And so we focus on retention and hiring the right type of people. But of course, that's a risk as well. And then finally, M&A, it's going to be a big part of our strategy going forward as we think about hitting those numbers. And that's really successful completion, execution of M&A and then that integration point. I think they are 3, I think, key risks really, but we mitigate that by having a very clear integration plan when we do these transactions and very clear targets around what we expect to achieve. So yes, there certainly are risks, but we're trying to mitigate them as much as we can within our control.

Brilliant. Thank you very much. I'm all out of questions, but thank you very much for your time, Grant. Thank you for listening to this addition of Edison TV.