Grindrod Shipping Holdings Ltd. (GRIN) Earnings Call Transcript & Summary

Good day, and welcome to the Grindrod Shipping conference call to discuss the financial results for the second half of full year period ended December 31, 2019. As a reminder, today's call is being recorded. Additionally, a live webcast of today's conference call and accompanying presentation is available on Grindrod Shipping website which is www.grinshipping.com. Hosting the call today is Mr. Martyn Wade, Chief Executive Officer of Grindrod Shipping; and Mr. Stephen Griffiths, Chief Financial Officer. I would now like to hand Grindrod -- -- hand over to -- introducing Grindrod Shipping's Chief Executive Officer, Mr. Martyn Wade. Please go ahead, sir.

Thank you, operator. Welcome, everyone, and thank you for joining our call for the second half and full year 2019 ended December 31, 2019. Let me start by referring you to Slide #2 with the forward-looking statement disclaimer. On this call, we will make certain forward-looking statements, including statements regarding our future financial and operating performance. These statements include information regarding future time charter contracts, outlooks for the drybulk and tanker markets and other operating matters. These statements are based on the beliefs and expectations of management as of today. Our actual results may differ materially from our expectations. Investors should read carefully the risks and uncertainties described in the slide presentation and in today's press release as well as the risk factors included in our annual report and our other filings with the SEC. We assume no obligation to revise or update forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, during this call, we will be discussing certain non-GAAP financial measures. For additional disclosures relating to these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP measures, please see yesterday's press release and Pages 32 and 33 of the slide deck, which is posted on our website and our filings with the SEC. So to start, please turn to Slide 4, our second half 2019 financial highlights. Financial results for the second half of 2019 was stronger than in the first half of 2019 across the majority of income metrics. Revenue in the second half of 2019 was $163.8 million compared to $167.2 million in the first half of 2019. Gross profit increased to $14.6 million in the second half of 2019 from $5.9 million in the first half of 2019. Adjusted EBITDA in the second half of 2019 increased to $25 million compared to $14.7 million in the first half of 2019. Net loss decreased to $16.4 million in the second half of 2019 from $19 million in the first half of 2019. Loss per share, EPS, improved to $1 -- sorry, $0.86 or $0.86 in the second half of 2019 compared to a loss per share of $0.99 in the first half of 2019. TCE per day owned by our handysize and supramax -- sorry, ultramax vessels in the second half of 2019 increased to $8,551 per day and $13,624 per day, respectively. This was in comparison to $7,030 per day and $10,481 per day, respectively, in the first half of 2019. We continued to outperform the relevant indices by $662 per day and $2,538 per day for our handysize and supramax, for our ultramax vessels, respectively, in the second half of the year. Tanker rates increased marginally on average relative to the first half of the year, though there was market volatility within this period, as the second half started lower than the first half averages before strengthening material in the latter portion of the period. TCE per day of $14,409 and $12,441 per day for our medium range and small tanker segments, respectively, in the second half of 2019 compared to $14,276 and $12,015 per day, respectively, in the first half of 2019. Net loss was negatively impacted by a $10.1 million of noncash impairment losses in the second half of 2019. We repurchased a combined total of 299,641 ordinary shares from the NASDAQ and the JSE at an average price of $6.62 per share or ZAR 97.13 based on the indicative ZAR/U.S. dollar exchange rates of ZAR 14.68 before costs. Now I'm going to ask you to please turn to Slide 5 to look at fleet developments in the second half of the year. In August and September 2019, we took delivery of 2 Japanese ultramax eco newbuildings, the IVS Okudogo and the IVS Prestwick, respectively. We drew down $15.7 million in financing with The IYO Bank in conjunction with the delivery of each vessel, resulting in a total financing amount of $31.4 million. In September 2019, we completed a financing arrangement with a Japanese shipowner relating to the 2011-built handysize vessel, IVS Kinglet, for a cash amount of $12.5 million before commissions but net of charter prepayments. The transaction generated net proceeds of $6.1 million after settling the debt associated with the vessel. In November 2019, we completed a similar financing arrangement with a Japanese shipowner relating to the 2011-built handysize vessel, IVS Magpie, for a cash amount of $10.3 million, again, before commissions but net of charter prepayments. The transaction generated net proceeds of $5.3 million after settling the debt associated with the vessel. We agreed to extend the charter-in of the 2014-built Japanese eco supramax vessel, the IVS Crimson Creek, for a period about 15 to 17 months from December 2019 at a revised variable rate structure. The bareboat charter of the 2016-built MR product tanker Matuku was extended for a further 2 years until May 2022. Now please turn to Slide 6, highlights of the company's recent developments. Effectively, February 14, 2020, we acquired an additional 33.25% ordinary and preferred equity interest in our IVS Bulk joint venture from Regiment Capital Ltd., one of the partners in the joint venture for a combined amount of $44.1 million, taking our interest to 66.75%. IVS Bulk's 12 vessels are modern Japanese-built eco vessels. We entered into a new shareholders agreement with Sankaty, the remaining partner, that grants us control of key aspects of the corporate governance of the joint venture. And as a result, the financials of IVS Bulk will be consolidated into our financial statements following the acquisition of the additional 33.25% rather than being accounted for under the equity accounting method as has previously been the case. The acquisition was financed from cash on hand and new debt with no equity dilution to our shareholders. Further details and pro forma financial statements reflecting these transactions are set out in the subsequent section of this presentation. We have tendered notice of redelivery of the long-term chartered-in vessel IVS Augusta and expect the vessel to redeliver on or about the February 28 this year. We sell the 2010-built small product tanker Kowie for an amount of $9.2 million before costs with delivery to her new owners planned on or about February 28, 2020. Now turning to Slide 7. Our charter-in performance relative to industry benchmarks in the drybulk segment continues to outperform in the second half of 2019 while the medium range tankers lag slightly behind. Handysize TCE of $8,551 per day versus $7,889 per day for the Baltic Handysize Index net outperformed by approximately 8.4%. Supramax/ultramax TCE of $13,624 per day versus $11,806 per day for the Baltic Supramax-58 Index net earnings outperformed by approximately 22.9%. Our commercial outperformance on the drybulk side reflects one of our key competitive advantages, our ability to maximize revenue through the use of in-house commercial pools and a significant cargo base. Medium-range tanker TCE of $14,409 per day versus $15,033 per day for the Clarksons Medium Range Clean Average Earnings assessment underperformed by approximately 4.2%. Now I'll pass the floor over to Stephen Griffiths, Chief Financial Officer, who'll go over financial highlights and performance for the second half of 2019.

Thank you, Martyn. Let's turn to Slide 9. Revenue was $163.8 million for the 6 months ended December 31, 2019, and $168.2 million for the 6 months ended December 31, 2018. Cost of sales was $149.2 million for the 6 months ended December 31, 2019, and $159.5 million for the same period in 2018. Gross profit was $14.6 million for the 6 months ended December 31, 2019, and $8.7 million for the same period in 2018. The other operating expenses for the 6 months ended December 31, 2019, included noncash impairment losses of $10.1 million recorded in the 6 months ended December 31, 2019. Administrative expenses were $15.1 million for the 6 months ended December 31, 2019, and $14.3 million for the same period in 2018. The increased level of administrative expenses in the 6 months ended December 31, 2019, was primarily due to an increase in professional fees, including fees incurred in relation to the refinancing and acquisition of our IVS Bulk joint venture, partially offset by a decrease in salaries. Interest expense was $6.1 million for the 6 months ended December 31, 2019, and $3.6 million for the same period in 2018. The increase in the 6 months ended December 31, 2019, was primarily due to the recognition of interest on lease liabilities following the implementation of IFRS 16 on January 1, 2019. Loss for the 6 months ended December 31, 2019, was $16.4 million, and loss for the same period in 2018 was $7.2 million. As indicated on the slide, a portion of our business is through IVS Bulk joint venture, which was accounted for on an equity basis and was not consolidated in our financial statements. That will change going forward. Now turning to Slide 10. With respect to the balance sheet, total assets were $527.2 million, which includes cash, bank balances and restricted cash of $45.2 million, while bank loans and other borrowings were $165.2 million. Please turn to Slide 11. We will now briefly discuss results in the drybulk and tanker business. As a reminder, segment results of operations include the impact of a proportionate share of joint ventures, which is not reflected in our unaudited interim condensed consolidated results of operations. In the drybulk business, handysize TCE was $8,551 per day for the 6 months ended December 31, 2019, and $9,066 per day for the same period in 2018. We achieved a fleet utilization of 99% in the second half of 2019. Supramax/ultramax TCE per day was $13,624 per day for the 6 months ended December 31, 2019, and $12,795 per day for the same period in 2018. We achieved a fleet utilization of 99.5% in the second half of 2019. The average long-term charter-in costs per day for the supramax fleet for the first half of 2020 is expected to be approximately $12,330 per day. As of February 20, 2020, we have secured the following TCEs per day, thus far, for the remainder of 2020: handysize, approximately 1,400 operating days at an average TCE of $6,420 per day; the supramax, approximately 1,420 operating days at an average TCE of $9,830 per day. On Slide 12 is the tanker segment's operational performance. In the tanker business, medium range tankers TCE per day was $14,409 per day for the 6 months ended December 31, 2019, and $10,950 per day for the same period in 2018. We achieved a fleet utilization of 100% in the second half of 2019. Small tankers TCE per day was $12,441 per day for the 6 months ended December 31, 2019, and $11,453 per day for the same period in 2018. We achieved a fleet utilization of 99.7% in the second half of 2019. The average long-term charter-in costs per day for the medium range fleet until the expiry of their charters in 2020 is expected to be approximately $15,300 per day. As of February 20, 2020, we have secured the following TCEs per day, thus far, for the remainder of 2020: medium range, approximately 360 operating days at an average TCE of $19,600 per day; small tankers, approximately 112 operating days at an average TCE of $12,800 per day. Now turning to Slide 13. This slide shows the owned fleet cash breakeven analysis for the second half of 2019. Our drybulk owned fleet cash breakeven rate for the year was $9,750 per vessel per day, long-term charter-in breakeven was $13,850 per vessel per day and core drybulk breakeven was $10,950 per vessel per day. Our tanker owned fleet cash breakeven rate for the year was $11,960 per vessel per day, long-term charter-in breakeven was $16,480 per vessel per day and core tanker breakeven was $12,900 per vessel per day. The cash breakeven rate per day includes operational expenses, net G&A, interest expense and debt repayments. Please turn to Slide 14. This slide shows TCE revenue sensitivity to charter rates for the last 12 months, every $1,000 change in TCE per day equated to about $11.1 million of annual TCE revenue. Please note that this refers to our combined fleet and includes our drybulk and tanker vessel operating days. Please turn to Slide 16. A subsidiary of the company, Grindrod Shipping Pte. Ltd., or GSPL, acquired a 33.25% ordinary and preferred equity shares held by Regiment for a total consideration of $44.1 million, thereby increasing its stake to 66.75%. The ordinary equity portion was acquired for $35 million while the preferred equity component was $9.1 million, representing Regiment's 33.25% share of the $27.3 million preferred share capital in IVS Bulk. The acquisition was funded through a combination of cash on hand, proceeds received from IVS Bulk following a refinancing of the IVS Bulk capital structure and a new loan at GSPL. Existing credit facilities at IVS Bulk were refinanced with 2 new loans totaling $127.3 million, representing an approximate 55% loan-to-value at drawdown with maturities both scheduled for 2025. New credit facility #1 is $114.125 million with pricing at LIBOR plus 3.1% per annum, and new credit facility #2 is $13.13 million with pricing at LIBOR plus 2.75% per annum. Proceeds of the refinancing and release of restricted cash under existing credit facilities at IVS Bulk utilized to repay in full $116.9 million in existing credit facilities, $10.9 million of shareholder loans and redeem a $7.7 million portion of the preferred share capital. In addition, Grindrod Shipping agreed to a new financing in the amount of $35.833 million with Sankaty. The facility bears interest at a rate of 7.5% per annum and is repayable at maturity in June 2021. It is redeemable by the company at any time prior to maturity, subject to a 6-month interest make-whole provision. Please turn to Slide 17. Here, we have down in detail the sources and uses of funds of IVS Bulk transaction. Please turn to Slide 18. The unaudited pro forma condensed consolidated financial information is provided for illustrative and information purposes only and is not necessarily indicative of our future results of operations or financial condition. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable but actual results may differ from the pro forma adjustments. These adjustments are subject to change. Our pro forma consolidated cash position will increase to $56.4 million while our bank loans and other borrowings will increase to $325.1 million on a consolidated basis. The acquisition and consolidation will also add $242.2 million of ships, property, plants and equipment to the asset side of our balance sheet. Now we can turn to Slide 19. Here, we have the unaudited 2019 pro forma income statement. Adjusted EBITDA for 2019, including the IVS Bulk acquisition would've been $59.0 million, an increase of $19.3 million or 48%. Please turn to Slide 20. Our debt repayment profile includes scheduled amortization payments of $28.8 million and $31.3 million, respectively, in 2020 and 2021 while the new $35.8 million loan for the IVS Bulk acquisition matures in June 2021. Turning to Slide 21. Here, you can find a snapshot of our drybulk core fleet as of February 26. As you can see, the 12 IVS Bulk vessels that are highlighted are all Japanese bulk eco vessels that ideally complements our cargo operations. The next slide shows our product tanker core fleet. With that, I would like to turn the call back over to Martyn and ask you to turn to Slide 24.

Thanks, Steve. On the left chart, the drybulk market trade developments are illustrated. In 2020, Clarksons projects the total growth to be 1.9% and 1.8% to 2021. There seems to be steady demand for minor bulks, which are the key cargoes for Grindrod Shipping's vessels. In 2020, minor bulk demand growth is forecasted to be 2% while, in 2021, it is forecast to increase by 2.6%. The current market environment presents unique near-term challenges as a result of the coronavirus, which has disrupted demand and trading patterns for both the dry bulk and product tanker markets and have shown a high degree of interdependence of all regions and industries in this era of globalization. We look to the positive fundamentals of both the drybulk and product tanker sectors, which are expected to take effect once the current crisis dissipates. The long-term demand fundamentals appear positive as steady demand for minor bulks combined with the longer expected cargo distances leading to strong ton-mile demand growth forecasts. Please turn to Page 25. Fleet growth has been steady at approximately 3% this year, as scrapping's expected to pick up due to ballast water treatment, IMO 2020 regulations and, of course, the current low market. The drybulk order book is estimated only 9% of the fleet. Deliveries, net of expected scrapping, are estimated at 30 million deadweight for 2020. The fleet profile and order book of the handysize and supramax vessels are the smallest in the drybulk fleet at 4.2% and 6.5%, respectively. Vessels older than 15 years represent 19% of the drybulk fleet and should encourage increased scrapping. Now please turn to Slide 26. Handysize and supramax TC rates declined recently due to reduced seasonal activity, which always happens around Chinese New Year, and the coronavirus. Asset prices remained largely flat over the last year, and we still believe represent attractive entry points for quality assets. Turning to Slide 27 to look at the product tanker demand. On the left chart, the product tanker market trade developments are illustrated. In 2020, Clarksons projects the total growth to be 3.2% and then 1.6% in 2021. After a weaker period during the third quarter, rates increased materially in the fourth quarter in the lead-up to IMO 2020 despite an overall contraction in the seaborne product tanker demand due to market disruptions, such as the attacks on the Saudi oil facilities. Due to increasing ton-miles of worldwide product movements, product tanker demands projected to increase even more than the cargo base demand with growth of 4.8% and 2.5%, respectively, in 2020 and 2021. Growth in refining capacity and dislocation between refiners and end users is expected to also boost demand in 2020. The IMO 2020 regulations are disrupting trading patterns and causing an increase in vessels used for storage and cargo repositioning. Spot earnings of MR tankers remained elevated since October due to increased storage and product movement in anticipation of the IMO 2020 changes. Now turning to Slide 28. Stronger earnings helped contribute to higher-than-expected fleet growth in 2019 with slower growth anticipated going forward. Product tanker order book is estimated at 7% of the fleet, which is the lowest in over 20 years. Product tankers, that is the 10,000 deadweight plus fleet growth is estimated at 2.4% in 2020. 24% of product tankers in the 10,000 size and above are 15 years or older. Stronger earnings helped to contribute to higher-than-expected fleet growth in 2019 with slower growth anticipated going forward. The medium range product tankers' asset prices have been gradually recovering due to stronger charter markets. Finally, let's turn to Slide 30 for our conclusion and strategy. Looking beyond the near-term uncertainties, our strategy remains to leverage Grindrod Shipping's strengths and competitive advantage, which include: our modern, high quality Japanese-built fleet; our ability to maximize revenue through the use of in-house commercial pools and access to cargoes; and our close commercial relationship with global and regional industry players and continuing with our 40-year concentration on the Indian ocean market. Core focus since listing has been to simplify the Grindrod Shipping story with investors by reducing the number of unconsolidated joint ventures. To that end, we have wrapped up the Leopard Tankers and Petrochemical Shipping joint ventures and acquired control of the IVS Bulk joint venture, leaving us with only one unconsolidated joint venture vessel. The IVS Bulk acquisition represents material growth potential for the company as 12 modern Japanese-built eco vessels will be fully consolidated into our financial statements. While some shipping companies have chosen to outfit their vessels with exhaust gas scrubbers, we have elected not to do so and instead are using compliant fuel. We believe that there are potential negative environmental impacts -- effects that are emerging with increased scrutiny on the scrubber technology. We are not convinced that the economic return on the scrubber installation cost will be sufficiently attractive in the vessel categories in which we operate due to the high-quality and fuel-efficient characteristics of our vessels and their trading pattern. Fuel spreads between high and low sulfur have already contracted materially since the start of the year. Product tanker markets -- the product tanker market has remained strong thus far in 2020, helping to mitigate the negative effects of coronavirus on the drybulk charter market. Despite the near-term negative drybulk demand impact the coronavirus has caused, market expectations suggest a strong recovery later in the year as China restarts its manufacturing and commodity demand. With this, I thank you all for joining our call today and looking forward to reporting further progress at Grindrod Shipping as we continue to grow. And with that, we'd like to open up for the questions. Operator?

[Operator Instructions] And we do have a question from the line, and it's from the line of Poe Fratt from NOBLE Capital.

I was just wondering if you could sort of highlight if you -- if there's any change in your short-term strategy or short-term charter-in strategy on the drybulk side. You've mentioned that the coronavirus is having an impact across all markets or across all segments, and then just sort of wondering what your response has been.

A very topical question. Thanks, Poe. Obviously, being based in Asia, we have been very aware of this for well over a month now. And our first concern, of course, were with staff and ship crew. We actually -- our 3 members of staff, one who'd recently been in China and 2 returning, to do this self-imposed quarantine at home. And thankfully, they did the quarantine and no effects. And we obviously had a number of ships in China at the time, which we immediately instigated the various measures, including masks, temperature checking and everything that was required. So in that respect,-- it's an interesting one because, of course, China has slowed down. There's no doubting that the coronavirus combining with Chinese New Year. And with that, we have adopted a pretty conservative approach, we say, for the first Q1, Q2. It is way too early to say when China will normalize manufacturing and commodity imports. Obviously, they're doing everything they can. We see that in the press every day. Second largest economy in the world. They need to feed, and they need the economy to pick up. But I think we have very much conservative approach. We've got a number of ships out of the Pacific because, of course, the Pacific is very much focused on China. And we have been looking to where we can, at attractive levels, increase our commodity base or cargo base. And also, to be honest, we've started to see some interesting charter opportunities where there are owners out there now looking to cover. So it's something we're weighing up. That's timing. But this is having a big effect, and we have had to adapt. I mean we don't trade a huge amount in the Pacific at times. It's more Indian Ocean, Atlantic, and we're now thankful we adopted that. So be happen to be very, very careful because are we going to get force majeure issues in China, are ports, countries in the world going to maybe quarantine ships just like the old days. In the old days, quarantine was 40 days. So let's see. So we're very aware of ships we've had there, where they're trading next and what goes on. So we're doing everything we can, but fundamentally adapting or adopting a very -- we started kind of a month, 6 weeks ago, a conservative approach going forward. Let's not bet when this will end. Obviously, when it does end, it could be interesting or very interesting because China will have to rebuild the stockpiles it's using at the moment. And as we've seen on the financial side, we'll have to stimulate the economy. But let's wait for that to happen at the moment.

And it would seem like the same comments would be impacting your potential acquisition strategy or growing the drybulk side. Clearly, having the IVS Bulk JV acquisition done is a nice step forward because it takes a lot less of your attention. But same comments for the acquisition side?

Yes. I mean obviously, any market like this, after the last 7, 8 years we've had and then we get this black swan event as, Steve's doing, looking after the balance sheet cash. But we also -- as I mentioned in my commentary that the scrapping will increase out there. And there's no doubting that there will be stress among some people, and there will be some attractive opportunities. But it's something we're obviously looking at continually. I think it's probably a little too early to call when. But you can sense some of -- should we say that the Greek buyers kind of sensing that it's a good time to buy those that are in a position. I think we will be at the same preselected opinion. But at the moment, let's just get through Q1. And China is learning -- restarting the coal burn. Thermal coal burn is increasing, which indicates factories are getting back to work. Congestion in Shanghai, Beijing, all over China is slowly but surely, picking up, indicating that there's more car use. People are getting back to work. But I keep on stressing, let's be a little conservative for the next couple of months and see where this takes us.

Understood. And then any way to quantify the impact of IMO 2020 as far as the increased -- you've mentioned disruption and then also increased storage bid. Any way to quantify that and then potentially even look at how long you think it's going to last?

Look, [indiscernible] -- it was interesting because, of course, it starts at the beginning of the year. So it combines with Chinese New Year and the coronavirus. So for 2 to 3 weeks, the price of clean fuels spiked very high as 95% of the fleet wanted it and that, combined with the weaker market. And that was quite an issue in terms of rates tumbling, and I think people have been discussing with the boarding exchange that you haven't factored in the massive differential in the fuel price. That seems to be evening out with the average over the world now is quite, to guess, about $170 differential, and in some countries, a little over $100. What has happened, of course, which was with the higher fuel price and also the market is that ships have slow down even more, which, of course, is always very, very positive for shipping. On the tanker side, it is same because, of course, in some of the Chinese exports so that -- in the clean product trades that have fallen, which means that other countries have taken up the slack. And that is, in some areas, has increased ton sea miles. And we're seeing some new trades developing that we don't generally see, where countries have always been dependent on China, having to source there, in our case, jet or gasoline from other countries. So as usual, we're shipping. It's always one door shuts, another one opens. There's always opportunity. And of course, I hadn't mentioned, you've got this disastrous locust situation in East Africa, where the National Geographic, not prone to exaggeration, is quoted "of biblical proportions " And they're talking there of maybe 1 billion, 1.5 billion people being affected. And that's -- we're already seeing grain going in. So that's, again, conversely, as usual with shipping, one disaster happens, we suffer. Another one happens, it becomes opportunity. So all in all, it's as usual with this industry, it's a roller coaster.