Pacific Basin Shipping Limited (2343) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to today's Pacific Basin 2019 Annual Results Announcement Call. I am pleased to present Chief Executive Officer, Mr. Mats Berglund, for the first part of this call. [Operator Instructions] Mr. David Turnbull, please begin.

Okay. Thank you. Thank you very much. I'm the Chairman of the company, and I'm joined by our CEO, Mats Berglund; and our CFO, who is on the line from Italy. In spite of a very difficult time, we made a small profit, a profit of $25.1 million, and we continue to perform well, I think. The Board is recommending a dividend of HKD 0.021. 2020 has started, well, very -- a very difficult time. Coronavirus has headwinds. And we expect the year to be very difficult. But we've shown before that our company, Pacific Basin, as you can, manage all these things very carefully and adeptly. I will ask Mats now to present our results for the year, and then we will talk about it a bit more, and then we will answer questions for you. Thank you. Mats?

Thank you, David, and good afternoon, ladies and gentlemen. Please turn to Slide 2 for a summary of our report. As David said, 2019 was a volatile and challenging year for dry bulk shipping. The market and our own trading were also heavily impacted by preparations for IMO 2020. Cleaning fuel tanks and switching fuel on all our Handysize ships and repositioning a majority of our owned Supramaxes to China and installing scrubbers on them is a massive undertaking. But in challenging times, our platform and business model really shows its value, and our TCE earnings outperformed the market indexes even more than in prior years. Our ship operating expenses, G&A overheads and financing costs remain well controlled and, like our TCE, are also very competitive compared to most of our peers. In early February 2020, we completed our scrubber retrofit program with scrubbers successfully fitted, certified and fully operational on 28 of our 35 owned Supramaxes, all substantially on time and on budget and all completed before the coronavirus-related delays at shipyards that many owners are now facing. Minor bulk continues to drive dry bulk demand and is expected to remain resilient once the coronavirus is contained and normal activity returns. 2019 saw higher net fleet growth than expected due to almost no newbuilding delivery shortfall compared to the scheduled order book and as scrapping remained subdued. Subject to the coronavirus effect on shipyard output, we expect dry bulk fleet growth to remain high in the first half of 2020 primarily due to newbuilding deliveries of larger ship types. However, the IMO 2020 effect is causing the speed of the global dry bulk fleet to slow down, effectively reducing supply, and scrapping to date is up significantly compared to last year. But these market factors are currently overshadowed by the negative effects on China and the world economy of efforts to contain the coronavirus. While we do not know how long the outbreak will last, we expect to see a rebound driven by catch-up demand and stimulus activity once the outbreak is contained. We strengthened our balance sheet last year and are very well placed to navigate the current volatility, and we are well set up for what we believe will be stronger markets in the longer term. Please turn to Slide 3. We made a net profit of $25.1 million in 2019, an underlying profit of $20.5 million and an EBITDA of $230.7 million. Our results benefited from our TCE earnings outperformance, enlarged owned fleet and competitive cost structure, but were adversely affected by weaker dry bulk market conditions and more off-hire than normal, especially in the second half of the year, due to scrubber installations and a record number of dry-dockings. We continue to grow our owned fleet with larger, high-quality secondhand acquisitions, focusing especially on adding Supramax ships and growing our Handysize carrying capacity by opportunistically trading up our smaller, older Handysize ships to younger and larger units, resulting in an even more efficient fleet with greater longevity. Consistent with this strategy, in 2019, we took delivery of 8 modern secondhand vessels, 2 Handysize and 6 Supramax, and we sold 2 older smaller Handysize vessels. A few additional transactions will soon increase our owned fleet to 117 ships. We tapped diverse sources of external funding during the year, and Peter will soon tell you more about these funding initiatives, which enhanced further our liquidity position to USD 383 million at the year-end. Slide 4. Our Handysize and Supramax net daily TCE earnings of USD 9,630 per day and $11,720 outperformed the Baltic Handysize and Supramax spot market indexes by 41% and 24%, respectively. Average Handysize and Supramax spot market rates declined 17% and 13% year-on-year, but in contrast, our own TCE earnings reduced only 4% year-on-year. As at mid-February, we had covered 42% of our Handysize days for 2020 at about $8,910 per day and 60% of our Supramax days at about $11,390 per day. Slide 5. The first half of 2019 was negatively impacted by iron ore supply disruptions in Brazil and Australia, trade war and African swine fever effects on Chinese grain imports and a generally weak U.S. grain export season. The markets rebounded in the third quarter due to strong South American and Black Sea exports and the return of normal iron ore volumes, which pushed freight rates up to 4- and 5-year highs in our respective segments. Towards the end of the year, rates weakened as shipowners prepared for IMO 2020 implementation, undercutting each other to secure employment necessary to use up their high-sulfur fuel before the year-end IMO 2020 deadline. Going into 2020, Chinese import activity wound down for the Chinese New Year holidays. The usual rebound following the holidays has not yet really materialized due to the effects of containing the coronavirus outbreak, but the market has stabilized and cargo inquiries are now returning. Note on the graphs the recent upturn in spot market graphs, albeit from a low level. Please turn to Slide 6. We continue to outperform in terms of TCE earnings, and the average TCE premium we generated over the market indexes in the last 5 years is over $2,000 and $1,500 per day in Handysize and Supramax, respectively. The premium we generate over index earnings is driven by harnessing our experienced commercial and technical teams, global office network, strong cargo support and large fleet of high-quality interchangeable ships in ways that optimize ship and carbon combinations for maximum utilization. As a result, our ships are laden with cargo over 90% of the time and ballasting only 10% of the time. But it's not only on a TCE level that we are competitive. Our vessel operating expenses is well controlled at $4,080 per day driven by the scale benefits and uniformity of our fleet and our sector-leading, in-house technical management team. Our OpEx is inching up, but note that we are still well below our 2014 level of $4,370 per day. Our G&A overheads average $730 per ship per day spread across our total fleet of owned and chartered-in ships. We achieved this competitive G&A mainly through a lot of hard work on our cost structure, scale benefits and efficient systems. Our financing costs are favorable at $770 per day per owned ship. Our access to capital and cost of capital represent a significant advantage as our fleet is financed through long-term secured facilities at the most competitive cost in our industry and because we focus on primarily good quality secondhand Japanese-built ships rather than more expensive newbuildings. Our earnings and cost outperformance amounts to a Pacific Basin advantage of over $2,000 per ship per day on average compared to the peers in our segments who publish comparable information. Please turn to Slide 8. Clarksons estimates dry bulk demand grew at 0.7% in 2019, mainly due to lower iron ore tonne-miles. Minor bulk demand grew faster at 2.1%, partly due to strong Chinese imports. 2020 has started with weak rates with the usual Chinese New Year seasonal weakness compounded and prolonged by reduced Chinese demand and disrupted logistics caused by actions to contain the coronavirus. Despite recent downward adjustments to growth estimates for 2020, demand for minor bulk commodities overall remains healthy, and we expect a rebound driven by catch-up demand and stimulus activity once the virus outbreak is contained. Clarksons estimates minor bulk tonne-mile demand to grow 2.5% in 2020 and 3% in 2021, while the combined Handysize and Supramax fleet is expected to grow slower at around 1.9% net for 2020 and 0.5% net for 2021. Slide 9. Clarksons Research have corrected upwards their historical newbuild ordering and deliveries records. This is mainly because many shipyards have held contracts and blocks for their own account and then resold these contracts much later to avoid the extra construction costs of Tier 3 engines and other new regulations. Clarksons now estimate that the global Handysize and Supramax fleet grew 3.1% net last year, and the global dry bulk fleet overall grew faster than expected at 3.9%. Unusually, there were almost no shortfall in newbuilding deliveries compared to the scheduled order book, which, combined with minimal scrapping, caused net fleet growth to increase. Scrubber installations took many larger ships out of service for several weeks, which helped to moderate fleet supply in the second half of the year and will continue to benefit the markets through the first half of 2020. Clarksons currently estimates overall dry bulk supply to grow at 3.4% net in 2020 and 1.5% in 2021. Again, the global Handysize and Supramax fleet is estimated to grow slower at 1.9% net in 2020 and 0.5% in 2021. Slide 10. New ship ordering activity reduced significantly in 2019 and is expected to remain subdued going forward. The commercial case for ordering new ships is weak as the gap between newbuilding and secondhand prices remain high. This large gap and uncertainty over upcoming environmental regulations and their impact on future vessel designs and propulsion technologies are discouraging owners from ordering new ships with old technology. Slide 11. The IMO 2020 global 0.5% sulfur limits took effect on the 1st of January 2020, and the majority of the global dry bulk fleet, especially smaller vessels such as our Handysize ships, are complying by using low-sulfur fuel. The higher price of low-sulfur fuel reduces ships' optimal operating speeds, and this trend is very clear since the fourth quarter last year. Many larger ships will continue to be taken out of service in 2020 for scrubber retrofits, which, combined with the reduced operating speeds of non-scrubber fitted ships, will mitigate effective supply growth this year. Having scrubbers on 28 of our owned Supramaxes provides us some optionality in how we manage our fuel. And based on the fuel price spreads seen in early 2020, our scrubber-fitted ships are making a significant contribution to our Supramax earnings. I now hand you over to Peter, who will present the financials, and I will then be back afterwards with a wrap-up. Peter?

Thank you very much, Mats, and good afternoon, ladies and gentlemen. Please turn to Slide 13. The group posted a net profit of $25.1 million in 2019 compared to $72.3 million in 2018. However, EBITDA increased from $215.8 million to $230.7 million due to the adoption of the new lease accounting standards HKFRS 16. Adjusted for these accounting changes, our EBITDA would have been $184.9 million. Owned vessel costs increased during the year, mainly because we added more owned vessels to our fleet, but also, we had some increases in the per vessel per day costs, primarily because of higher depreciation from ballast water treatment systems and scrubbers, but also due to crewing, repair and maintenance, ballast water operation in preparation for IMO 2020. G&A increased by $1.4 million, mainly due to an increase in our staffing overhead, but it has reduced on a per-vessel, per-day basis. The underlying profit of $20.5 million was lower than the net profit, mainly because the net profit takes into account mark-to-market gains from our unrealized bunker swaps due to the increase in bunker prices since the start of the year, which is partly offset by vessel disposal losses. As David mentioned earlier, the Board recommends final dividend of HKD 0.021 per share, Hong Kong dollar that is. This represents half of our net profit for the full year, which is consistent with our dividend policy. Now please turn to Slide 14. Compared to 2018, our Handysize revenue days decreased by 4% and our TCE earnings also fell by 4% to $9,630 per day, resulting in a Handysize contribution of $55.4 million. Our Supramax revenue days increased by 12%, mainly due to acquisitions of Supramax vessels, and our TCE earnings dropped by 4% to $11,720 per day, resulting in a Supramax contribution of $23.1 million. Going forward, you should expect the proportion of our Supramax contribution to our earnings to increase as a result of our investment in scrubbers on the majority of our owned Supramax ships. The otherwise stable post-Panamax contribution has reduced by $1.4 million, mainly because of the adoption of HKFRS 16 accounting standards. Now please turn to Slide 15. On this slide, our Handysize owned vessel costs increased by 3.2% to $7,650 per day mainly due to higher operating expenses related to crewing, repair and maintenance, ballast water treatment system operation and IMO 2020 preparation. Our depreciation costs were slightly increased because of the installation of ballast water treatment system. In relation to chartered-in costs, we no longer have the benefit of onerous contract write-backs, and the cost per day of the long-term charters were above market rate. These are gradually expiring, and we are replacing them with owned ships at lower breakeven levels and with short- and medium-term charted-in ships. Now please turn to Slide 16. Our Supramax owned vessel daily costs increased by 6.1% to $8,580 per day, mainly due to higher operating expenses and depreciation costs owing to the scrubber installation program, partly offset by slightly lower finance costs per day. As is the case in the Handysize segment, our cost on long-term chartered Supramaxes was above market rate in 2019. On the next slide, 17, we aim to illustrate our significant operational leverage and how our earnings move in relation to changes in the freight rates. The chart sets out our 2019 Handysize and Supramax TCEs per day compared to the all-in costs per day depending on whether a vessel was owned or chartered-in on a short-term or long-term basis. Our owned and long-term chartered-in vessels have largely fixed costs, and an increase or decrease in achieved freight rates will directly impact the underlying profit. We say that for each $1,000 change in daily TCE, the underlying profit and operating cash flow of the group will change between $35 million and $40 million, taking into account that we typically have 20% to 25% long-term forward cargo cover for the next 12 months at any point in time. In addition to the direct vessel costs, we have G&A which we divide between owned vessels at $940 per day and chartered-in ships at $530 per day. The blended G&A per day across our entire owned and chartered-in fleet is $730 per day. It is important to remember that our reported 2018 long-term chartered-in rates were positively affected by a $16.1 million release of onerous contract provisions, which were not available in 2019 as these provisions were fully written back at the end of 2018. We also incurred more off-hire and depreciation costs due to the scrubber installation program and higher OpEx costs in general in 2019. Our short-term and index vessels are largely used to trade for profits and to optimize the earnings of our core fleet. Both revenue and cost per day largely follow market rate levels. Hence, for the purpose of this analysis, we do not assume any relevant sensitivity for short-term and index vessels from overall movements in the freight markets. Now please turn to Slide 18. With the new HKFRS 16 lease accounting changes, the operating cash flow for 2019 was $217 million. If we adjust this to include all long-term and short-term charter-hire payments, we had operating flow of $174 million in 2019 compared to $190 million in 2018. Our net cash flow from investment activities was a negative $144 million in 2019, comprising total CapEx of $184 million, which includes cash payments for acquired vessels, regular maintenance CapEx, dry-dockings as well as the installation of ballast water treatment systems and scrubbers. Eight vessels were added to our fleet in 2019, and one more was added in January 2020, and we docked some 50 vessels during the period. This CapEx was offset by disposal proceeds of $15.5 million from the sale of 3 of our older Handysize vessels as well as interest income and other items. 2019 in general was a major investment year for Pacific Basin. We chose to do a large number of dry-dockings, including investment in ballast water treatment systems and scrubbers, setting up for what we believe will be stronger markets in the future. Consequently, you should expect us to have lower dry-docking CapEx in 2020. Our net cash flow from financing activities was a negative $202 million in 2019. This mainly comprises the net drawdown on our committed facilities, regular loan amortization, interest costs, including those on our lease liabilities, and any dividends paid. In terms of financing, in May 2019, we closed a new $115 million syndicated 7-year reducing revolving credit facility against 10 of our vessels at a very competitive interest cost of LIBOR plus 135 basis points. In November, we closed a new $50 million unsecured 364-day revolving credit facility at an interest cost of LIBOR plus 75 basis points. And in December, we issued new convertible bonds of $175 million with a coupon of 3% per annum, and they will mature in December 2025. Including the $125 million repayment of the old convertible bonds in July and August last year, the repayment of our borrowings and the dividend payment of $22 million, our cash position reduced to $200 million at the end of 2019. However, we had undrawn committed facility of $183 million at the end of the year, which means that we had available liquidity of $383 million, which is $41 million more than at the end of 2018, so our expected cash position has increased. And this is a very strong cash position, sufficient to service our debt, meet our capital expenditure requirements and continue to grow our own fleet should opportunities present themselves. Now please turn to Slide 19. At the end of 2019, we had vessel and other fixed assets of $1.9 billion. Our vessels were financed by $863 million of interest-bearing liabilities. Cash and deposits, as mentioned, stood at $200 million, giving net borrowings of $663 million, and that is 35% of the net book value of our owned fleet, which is a 1 percentage point increase compared to the end of 2018. And as previously mentioned, our liquidity position at $383 million is very strong. I now hand you back to Mats for his wrap-up.

Thank you, Peter. Please turn to Slide 21. Looking ahead, we support IMO's ambitious goals of improving the global fleet's carbon efficiency by at least 40% by 2030 and then cutting our industry's total greenhouse gas emissions by half by 2050. This will require research and development of new fuels, engine technologies and bunkering infrastructure that are not yet available and will take time to develop. In the short term, what the industry can and should do to reduce emissions is to invest further in such initiatives that bring incremental energy efficiency gains and, most importantly, to slow down the speed of existing ships and refrain from ordering new ships with old technology. In a few years, more detailed regulations will likely be introduced to drive the decarbonization movement so the industry meets the new IMO emissions reduction goals. To follow and contribute to this development, we have joined the recently formed Getting to Zero Coalition committed to exploring how to achieve these goals. Meanwhile, we are already among the most carbon-efficient companies in our segment, partly because our ships are laden with cargo over 90% of the time. That is a significant advantage compared to the average owner of similar ships, which spend more time in ballast. Additionally, we invest in fuel-efficient secondhand Japanese-built ships, energy-efficiency technologies and fuel-optimization practices that reduce our emissions. And importantly, we carry primarily nonfossil fuel commodities that will be the mainstay of global seaborne trade in the long term. We are well equipped with an excellent team and good financial health to adapt and cope both practically and financially with compliance and new technology. On Slide 22, we share with you a summary of our key strategic priorities for the medium to longer term. We will maintain our business model as a fully integrated ship owner and operator, both asset-heavy and asset-light, with a strong focus on safety, cargo and customers with an office network that keeps us close to customers all around the world. Over the long term, we see upside in secondhand values and continue to grow and renew our owned fleet with quality secondhand acquisitions. We still own a smaller proportion of our Supramax ships, so expect us to grow our owned Supramax fleet more than Handysize. We are not contracting newbuildings due to their high price, low return, and because of the uncertainty over new environmental regulations, which will impact future vessel designs and technology. We will continue to reduce the number of ships we take in on long-term charters, replacing them with owned ships and short- and medium-term chartered ships. We're investing in further optimization on our existing ships, and we will invest in low-emission ships in the future when they become technically and commercially viable. Our empowered local chartering and operations functions continue to be key as they are close to customers, benefiting from best-in-class centralized support, systems and technology for optimum efficiency. We keep building our brand, applying long-term thinking, safety, care and quality in everything we do. Last but not least, we will keep our balance sheet strong, enhancing our ability to take advantage of opportunities to grow our business and attract cargo as a strong partner. Wrapping up on Slide 23. We have worked hard over several years to streamline and focus the company and grow our core business. Our outperforming business model, including experienced staff and very importantly, a much larger owned fleet with an efficient cost structure, position us well for the future. For Pacific Basin, 2019 was a year heavily influenced by investments and preparations for new environmental regulations, including scrubber installations, optimization programs, a record number of dry-dockings and continued acquisitions of quality secondhand ships, all serving to set us up for what we believe will be stronger markets in the longer term. Having navigated a difficult decade, including a 45-year low in 2016, and despite the current turbulence, we are looking forward to a new and much better decade ahead for dry bulk shipping. Thank you for joining us today, and thank you for your continued support.

Well, thank you. And if I may, can I ask any of you to ask a question?

[Operator Instructions] We have the first question from the line of Parash Jain from HSBC.

Mats, if I may ask 2 questions, I mean, and to Peter as well. Firstly, when we talk about TCE, especially what we have seen year-to-date, how should we think about the rates that you managed to get from your scrubber-fitted Supramax versus Supramax that did not have scrubber? And the rate guidance for 2020, would it still be TCE assuming a vessel does not have a scrubber? How should we think about that? And my second question, when we look at the operating cost -- and I appreciate that the costs in 2019 were accelerated because of the cost associated with retrofitting and dry-docking, et cetera. Do you expect this to normalize going into 2020, 2021? Maybe if you can answer these 2 first.

Thank you, Parash. Well, the TCE going forward for Handysize is obviously, as always, without any scrubbers, and we have 42% of the days covered at $8,900 per day in spite of current market levels having been $3,000, $4,000 per day. So very strong value of our platform and cargo system there. The Supramax is a combination of all our Supramax ships, of which 28 are Supramax fitted. We completed the last installation very early February. But from here on, it will be 28 Supras with scrubbers, and the rest will not have it, right? So overall, a vast majority of our fleet, if you base it on more than 200 ships as we typically have, it's about 15% of the fleet that have scrubbers and the rest do not. The scrubber benefit is totally dependent on the fuel price spread, which we show there on one of the slides. It's now around $200 per tonne. Early in the year, it was $300 per tonne, and we've obviously bunkered a lot of these ships early in the year. So we have a significant benefit, and we are happy with the returns that the scrubbers are giving us. Peter, maybe you want to comment on the operating cost?

Yes. Thank you. Thank you, Parash, for your questions. Yes, I mean, you're right to say that the cost increases in 2019 were, to some extent, a little bit one-offs in that we took -- we did a lot of preparation for IMO 2020. We put a lot of equipment on, which kind of pushed up the depreciation, et cetera. So I mean I think you should expect the cost increases to sort of normalize going forward more to sort of an inflationary rate. Of course, it depends on whatever new regulation comes up that we have to comply with for the long run, but 2019 was a little bit exceptional from a cost increase perspective.

And remember...

That makes sense. And just Mats -- just to follow up on what Mats talked with respect to the TCE. Can you give us a sense, let's say, at $200 spread, some of your modern Supramax probably must be burning around 20, 25 tonne a day? Is it a fair guestimate that the differential in TCE between Supramax with the scrubber and without the scrubber hovers around $4,000 to $5,000?

No, that is too high. You're in port for some 40% of the time, so you only have the benefit when you're in the open ocean. So roughly a Supramax consumes, call it -- it depends on speed, right? But on 11.5 knots, about 5,500 tonnes per year, of which about 80% is heavy fuel oil and the rest is MGO that you burn in ports and in the SECA areas, et cetera, where you're not allowed to use the scrubber. So 80% times 5,500, and then you apply the scrubber differential. But then you also have slightly higher operating costs on a scrubber ship. So at today's forward curve, the payback time is roughly 3 years. And we're -- it's -- but that has a higher, quicker return in the earlier periods than in the later period due to the curve of the forward price spread. Happy to give you more details offline maybe on that.

We have the next question from the line of Sally MacDonald for Jing Liang of Marlborough.

Thank you very much for the presentation and the results. I wonder if you can talk us through, in more detail, the rather moving target that we have in terms of the impact of the virus at the moment, in terms of the numbers of days that you have lost. What percentage of your costs are fixed costs as opposed to variable? Whether you're starting to see bad debt from your customers? Whether -- you say you have undrawn facilities at the bank as well, but are the banks still prepared to lend on these? Because we're hearing some really terrible stories out there at the moment, and we'd like you to just clear it up.

Sorry, this is the Chairman speaking. So what is your question exactly?

The impact of the coronavirus so far, the number of days that you have lost, what percentage of fixed costs you have, whether you're seeing any bad debt at the moment, whether your undrawn facilities at the bank are still good to draw.

Okay. So let's start.

Yes. It is no to basically all these questions. We have not lost any days. There's no effect on availability of financing due to what's going on. There are no customers that have not performed under any of our contracts. Chinese ports are operational. We have ships in and out of there on a regular basis. Our ships are operating as normal. The effect is on the rate levels, which is lower than the normal. The normal rebound after Chinese New Year has been delayed, but China is gradually coming back to work, as you can see on the spot market rate graph that rates are inching up. But the effect is on the overall freight rate level, which is low, lower than normal, but things are improving, and China is gradually coming back. Most of our customers are now fully back, operational, but we have seen lower volumes imported to China than normal, and that is having an effect on the overall cost level. You're asking about fixed and variable costs. We have that in our disclosures there, how much of our forward is covered and how much is open.

If I may, to the lady on the line, can I ask where you're calling from?

Yes, the U.K. So I'm not expecting that, that part was asked...