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

Welcome to today's Pacific Basin 2020 Interim Results Announcement Call. I am pleased to present Chief Executive, Mr. Mats Berglund. [Operator Instructions] Mr. Berglund, please begin.

Thank you, and welcome, ladies and gentlemen. Thank you for attending Pacific Basin's 2020 Interim Results Earnings Call. My name is Mats Berglund. I'm the CEO of the company; and I'm joined by our CFO, Peter Schulz. Please turn to Slide 3 for a summary slide on our first half highlights. In a challenging half year dominated by the global COVID-19 pandemic and related economic disruption, we delivered a positive EBITDA of USD 79 million and outperformed Handysize and Supramax market rates by a significant margin. We are encouraged by the fact that spot rates have more than doubled since the low point in May. Demand is typically stronger in the second half of the year, and we expect newbuilding deliveries to be a bit fewer. So we have good reason to expect a seasonally stronger, albeit volatile second half, and we believe that at least the worst of the market is behind us. Our midyear committed liquidity amounted to a very strong USD 350 million, which is valuable in uncertain times like these. Our vessel operating expenses and G&A overheads are both competitive and well-controlled and are running slightly below last year's levels. We grew our owned fleet to 117 ships. We continued to reduce our long-term chartered fleet and thereby reducing our core fleet breakeven levels further. And overall, we had 235 ships on the water at the end of the period. Crew changes remain our and our industry's largest operational problem during the COVID pandemic. This is due to entry, exit and quarantine restrictions and also due to extremely few flights in and out of China for our Chinese group. We owe significant gratitude to our seafarers and are supporting them vigorously. We continue to work hard with authorities and industry organizations to push for solutions. Please turn to Slide 4. Our underlying results were negatively impacted by weaker dry bulk freight rates due to global effects -- global efforts to contain the pandemic while the dry bulk fees continue to grow. And in spite of our continued TCE outperformance and competitive cost structure, we made an underlying loss of $26.6 million, including a $198 million of noncash impairment of our Handysize core fleet, primarily our smallest and oldest Handysize vessels. We made a net loss of $222 million. This impairment does not impact our operating cash flows, EBITDA or available liquidity and will result in lower depreciation costs, higher earnings per share and higher return on equity going forward, all things being equal. Slide 5. Our core fleet generated average Handysize and Supramax daily TCE earnings of $7,190 and $9,980 net per day. While down 22% and 8% year-on-year, these TCE earnings are highly respectable, given index earnings of only about $4,900 and $5,700 for Handysize and Supramax, respectively. As at late July, we have covered 60% of our currently contracted Handysize days for the second half of 2020 at about $8,400 per day net and 75% of our Supramax days at about $10,800 per day net. Note that these cover rates indicate a positive trend and are at or just above our estimated P&L breakeven levels for the second half of 2020. Slide 6. We outperformed Handysize and Supramax index rates by $2,270 and $4,250 per day, respectively, in the first half as Supramax outperformance was particularly strong, partly due to the significant scrubber benefits that we realized early in the period. So far, we have achieved a net saving of $23.1 million on our scrubbers, representing 38% of our roughly $60 million original scrubber investment. $7.4 million of the saving was achieved by closing out bunker price spread hedges. Our operating activity generated a healthy margin of $1,790 net per day in the first half of the year and $1,400 net per day in the past 12 months. And this is on short-term shifts that we chartered specifically to carry spot cargos. Our operating activity complements our core business and matching our customers' spot cargos with short-term chartered ships even when our core ships are unavailable, thereby providing a service to our customers and making a margin and contributing to our group results regardless of whether the market is weak or strong. In fact, we made $12.5 million on this activity in spite of the very poor market in the first half of the year. In Slide 7, you can see the development of spot rates so far this year compared with prior years. Seasonal Chinese New Year weakness early in the year was compounded by measures to contain the COVID outbreak in China. Following a partial recovery in March as Chinese activity gradually returned, the market weakened again from late March until early May as the coronavirus spread and severely impacted activity around the world. Despite estimates of a significant reduction in demand in the first half of the year overall, we have observed increasing levels of trade and inquiries in recent months. This has caused index rates to double since the low point in early May, and rates are above previous lows for this time of year. Turning to Slide 8. You will see that indicative cargo loading data points to a 1.7% reduction in overall dry bulk loadings compared to the same period last year. However, note the strong bounce back in June when global dry cargo loading volumes reached an all-time high. On Slide 9, we show indicative cargo loading data separately for each of the main dry bulk cargo sectors. Grain volumes grew strongest during the first half at plus 12% compared to last year, driven by record exports from East Coast South America and by recovering Chinese soybean demand as swine fever is receding. If you look at the scale of these charts, you will see that the strong volume increase in June was led by, first of all, minor bulks and second most growth we had in iron ore. This is primarily driven by strong Chinese economic activity, with domestic steel production in June recording an all-time high. Coal and construction materials were the weakest performers, affected by lower energy consumption and construction slowdowns throughout the world due to the pandemic. But the recovery is hopefully underway with coal volumes, as you can see, edging up in June, albeit from low levels. Slide 10. Clarksons Research estimates that the global dry bulk fleet grew 2.2% net during the first half year, mainly due to significant Panamax and Capesize newbuilding deliveries and little scrapping. However, we expect lower supply growth in the remainder of the year as newbuilding deliveries will be fewer and due to scrapping being allowed again as the Indian sub-continent scrapyards are gradually opening up. Scrapping volumes though will depend on what freight rates will do. Uncertainty over environmental regulations and future vessel designs will result in less new ship ordering and deliveries leading to tighter supply. Currently scheduled newbuilding deliveries in 2021 are down 34% compared to the 2020 deliveries as forecasted 1 year ago at this time. The Handysize and Supramax order book is smaller than for the larger ships and the lowest in percentage terms since the 1990s. We do expect the overall dry bulk order book percentage to reach an all-time low later this year. I now hand you over to Peter, who will present the financials. Peter?

Thank you very much, Mats. Good afternoon, ladies and gentlemen. Please turn to Slide #12. The group posted a $79 million positive EBITDA but an underlying loss of $26.6 million in the first half of 2020 as a result of weaker market conditions. The net loss of $222 million was mostly due to the $198 million noncash impairment on our Handysize fleet. While our owned vessel costs increased during the year as we added more owned vessels to our fleet, the per day cost reduced due to lower travel costs. G&A also decreased primarily due to less travel and various other cost reductions. Since the group has posted a loss, the Board has decided not to declare any interim dividend for the period. Please turn to Slide #13. As our core Handysize TCE earnings per day were below our core blended costs per day, our Handysize fleet posted a negative contribution of $16 million in the first half of 2020. However, our core Supramax TCE, boosted by scrubbers on 28 of our vessels at over $1,000 per day higher than the core blended cost, which yielded an average positive Supramax contribution of $5 million. Our operating activity contribution was a strong $12.5 million or $1,790 per day. Now please turn to Slide 14. On Slide 14, our Handysize owned vessel cost reduced to $7,530 per day, mainly due to lower operating expenses related to less travel. We should expect these costs to increase again post pandemic. Our depreciation costs, on the other hand, increased slightly due to the installation of ballast water treatment systems. However, depreciation on our Handysize vessel will reduce by about $600 per day going forward due to the recent impairment. The cost per day of the long-term charters were above market rates. However, these are gradually expiring and we are replacing them with owned ships at lower breakeven levels and with short- and medium-term chartered-in ships. We have covered 60% of our second half committed days at $8,420 per day, which is at expected second half blended P&L breakeven levels. On the next slide, we see Supramaxes. Our Supramax owned vessel daily cost reduced to $8,540 per day for the same reason we saw a reduction in our Handysize costs. As is the case in the Handysize segment, our cost of long-term chartered Supramaxes was above market rates in 2020. However, 75% of our committed days in the second half of 2020 have been covered at about our blended P&L breakeven levels. On the next slide, we reiterate how to model our business. For each segment, the core TCE multiplied by the number of core revenue days provide the revenue. And the core blended costs multiplied by the number of core vessel days provide the cost. Operating activity can be calculated using the daily operating margin multiplied by the number of operating days. Our core 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 to $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. This, of course, assumes a stable of booking activity profit. On Slide 17. The operating cash flow for the first half of 2020 was $77.5 million, inclusive of all long and short-term charter-hire payments. Despite lower TCE rates, this was actually about $5 million higher than the same period last year due to variations in working capital. Our borrowings increased due to drawing down $213 million on existing and new committed loan facilities, which was offset by regular amortization of $59 million. The new facility we drew on was a $30 million bilateral 7-year reducing revolver secured against 3 vessels with which we closed in June at a very competitive cost of LIBOR plus 1.6%. CapEx consisted of $38 million paid for 3 vessels delivered in the first half of 2020 and $52 million in dry docking, scrubbers and ballast water treatment systems. We docked some 20 vessels during the period and fully completed our scrubber investment program. Including the dividend payment in May, our cash position increased to $316 million at the end of the period. Now please turn to Slide 18. Our committed liquidity was $349.5 million at the end of the period, a significant number. In the second half of 2020, we expect regular maintenance CapEx of around $20 million and about $80 million in scheduled debt service, including interest payments. In addition, a $50 million unsecured revolver is maturing in November. We expect all of these commitments to be comfortably met by existing liquidity and operating cash flow. At the end of June 2020, our net borrowings were 41% of the net book value of our owned wet vessels, which is a 6 percentage point increase on the end of 2019 but well below our KPI of maximum of 50%. This is driven by the net increase in borrowings and the impairment of our Handysize vessel. I now hand you back to Mats for his wrap-up.

Thank you, Peter. On Slide 20, we share with you a summary of our key strategic priorities for the medium to longer term. Unlike many other shipping companies who are increasingly going asset-light, we will continue to develop our somewhat unique business model of having both, A, a fully integrated, core, asset-heavy model with owned and in-house managed ships, allowing us to control safety and service quality to our customers; and B, an asset-light model where we use short-term chartered-in ships to provide a service to our customers while making a margin regardless of whether the market is weak or strong. Our plan is to continue to grow primarily our owned Supramax fleet, while in Handysize, we trade up by replacing smaller with larger-size vessels. Over the long term, we see upside in secondhand values but out of caution during this period of very uncertain market conditions, we have paused our spending on growing our owned fleet, preserving our capital unless we find particularly compelling opportunities. Like most other shipowners, we are not contracting newbuildings with what we consider old technology due to their high price relative to secondhand ships, lower returns and because of the uncertainty over new environmental regulations. And we will wait until low-emission ships become technically and commercially viable. We are investing in further optimization, systems and process improvement on and across our ships and in our offices. Initiatives include fuel and energy savings, automation, software and AIS data analysis to improve our competitive edge, both on revenue and on costs. We have a strong cash position and will continue to keep our balance sheet and liquidity strong, enhancing our ability to take advantage of opportunities to grow our business and attract cargo as a strong partner even in challenging times. Wrapping up on Slide 21, we have worked hard over several years to streamline and focus the company and grow our Handysize and Supramax business. We have reduced both OpEx, G&A and cost of long-term charters significantly over the last few years. Our healthy balance sheet and strong liquidity position, combined with our outperforming business model, experienced staff, substantially larger owned fleet than before and competitive cost structure position us well for the future and for what we believe will be improving freight market conditions in the second half. COVID-19 has been a very unfortunate setback for businesses and people all over the world. This makes for significant uncertainty and markets will likely remain volatile. But we do expect that at least the worst of the market is behind us and that we will see a seasonally stronger second half, assisted by stimulus measures and fewer newbuilding deliveries, which should bode well for our business, both in the second half and beyond. Ladies and gentlemen, that concludes our results presentations -- presentation, and lines will now be opened for any questions you may have. Operator, over to you.

[Operator Instructions]

We have a question on line. Jeff, should we do that first? Yes. Okay. So there's a question from -- there's a question from Parash Jain from HSBC. Can you please help us understand the math behind the Handysize vessel write-down? What drives that decision? And do we expect the same to Supramax in the future? So it was the uncertain market outlook that prompted us to look at the carrying value of our fleet. However, it wasn't necessarily a more negative rate scenario that prompted the actual impairment. It was predominantly driven by changes in methodology. And let me explain that. We have historically treated all our Handysize vessels as one cash-generating unit as the same as Supramax, that is one cash-generating unit. So we've had 25 Supramax as 2 separate cash-generating units. However, a long-term trend in the Handysize market is that smaller and older vessels, and we have quite a few, 28,000 deadweight tonnes ships, as you know, of increasingly trading in different manner and with different customers and different routes from the larger Handysize, and they are becoming less interchangeable with our larger Handysize ships. And a condition to have ships within the same CGUs are -- is that they are almost perfectly interchangeable. So when we looked at this, we decided that since they are not fully interchangeable to separate out the smaller Handysize ship in a separate CGU. And by doing that, we can no longer have sort of an average rate expectation across all our Handysize, but we have to have a separate rate expectation for the lower and for the smaller and the larger ships. And that crystallizes a need for impairment on the smaller and older ships. So it doesn't mean that the average expectation for future rate has changed. It's just that it's crystallized by putting these ships into a separate CGU. And that is the key driver for the impairment. There were a few other changes in assumptions, but that was the most material one. And I hope that answers your question. Oh, sorry, you also asked whether we should expect any impairment on Supramaxes in the future. The answer is unless there's a significant further deterioration in the market, we do not expect any further impairments.

Any question on the phone?

Yes, sir. We have a question from the line of Andrew Lee from Jefferies.

I have a few questions. The first question is on the impairment, right? I think you mentioned during your presentation that you were looking to potentially phase out these older and smaller vessels with bigger ships or the chartered, right? How quickly are you looking to phase these vessels out? That's my first question. Second question is on Slide 23, where you provide the vessel days under long-term chartered commitments. Do you have any guidance in terms of like -- for the second half, how much short-term core days? How many operating days you will have, right, for the second half and into next year as well? And then maybe 2 more questions. Is any update on how the grain season will look? And then final question is you're positive on the second half outlook. But as you mentioned, you're not looking to basically increase your owned fleet, right? You're not looking to buy any second-hand vessels. If -- what would make you change your mind? Is it when margins hit a certain level, when rates hit a certain level? I'm just trying to get a sense on what will change your mind.

Thank you, Andrew. So first question regarding selling or trading up within Handysize there, how quickly will we sell or trade up to -- in Handysize. It depends on opportunities. Mainly history is a decent guide there, right, when we have sold maybe 3 ships a year of the smaller ones or something like that. Another guide to see when our ships kind of get close to the 20-year mark, there's no cutoff in 20 years or anything but expect us to sell maybe 2, 3 ships a year, but it depends on opportunities and specific vessel situations. You asked about the grain season, how does that look. Well, the reports of a big crop in the U.S., but these things can change with weather, et cetera, but all things looking good so far for the Northern Hemisphere grain season. Again, we have had extremely strong grain volumes out of the South American east coast in the first half, right? So they have the seasonality right. So that season has been very good. So we're optimistic about that. And again, grain demand is recovering with swine fever receding in China and has been strong throughout the COVID period, right, people need to eat in spite of the COVID-19 situation. What will make us buy second-hand ships? We do say that if we come across extra compelling opportunities, we are prepared to open the wallet now, so it depends on what opportunities. And if they're really attractive, we may do it now. But we're looking for more indications of continued recovery and stability. We showed you the slide there on the strong recovery in June. But we like to see a little bit more than that to feel good about a real solid bounce-back in volumes longer term. Peter, can you try to answer a question of days forward? We have...

Yes. On the days forward -- yes. So yes, on Page 23, the core days, if we do not buy many more or taking more long-term charters, the number of core days in the first half should be fairly similar in the second half and going forward. So that depends on if we buy more [ or if we sell ] ships or take in or return more long-term charters. You have the number of long-term charter commitment in the table on the slide there. So there you can see that it is coming down over time, but it's not a big, big change for the second half. I mean operating days, it's always difficult to estimate how many operating days we have. But I would always say that the best estimate for operating days in the next period is how many did we have in this period. So if you want to model it, assume it's the same, unless there's a particular reason why we would choose to increase or decrease our operating.

Okay, Andrew?

Yes.

We have the next question coming from the line of Mike Sell from Alquity.

2 questions. Given the hog cycle in China, would you expect to be seeing very strong demand for soybeans over an extended period as the hog population rebuilds? And secondly, I realize that you benefit from trade wherever it may be. But could you talk about what you're seeing in terms of U.S. Chinese trade? Are you seeing a pickup? And is that additional to you or is that just displacing it and Brazil is losing out and America is gaining due to the Phase 1 trade deal?

The animal feed going into China is increasing due to the swine fever that have come to terms with the number of pigs, the population is increasing again. Exactly how much, it's hard to get accurate data, but there's clear evidence that it's coming back. We're not back yet up to the levels where we were before the swine fever hit, so there's recovery to be had there. Do we benefit from that? Yes, we do, as regards the impact on the overall market. But the way this market works is that it impacted overall markets like ships are movable and replaceable, so if we don't get it in one place with one type of cargo, we employ our ships elsewhere, right? But a recovering hog population in China is obviously helpful. Do we see those soybeans coming from the U.S. or South America? Well, they have bought a lot from South America in the first half. And whether they are to buy more from the U.S., the export season for soybeans in the U.S. is typically starting fourth quarter, starting in September or October, something like that. And they -- the volumes out of the U.S. doesn't really start bigtime until then. So it's yet to be seen. What we have seen so far is that China has bought unusually, so more corn and wheat from the U.S. These are not big quantities because China is basically self-sufficient on these commodities, but maybe that's an indication of -- that they're trying China to buy also from the U.S. But the big volume going into China so far has been soybeans from South America. Trade, other effects of the U.S.-China trade situation, we haven't really been -- I mean, the major impact in prior periods have been the lack of soybean. But again, that coincided with the swine fever, so it was kind of a double hit on the U.S. farmers, right? The tariffs and then swine fever was a double hit on them. We haven't had any other major impact on our business by the U.S.-China trade -- tariff trade war stuff. Other questions on the phone?

[Operator Instructions]

Maybe while we're waiting, we can have another online question. There's a question, can you give us an illustration of how much incremental benefits will be coming from the runoff of high-cost long-term chartered vessels? This is from Amiral Gestion. We have that on Slide 23. You can see in the table to the right the number of days and the rates. So you have both the number of days and how the rate changes there year by year. The long-term Supramax dates is basically coming to an end here shortly, right? In 2022, we only have one ship left. While in Handysize, it lingers on for a bit longer, but it's coming down significantly from an annualized level of more than 5,000 days this year to 3,500 next year and onwards down, right, to 3 -- what is it, like 5 ships left in 2024. Another question online. The strong rebound in minor volumes, is this just a catch-up following earlier disruption? Again, I think the situation is unusually uncertain at the moment. Nobody in the world really knows how the virus will develop further. But at the same time, the world is kind of coming to terms with it and are taking more targeted actions to deal with the virus and allowing more economic activity to take place. So we are cautiously optimistic, if you will. We do say that we expect the help from stimulus activities. Longer term, we will definitely have fewer newbuildings, so we do think that the worst of the market is behind us. We do think second half will be better than the first and that we are getting into better times, not worse. But whether that's extremely strong rebound in June is there to stay. It's very hard to say.

Another question online here from -- a follow-up question from Parash Jain, HSBC. So Parash is asking, how many such Handysizes were taken for write-down? What percentage of the value has been taken off? So the small Handysize, we have around 20 of these vessels, which are below 30,000 deadweight. And given that -- and you can -- given the lower TCE earnings on these compared to the larger Handysizes, it could be 20%, 25% less in many cases. When you crystallize that, there's a significant reduction compared to our carrying value, probably to the tune of 50% or something.

Question on the phone?

You have a question coming from the line of Yang Lee (sic) [ Yang Liu ] from Pinpoint.

Just one simple one. The -- regarding the crew change problem that the whole industry is facing at the moment, have you -- in the first half, especially in Q2, did you already have any problem or any business disruption related to this -- the crew change problems? And do you foresee any challenge in this area in Q3, Q4?