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

Welcome to today's Pacific Basin 2020 Annual Results Announcement Call. I'm pleased to present Chief Executive Officer, Mr. Mats Berglund, for the first part of this call. [Operator Instructions] Mr. Berglund, please begin.

Thank you very much, and welcome, ladies and gentlemen, and thank you for attending Pacific Basin's 2020 Annual Results Earnings Call. My name is Mats Berglund, CEO of Pacific Basin; and I am joined by our CFO, Peter Schulz. Please turn to Slide 3. This is, obviously, a 2020 results presentation, but as you can imagine, it's a lot more fun to talk about 2021, and you can understand why when looking at the graphs on this slide. We will get back to this later. 2020 was a year of 2 very different halves for dry bulk shipping. Measures to contain the COVID outbreak initially in China and then elsewhere around the world severely impacted the dry bulk market in the first half, driving Handysize and Supramax index rates down to their lowest second quarter average in 50 years. However, dry bulk demand and freight earnings started to improve significantly from May 2020 and have continued to strengthen into 2021. Handysize and Supramax market freight rates have quadrupled since May to 10-year highs now. While the recent very sharp increase in spot rates is not expected to continue going up, it does demonstrate that demand and supply is finely balanced. And when the current extreme tightness eases, we believe that rates will settle at substantially higher levels than in recent years. A vaccine and stimulus-powered strengthening of economic activity, coupled with reducing dry bulk fleet growth, make us optimistic about the freight market in 2021 and in the years ahead. Please turn to Slide 4. We delivered a positive EBITDA of USD 184.7 million and an underlying loss of USD 19.4 million in 2020. Our TCE earnings were below breakeven in the first half of the year, resulting in an underlying loss for that period. Our net profit was further impacted by a noncash $198 million impairment of our Handysize core fleet, primarily our smallest and oldest Handysize vessels. Our TCE earnings recovered in the second half of the year, resulting in an underlying profit of $7.2 million for the period. We also improved our available liquidity to $362.5 million and net gearing reduced to 37% from 41% in June. Slide 5. Our core fleet generated average Handysize and Supramax daily TCE earnings of $7,860 and $11,140 net per day. While down 18% and 5% year-on-year, these TCE earnings outperformed the Handysize and Supramax spot market indexes by $1,140 and $3,360, respectively, in the year. Our outperformance narrowed in the second half, which is typical in a rising freight market due to the effect of existing cargo contracts committed earlier at lower levels and the lag between spot market fixtures and the execution of voyages. Our Supramax outperformance was particularly strong due to our successful management of our scrubber-fitted ships and the bunker price spread that was especially wide early in the year. So far, we have recovered 44% of our original scrubber investment, including realized bunker price spread hedges. Our Supramax outperformance also benefited from a relatively stronger Atlantic market, where the majority of our Supramaxes are trading. Our operating activity generated a healthy margin of $1,080 net per day over 15,500 operating days in the year. Slide 6 shows the positive development of market rates and our earnings from loss-making levels in the first half of 2020 to breakeven levels in the third quarter and into profitable levels in the fourth quarter and more substantial profitability in early 2021. The dotted line across the chart illustrates the indicative breakeven level after G&A on our core fleet. We have currently covered 94% and 100% of our Handysize and Supramax vessel days for the first quarter of 2021 at $10,150 and $13,380 per day net, respectively. The red bars to the right show last night's Handysize and Supramax index rates to give you a sense of the current very attractive spot market levels. Please turn to Slide 7. The solid blue line represents 2020 and notes the recovery in market freight rates over the last 7 months of last year. The red lines show the remarkable and unseasonal further strengthening in 2021 to date. Handysize and Supramax rates have quadrupled since May 2020 to 10-year highs. The recovery is driven by: strong Chinese dry bulk imports, which grew 8% year-on-year overall in spite of the pandemic; global shipments of grain, which grew by more than 8%; recovering demand for Asian coal, Indian coal in particular, and construction material; and unlike the fourth quarters of 2018 and '19 that were negatively impacted by U.S. tariffs and swine fever in China, U.S. grain exports, including to China, were very strong in the fourth quarter of 2020. This has continued into 2021 and is partly why Atlantic rates are significantly above specific rates. Recent market strength has also been supported by slowing net fleet growth since the second half of 2020 and fleet inefficiencies due to COVID quarantines, trade tensions and a fleet imbalance between the Atlantic and Pacific Basins. Please turn to Slide 8. In view of the generally much improved conditions and outlooks, we resumed our strategy to grow and renew our own fleet with the acquisition in November of 4 high-quality, 2015-built Ultramax ships, followed by another secondhand Ultramax earlier -- early this month. On the back of the improving freight market, asset values have rebounded by around 15% since the lows of last year. So we consider our 5 recent Ultramax acquisitions to have been well timed. We have grown our own fleet significantly in recent years. In particular, we have grown our Supramax fleet with the acquisition of Ultramax vessels. And we continue to sell our smaller, older Handysize vessels to trade up to newer Handysizes with larger carrying capacity. Supramax and Ultramax vessels offer a larger earnings upside in strong markets. And this, combined with our overall fleet growth, gives us really good leverage to the market improvements we are currently seeing. On Slide 9, we show indicative cargo loading data for each of the main dry bulk cargo sectors, which supports some of the points I made in Slide 7 about the drivers of this recovery. Grain volumes grew the strongest at over 8% compared to 2019 as people and animals need to eat in spite of the pandemic. Minor bulks were down 2% compared to 2019 due primarily to weak demand for construction materials in the first half, but loadings have recovered strongly since June. Healthy iron ore volumes out of Brazil and Australia drove a 3% increase in ore shipments year-on-year, driven by strong Chinese economic activity and domestic steel production. Coal was the weakest performer in 2020, affected by lower energy consumption due to the pandemic. But coal volumes, Indian coal in particular, have gradually recovered since July. All 4 commodity groups were up year-on-year in December. And our 2 key cargoes, minor bulks and grain, have started 2021 strongly. Slide 10. New ship ordering in 2020 remained concentrated in the Panamax and Capesize segments, but was significantly lower than in recent years. The overall dry bulk order book at 5.7% of the existing fleet is now the smallest it has been in decades, which means continued support from fundamentals in the next few years. The combined Handysize and Supramax order book is even lower at 4.6%. Please turn to Slide 11. Scheduled newbuilding deliveries for 2021 are 30% lower compared to actual deliveries in 2020. We expect new ship ordering to remain muted despite stronger freight rates, discouraged primarily by the uncertainty around environmental regulations and future technology. And our segments continue to benefit from lower fleet growth than the larger vessels. Slide 12. IMF projects global GDP to rebound from a 3.5% contraction last year to growth of 5.5% in 2021. And Clarksons estimates minor bulk demand to rebound from a 1.5% contraction last year to growth of 4.9% in 2021 and 3.7% in 2022, while the combined Handysize and Supramax fleet is expected to grow by only 1.8% in '21 and 0.4% in 2022. This tighter supply and demand balance is already benefiting the dry bulk market. I now hand you over to Peter, who will present the financials, and I will be back afterwards with a wrap-up. Peter?

Thank you very much, Mats. Good afternoon, ladies and gentlemen. Please turn to Slide 14. The weak freight market in the first half of the year, coupled with the Handysize fleet impairment in June, negatively impacted our annual results in 2020. However, the performance in the second half of the year was considerably stronger. And in this period, we returned to positive underlying and net profits. OpEx and G&A were very well controlled in 2020, and Handysize depreciation reduced in the second half due to the effect of the impairment. Since the group posted a full loss for the full year, the Board has decided not to declare any dividend. Now please turn to Slide 15. Our core Handysize fleet posted a negative annual contribution in 2020, albeit with the second half of the year showing a significant improvement over the first half as rates recovered. However, our core Supramax fleet, boosted by the scrubbers on 28 of our vessels and our higher share of vessels in the Atlantic, achieved almost $2,000 per vessel per day profit, yielding an overall positive Supramax contribution of $25 million in 2020. This is an extraordinary result in what was generally a very weak dry bulk market year and validates the investments we have made in growing our Supramax fleet in recent years. Our operating activity contribution was a strong $17 million or $10,080 (sic) [ $1,080 ] per day, a continued improvement over recent years. Now please turn to Slide #16. Our Handysize core business costs are well controlled, and blended cost reduced by $370 per day or 5%. Our owned vessel cost reduced by $270 per day, mainly due to lower depreciation from the midyear impairment, while OpEx was well controlled and remained the same as in 2019. The cost per day of long-term chartered ships also reduced as legacy contracts expire and we replace them with primarily owned ships at lower breakeven levels and with short- and medium-term chartered-in ships. Now please turn to Slide #17. The overall blended cost per day of our core business Supramaxes reduced year-on-year as the daily long-term charter cost decreased in 2020 as we redelivered more expensive chartered ships. Our Supramax owned vessel daily cost increased by $240 per day, mainly because a large proportion of the Supramax fleet trades in the Atlantic and costs increased due to more expensive crew changes and spares deliveries from Asia. Finance costs per day also increased slightly, partly due to a cost reallocation between our Handysize and Supramax fleets following the Handysize impairment. Now on Slide #18. The operating cash flow for 2020 was $181.5 million. That is inclusive of all long- and short-term charter-hire payments. Despite lower TCE rates, this was higher than 2019 due to positive movements in working capital. Our borrowings decreased due to net repayments of $178 million, offset by drawing down $166 million on committed facilities. CapEx consisted of $38 million paid for 3 vessels delivered in the first half of 2020 and $65 million in dry dockings, scrubbers and ballast water treatment systems. We docked some 32 vessels in the year. Including the net interest and the dividend payment in May 2020, our cash position increased to $235 million at the end of the year. In addition, we have $128 million of undrawn committed facilities. Please turn to Slide #19. We ended 2020 with a strong balance sheet as evidenced by the $362.5 million of cash and committed liquidity as well as lower net debt compared to the beginning of the year, and this despite the market volatility. We achieved this through careful managing of our liquid resources and the leveraging of our sector-leading access to funding. During the year, we raised a total of $63 million in new secured borrowings from banks and owners and renewed our $50 million unsecured 364-day facility at very competitive costs. We have the capital resources to continue our strategy of growing and renewing our fleet when we see attractive opportunities. I now hand you back to Mats for his wrap-up.

Thank you, Peter. Please turn to Slide 21, our strategic direction and priorities. We are continuing to develop our somewhat unique business model of having both a core, asset-heavy model with owned and in-house managed ships and an asset-light model where we use short-term chartered-in ships to provide a service to our customers while making a margin. This is important, especially in weaker markets. But in rising and strong markets that we are currently enjoying, it is, of course, our now much larger core fleet that is the engine and provides the leverage and profitability to us. We continue to assess opportunities to acquire secondhand vessels at attractive prices, and our plan is to continue to grow primarily our owned Supramax fleet. While in Handysize, we continue to sell our smaller, older vessels and trade up to newer Handysizes with larger carrying capacity. Like most other shipowners, we are not contracting newbuildings now with existing technology as secondhand ships yield higher returns and because of the uncertainty over new regulations and technology. We will wait until low-emission ships become technically and commercially viable. We are investing in further optimization, systems and process improvement on our ships and in our offices. Please turn to Slide 22. Our owned fleet's carbon intensity continues to reduce and is on course to meeting our IMO-aligned target of a 40% improvement by 2030. Customers prefer freight partners who own and operate their own fleets. And while always focusing on safety, we are progressing our decarbonization initiatives, including: one, maintaining our very high laden-to-ballast ratio; two, continuing to modernize our fleet by gradually trading up to younger, larger, more energy-efficient ships; and three, investing in fuel-efficiency technologies and operating practices, such as slow steaming, engine tuning, weather routing technologies, trim and draft optimization and many other optimization initiatives. We're also neutralizing our carbon emissions from our global shoreside activities by carbon offsetting. We have an outstanding technical team and are actively involved in the industry-wide discussion about how shipping will decarbonize and meet the IMO's longer-term goals. There is no doubt in our minds that IMO's decarbonization rules will lead to lower speeds, further supporting the demand/supply balance. And it is comforting to know that as the world decarbonizes, we will continue to carry the nonfossil fuel commodities that will be the mainstay of future trade. Wrapping up on Slide 23. Although some COVID-related uncertainty remains, the demand outlook is positive with vaccines and economic stimulus expected to lead the demand recovery. The dry bulk order book is now the smallest it has been in decades, and fleet growth is expected to slow further because of the effect of environmental regulations and new ship ordering -- on new ship ordering and on vessel operating speeds. All this presents real potential for a continued beneficial demand/supply balance in the next few years, from which we are very well positioned to benefit. I'll finish up with a reminder that our now much larger owned fleet has largely fixed costs, and a change in 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 USD 35 million to USD 40 million annually. I really encourage you to do the math with the strong rates we are currently seeing, but remember the lag between fixing ships in the spot market and the execution of voyages. It takes a few months before the current strong rates show up in our P&L. Before we move on to questions, I would like to mention that this is my last annual results presentation with Pacific Basin. As announced in January, I have decided to retire at the end of July and return to my homeland, Sweden. I am very proud of the way we, as a team, have developed and positioned our business during my 9-year tenure as CEO, and it has been an honor serving the company over this period. I do look forward to speak to you again at the 2021 interim results announcement in July. I think it will be an exciting interim report. And we will then also introduce you to my successor, Martin Fruergaard, who I am confident will be an excellent new CEO for Pacific Basin. Ladies and gentlemen, I will now hand over to the operator, who will open up the lines for any questions you may have. Operator, over to you.

[Operator Instructions] Our first question from the line comes from Andrew Lee of Jefferies.

Mats, congratulations on your retirement. As you said, last 9 or 10 years have definitely been some interesting times, right, with -- for Pacific Basin. So it's been an amazing start to the year, right? I think -- sorry if I ask some of these questions that you repeated as I dialed in late. You talked about the fleet inefficiencies. How much capacity do you think has been taken out because of the -- well, the problems with docking into China, right, from Australia? Is that sizable? That's the first question. The second question is on the fleet. Could you give me the date of the fifth vessel that you purchased? When is the expected delivery date? And going ahead into this year and to next year, how many more of these vessels do you think you would like to purchase? Third question is on the scrubber side. The spread between the fuel has actually been increasing. Do you think that is sustainable? So I'd like to see your outlook on that. So maybe those are the first questions -- those were the few questions first.

Thanks, Andrew. Your first question is regarding the coal that's been stuck on ships off China prohibited from discharging due to the Australia-China trade spat. They have started to discharge there. It has primarily impacted the Capesize market and the iron ore market since Capesize primarily carry iron ore. But it has maybe had a little bit of a positive impact for us because Australian coal have moved to India instead and other places, and that sometimes goes in smaller ships, but not a real significant factor. There are the other drivers that we mentioned that really drives our markets. China's strong growth overall and the very strong U.S. grain exports are the real underlying drivers of the recovery. Your second question was on the fifth Ultramax ship that we bought in early February that was delivered to us in the second quarter of this year. How many more will we buy? Well, we never define that exactly because it depends on what the opportunities present itself to us. And we are saying that we are continuing to actively assess good opportunities, but we are continuing to be very disciplined and we'll only buy the right ships at the right prices. The scrubber spread has expanded a bit again, yes, that's correct. The difference between low-sulfur and high-sulfur fuel now is, call it, $130 to $140 per tonne, and that represents -- if you take into account the little extra costs, you have a net benefit of $1,200 to -- call it, $1,200 to $1,500 per day at the moment. I hope those answers your questions, Andrew.

And then maybe one final question is on Slide -- oh, sorry, on Page 12 of the presentation, right, on vessel days. Your Supramax off-hire days drops -- well, it dropped from 1,000 days in 2019 to 280. What was the reason?

You're asking about off-hire days?

On Page 12, yes, the off-hire days, the owned off-hire days for the Supramax. It was 1,050 in 2019. And then for this -- for last year, it was -- fell to 280 days.

This is not Slide 12. This is some other page you're referring to. Slide...

Page 12 of the results announcement.

Of the results announcement, okay. Maybe Peter can take that up separately. Off-hire days on Supras, probably higher in 2020 due to all the scrubber installations. That's probably the answer to your question.

Yes. We preponed a lot of dry docking for -- to get the scrubbers ready for IMO 2020. So that would have driven up the off-hire days for the Supramax fleet. And of course, if we prepone dry docking, we don't have to do the year after. So that's probably the reason.

[Operator Instructions] We have our next question from the line of Parash Jain from U.S. -- HSBC.

Mats, again, congratulations, and we shall meet as much as possible before you depart from Hong Kong. I have 3 questions. First, as you have -- as you always alluded in the past, what will trigger the newbuilding wave? Because the gap between the secondhand vessel and newbuild have started to narrow. How far are we? Or you think that we will definitely not see a surge in newbuild? Because after a record 2020, we have seen a surge in the newbuild activity in container as well. So if these spots rates were to sustain for a quarter or 2, do you think that the gap between newbuild and secondhand is still wide enough, which would discourage ship owners to order newbuild? Any thoughts on that? Secondly, on these spot rates, can you help us visualize, I mean, how much of that you would owe due to supply side constraint or condition? And when do you expect those things to normalize? On the demand aspect, I think I'm fairly comfortable. And lastly, on scrubber, just picking from where Andrew has left. Now that we are pretty much an -- year out of scrubber, how has been your experience, i.e., is it delivering the results that you are hoping? This -- is there a 2-tier market developed for the vessels with a scrubber and without a scrubber?

Thank you, Parash. Good questions. Will there be a newbuild ordering wave? We do not think so for the reasons that we outlined. There will be some new ordering, of course, but nowhere close to what it would have been if it wouldn't have been for these new environmental regulations and the uncertainty about technology. Let me repeat that who in his right mind will go to his Board today and recommend that I want to order a ship today that's going to deliver 2 years from now that I need 25 years of life on, and this ship that I'm going to order have an engine that is built and designed to burn heavy fuel oil. Would you, as a Board member, be all excited about that? I don't think so, right? So we don't think that we will see a lot of this. The yards are, of course, doing what they can to market newbuildings. But what we will see instead is slower speeds, and it will be forced by the IMO rules, et cetera. And the difference in fuel consumption between the latest designed ship and a good secondhand ship at 11 knots is very small, right? So it's just a much better, safer bet to buy a secondhand ship. So we will definitely not see any newbuild ordering in any volume before first -- at least, secondhand values have to go up, right? But you can buy a 7- or 8-year-old ship for half the price almost, and you have a much shorter payback time, and you can have your money back well before 2030, so to speak. It's just a much more attractive proposition. How much of this spot rate increase today is due to supply constraints? Not that much, right? It's a little bit of fleet inefficiency. I would say probably the biggest impact is that due to this very strong U.S. grain exports in the fourth quarter last year and into this year, that has kind of drained the Atlantic market on ships. So you should -- we should highlight to all of you that there's a very wide discrepancy between the Atlantic rates and the Pacific rates. It's a shortage of ships in the Atlantic that has driven up freight rates to these levels and Atlantic rates are much higher than the Pacific. So it is the U.S. grain exports combined with China's very strong imports that has pulled ships into the Pacific, and that is the driver of the strong rates, not really supply constraints. The scrubber experience, we are very happy with how we have handled it. We have them ready on time. We took advantage of the wide fuel spread early in 2020. We installed them on time, on cost, on budget. They have been operating well and enjoying -- even today, a $1,200 to $1,500 premium is significant, right? So yes, we are very happy. There is -- this is kind of over and done with as regards in the market. Nobody talks about scrubbers. Customers don't ask about it. The freight rates are set based on low-sulfur fuel. So again, it has developed the way we thought it would, and we have benefited from it.

And just if I may ask another follow-up question on scrubber. So given that $100 , $150 perhaps is a new normal with respect to spread, do you see any merit in extending your scrubber drive into Handysize? Or if not you, do you -- are you seeing that your industry players are thinking of installing scrubber into a smaller Handysize vessel? Or you think that Supramax is pretty much as low or as small as they can get?

Very few ships today consider installing scrubbers, right? The opportunity was early. You had to be out there early and plan it early and order the scrubbers early and be there to take advantage of the $300 per tonne spread that we had early in 2020. Now it is $130, $140. But the forward curve, as you know, the Brent crude oil is in backwardation and so is the spread a little bit. So it doesn't make sense to install a scrubber now. The opportunity was there. We took it. It is gone. We're very happy with the ones we have. We do not see a second scrubber wave unless the spread, of course, goes significantly up again. But with the environmental uncertainty going forward and everything, we think it's over, so to speak, right? So we are not planning any new scrubber installations and definitely not on Handysize ships. You can almost count the scrubbers on Handysize ships in the world with -- on both of your hands -- or maybe you need 3 hands. But extremely few of the 3,500 Handysize ships in the world have installed scrubbers because the consumption is too low and now the spread is too small.

Allow me to go to the next question. It's from Yang Liu from Pinpoint.

Mats, congratulations for the fantastic results and the outlook. I've been following your company for over 10 years. It's never been as exciting as today, to be honest. My question, I think enough has been said regarding your core assets or core fleets. How about the other part -- the smaller parts of your business like Panamax? That seems to be under long-term contract, but is the contract going to be restrike to high rates? Is there any potential for that? That's number one. Then regarding your business strategy, given -- I think we understand you primarily focus on the spot market. But given the very high rates and -- is there any possibility at a certain market rate level, you would consider shift a part of the fleets if this [ demand -- should long-term contracts ]? Yes, those are my 2 questions.

Thank you. The -- we own one Panamax, and it's really a long-term deal with many years left, but it's bareboated out. So we're not involved in operating the ship neither technically nor commercially, but it gives us a very good and stable contribution and that will continue. The second we have had have been a ship that we time-chartered in and time-chartered out and made a profit in between. That time charter expires later this -- that -- this year. So those are 2 deals. Our legacy deals that have been very good, still are very good, but we do not expect to expand into Panamax. So we are focusing fully on Handysize and Supramax. The strategic question, spot versus fixed contracts. The spot market has extreme strength today, and it's -- it needs to stay there for a bit longer before people are considering fixing contracts at these levels. So it's the spot market strength that is there, and we are watching that very closely. I would absolutely not rule out that we cover a portion of our fleet. We always have. On a 12-month forward basis, we would typically have 20%, 25%, sometimes a little bit more, of our days covered by contracts. But it's too early for customers to fix contracts at these very heated levels. So right now, we're just watching it, enjoying it. And again, just a reminder again that it takes a little while before those very high rates hit our P&L because what we fix today, we don't execute that voyages until 1 to 3 months forward. But yes, we will definitely consider taking cover at attractive levels, a little bit if we -- when we see this settle a little bit, right, and customers are there to do long-term contracts. They're not there yet to do that. I hope that answers your questions.

Next question comes from the line of James Teo from Bloomberg Intelligence.

I'd like to clarify more also on the contract cover. You mentioned that it is 46% and 63% for 2021. So I think a follow-up on the earlier question. When these contracts expire, are you going to stay on the short term or spot contract rates -- I mean, spot rates for now, as you said, to try to enjoy? Or will you try to fix it? Or is it depending on the customer preference? And is there like a target in terms of ratio? Or is that a flexible thing of -- depending on the market situation in terms of what level of long-term contracts that you would like to have?

Yes. Thank you. Our -- the majority of our cargo contracts are what we call backhaul contracts. And they are there for very specific reasons, and it is to facilitate the high-laden percentage system that we have built up over many years. So you should expect us to renew many of these contracts when they come up for renewal because they serve a very important purpose. And the key reason for why we have a long track record of outperforming is that we have a very high utilization of our ships, and the backhaul contract is a very important ingredient in that business model. But again, if you look at the cover for the rest of the year, especially the third and fourth quarter 2021, those are contracts that were taken previously at earlier lower rates. But importantly, they are backhaul heavy. So when we execute the backhaul contract in combination with a higher-paying fronthaul, the average TCE that we achieve is higher than what you see in these cover rates. The other thing you should be aware of in the Supramax cover is that there's no scrubber benefit included in that forward cover TCE, so there's another scrubber benefit coming on top. But important to note that we are not catching 100% of this very enjoyable freight increase, but we're catching a lot of it and more for every month that we go forward, right, because we have high cover in the immediate months. But as we go forward, our open days are increasing, and we're able to take more advantage of these higher rates. We will continue -- we will always continue to have a portion on long -- on contracts, and it's for the reasons I mentioned. Thank you.