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

Welcome to today's Pacific Basin 2021 Annual Results Announcement Call. I am pleased to present Chief Executive Officer, Mr. Martin Fruergaad, for the first part of this call. [Operator Instructions] And afterwards, there will be a question-and-answer session. Mr. Fruergaad, please begin.

Thank you, and welcome, ladies and gentlemen, and thank you for attending Pacific Basin's 2021 Annual Results Earnings Call. My name is Martin Fruergaad, I'm CEO of Pacific Basin, and I'm joined on the line by our CFO, Peter Schulz, who is currently in London. Please turn to Slide 3. In 2021, we saw the strongest dry bulk freight market since 2008 and generated our best result in our company's 34-year history. We made an underlying profit of USD 698 million and a net profit of USD 845 million, yielding an exceptionally strong return on equity of 58%. Our results were positively impacted by USD 152 million reversal of the Handysize vessel impairment provision we took in 2020. The reversal was required because of the significantly improved dry bulk market, which has driven up the market value of dry bulk vessels. The reversal does not impact our underlying profit, operating cash flow, EBITDA or available committed liquidity. By the end of the year, we significantly strengthened our financial position with available committed liquidity increased to USD 668 million and net gearing reduced 7% compared to 37% at a year before. In light of the extraordinary cash flow of last year and our robust balance sheet and positive outlook, the Board recommends a final basic dividend of HKD 0.42 per share, and an additional special dividend of HKD 0.18 per share. Combined with the HKD 0.14 interim dividend distributed in August, the basic dividend represents 50% of our underlying profit consistent with our dividend policy. Combined with the proposed special dividend of HKD 0.18, the total dividends for 2021 amounts to HKD 0.74 per share or around USD 458 million in total, representing 66% of our underlying profit for the full year. Our 2021 daily time charter equivalent earnings averaged USD 20,460 net for Handysize and USD 29,350 net for Supramax, which is considerably higher than 2020. Our strong results were also driven by our enlarged core fleet with, which we are well positioned for what we expect will be a continued strong dry bulk shipping market in 2022 and beyond. Please turn to Slide 4. On the left of this slide, the dark blue line shows the strong upward trend in freight market earnings for most of 2021. The annual average Handysize and Supramax freight market for 2021 were the highest ever apart from the extraordinary year of 2007 and 2008. Rates corrected downwards in the fourth quarter due to weaker industry output in China and uncertainty over Chinese real estate market, steel production and energy curves as well as the usual seasonal softening towards the end of the year. However, rates were still at a strong level of around USD 25,000 per day for both Handysize and Supramax at the end of the year. On a tonne-mile basis, Clarksons estimate total dry bulk demand in 2021 was up 4% a year. On the right of the slide, we show Oceanbolt indicative cargo loading volume data for each of the main dry bulk cargo sectors for a sense of what drove the market last year. The volume of selected key minor bulk expanded 15% due mainly to strong demand for construction materials, such as cement and tankers, steels, aggregates and forest products. The market also benefited from stable strong grain volumes, which met the exceptionally strong activity of the previous years. The coal trade recovered strongly at 7%, following a weak 2020 and coal exports were hard hit by lockdowns in key economies. And finally, iron ore volumes growth at 2% was limited by cargo availability in Brazil and Australia and also by Chinese dealer quotas in the second half of the year. Please turn to Slide 5. We quadrupled the carrying capacity of our own fleet over the 9 years prior to 2021, and we continue to grow our own fleet last year. We added 11 modern secondhand ships to our fleet during the year, including 6 large Supramaxes, also commonly called Ultramax, and 5 large Handysize ships. And we sold fiber, our smallest and oldest Handysize ships. We have since taken delivery of another modern Ultramax in January 2022. We currently own 121 quality Handysize and Supramax ships that are well suited for our customers and trades and are generating very attractive returns, including chartered ships. We currently have around 250 ships on the order. Buying secondhand ships from delivery in today's strong market remains a more attractive investment and contracting newbuildings from shipyards. Our vessel purchasing has slowed in recent months and is expected to continue to be very selective as asset prices approach new historical highs. However, we remain committed to our fleet growth and renewal strategy longer term. Please turn to Slide 6. Our average Handysize -- sorry, our average Supramax daily time charter equivalent earnings outperformed the Supramax spot market index by about USD 3,900 per day, partly due to well-timed commercial positioning and to successful management of our 32 scrubber-fitted ships. Our scrubber benefit is currently about USD 1,200 per day, and we have so far recovered 67% of our original scrubber investment, including realized bunker price spread hedges. Our core Handysize time charter equivalent earnings lagged the impact in the first 3 quarters of 2021, which is typical in a strongly rising freight market due to the lag between spot market fixtures and execution of voyages and also due to the effect of cargo contracts secured in earlier weaker markets. However, we outperformed the Handysize index in the fourth quarter where the market correct -- with the market correction in November allowed us to catch up. Complementing our core business is our short-term operating activity, which generated significantly increased margins partly due to our decision to take in tonnage particular Supermax ships early in the market recovery and partly by leveraging our global network to combine ships and cargoes for high laden utilization. Please turn to Slide 7. Our core fleet P&L breakeven level, including G&A, was USD 9,030 per day for Handysize and USD 10,250 per day for Supramax in 2021. Our overheads financing cost and vessel operating expenses remain well controlled and competitive. However, ship operating expenses have increased for the entire shipping industry due mainly to more expensive crude travel, quarantine and other pandemic-related manning cost. This is reflected in the 13% increase in the heavy size OpEx. The reversal of the vessel impairment provision will result in additional depreciation in 2022 and beyond, increasing blended vessel costs by approximately USD 500 per vessel per day. Please turn to Slide 8. Our Supramax core vessel blended costs were substantially unchanged year-on-year with a slight reduction in long-term charter costs, finance costs and depreciation, largely offset by increased OpEx due to the industry higher manning cost. We remain cost-conscious, but our main focus in today's strong rate environment is, as always, on safety and ensuring maximum utilization of our business. I now hand over to Peter, who will present the financials, and I will be back afterwards with outlook and strategic summaries. Peter?

Thank you very much, Martin. Good afternoon, ladies and gentlemen. Can you please turn to the next slide, which sets out our P&L in summary. You can see how in the robust market of 2021, we generated significantly stronger performances from both our core business and operating activity to deliver our best underlying results ever. And you can also see how net profit in 2021 is positively impacted by the write-back of the impairment we took in 2020. Now please turn to Slide 11. The operating cash flow for 2021 was $813 million, and that's inclusive of all long- and short-term charter-hire payments. This was significantly higher than 2020. And the second half of 2021 cash flow was markedly stronger than the first half due to the rising market throughout most of the year. Our borrowings decreased due to net repayments of $333 million, partly offset by drawing down $45 million on committed facilities. CapEx consisted of $224 million paid to 6 secondhand Ultramax and 5 secondhand Handysize vessels, which delivered into our fleet in 2021, plus 1 more Ultramax that delivered in January 2020. It also included $37 million for dry dockings and ballast water treatment system. In total, we docked 26 vessels in the year. Now if you please turn to Slide 12. As Martin mentioned, our net profit was positively impacted by a $152 million write-back of the vessel impairment we took on our Handysize core fleet in June 2020. The reversal was required because of the significantly improved dry bulk markets and the increase in ship values. It doesn't impact our underlying profit, operating cash flows, EBITDA or liquidity, but it does strengthen our balance sheet. Our operating cash flow significantly enhanced our financial position further, driving down our net gearing to 7%, which is compared to 37% the year before. And we had available committed liquidity of $668 million by the end of the year. We have the capital resources to continue our strategy of growing and renewing our fleet when we see attractive opportunities. And our priority for capital allocation willing to deleveraging in line with our amortization profile, maintaining a strong available liquidity position and distributing dividends to our shareholders, in line with our stated policy with special dividends possible should our liquidity merited. I now hand you back to Martin for his outlook and strategy slides.

Yes. Thank you, Peter. Please turn to Slide 14. We expect a continued strong dry bulk shipping market in 2022 and beyond, in part due to broad-based demand especially for minor bulks and grains, supported by healthy economic growth with continued stimulus in many countries. In January 2022, the IMF moderated its global GDP growth forecast to 4.4% in 2022 and also 3.8% in '23, largely reflecting markdowns in the U.S. and Chinese economies due mainly to increasing U.S. inflation and the retrenchment in China's real estate sector. Despite this moderate GDP growth forecast -- sorry, despite this moderated GDP growth forecast, dry bulk demand growth is still expected to outpace supply growth in 2022 and more so in 2023. Please turn to Slide 15. Despite some new ordering in a very strong market, we are optimistic that dry bulk supply will remain under control, giving further support to the dry bulk freight market in the longer term. The dry bulk order book stands at 6.8% of the existing fleet, which is the smallest it has been in decades. The combined Handysize and Supramax order book is even lower at 5.6%, presenting the basis for continued low supply growth in the next few years. We expect that new ship ordering will remain restrained encouraged by, first of all, uncertainty about the future fuel and technologies required to meet coming decarbonization regulations. Also the expectation that 0-emission ships will not be commercially viable for several years. The high cost of new buildings with a 2- to 3-year wait for delivery in secondhand ships with problem delivery represents more attractive investments. And finally, the shortage of shipyard capacity when berths are fully booked with orders for non-dry bulk ship types. Based on Clarksons data, a global combined Handysize and Supramax fleet is estimated to grow by 2.5% in 2022 with very little scrapping taking place and possibly start to shrink in 2023. It is also worth noting that IMO and EU fuel-efficiency rules are likely to start forcing slower speeds from 2024 and even accelerate the scrapping of the least efficient ships, which will further reduce supply. Please turn to Slide 16. Despite the usual seasonal weakness from November to the Lunar New Year, rates have been much higher than usual over the winter, and market activity has resumed with freight rates recovering as expected since early February, particularly in the Pacific. Beneficial during the seasonal weaker start of the year, we commenced 2022 with a good level of cover for the first quarter. In January 2022, we achieved actual Handysize and Supramax time charter equivalent rates of USD 24,800 and USD 30,600 per day net, respectively, significantly outperforming market index rates of USD 18,050 and also USD 19,430 per day net, respectively. We have covered 48%, but 64% of our Handysize and Supramax vessel space currently contracted for full year 2022 at USD 19,550 and USD 25,210 per day net, respectively. That leaves us with significant opportunity to add cargo testers to our book and what we expect will be strong market spot rates in the month ahead. Please turn to Slide 18. Our established strategies remain substantially unchanged for 2022, although with some adjustments in how we execute them in the current strong market and for greater effectiveness. We want to stay specialized in minor bulk and the ship types that we know so well and want to maintain our customer and cargo-focused business model and grow our scale. At our core, we will remain asset heavy and will continue our strategy over the long term of growing our Supermax fleet and renewing our Handysize fleet with quality secondhand ships. We will continue to complement our core fleet with mainly short-term chartered ships. We will also continue to gradually sell our smaller, older Handysize ships when the time is right, thereby crystallizing value and further optimizing our fleet to more easily need tightening environmental regulations. We will not contract newbuildings with -- until zero-emission ready ships are available and commercially viable in our segment. We aim to always keep our balance sheet and liquidity strong, and we want to be the industry leader on an earning and cost per day basis. There are also a few areas of special focus that we are attending to in the short term. I want to ensure our team are equipped and supported so that they can continue to deliver quality service to our customers while maximizing our earnings in the current strong market. Safety, health and well-being are always a priority, especially during the challenging pandemic on crew change restrictions and related publications take their toll on seafarer. We are further enhancing our focus on optimizing our environmental performance to ensure we meet or exceed the carbon efficiency compliance requirement of the IMO and potentially also other regional governments. We're expanding our digitalization program with investments in new digital solutions to leverage our large amount of in-house data to optimize our business processes and interactions and improve our decision-making ultimately delivering additional value to our business and our customers. Please turn to Slide 19. The IMO adopted global regulations in June 2021 to drive improvements in the energy efficiency and carbon intensity of conventionally fueled existing ships. There will be much more about this in our sustainability report to be published in mid-March. In short, the IMO EEXI technical routes will cap maximum engine power limits for the majority of the existing ships in the world. And as CII operational rules will require ships to become increasingly carbon efficient in the way they are operated, which will lead to gradually slower speed from 2024 onwards. Renewing our fleet with younger, larger, more efficient ships is an important part of our strategy to meet these carbon intensity reduction rules and help to achieve our industry greenhouse gas reduction goals. We will continue to trade our ships efficiently for high laden-to-ballast utilization and will constantly seek assess and implement energy-efficient operating measures, including looking for collaboration solution with our customers, tonnage providers, ports and other stakeholders. This will ensure that our existing ships running on conventional fuel oil can maintain sound annual efficiency ratio of AER rating and continue to trade for the foreseeable future. We target for our ships to achieve AER ratings of C or better from 2024 onwards. In parallel, we are collaborating and making preparations to achieve the longer-term goal of complete decarbonization by decisioning to entirely new 0 emission ready ships and fuels. With that in mind, in July 2021, we set ourselves a new target of net 0 emissions by 2050. To achieve that goal, we target that our fleet will comprise only 0 emission vessels by 2050, and we will not contract newbuildings until so mission-ready ships are available in commercially viable in our segments and the appropriate refueling infrastructure is being built out globally. We have an outstanding in-house technical team and are actively involved in the industry-wide discussions about how shipping will de-carbonized and meet the IMO long-term goals. And it is comforting to know that as the world decarbonizes, we will continue to carry the nonfossil fuels commodities that will be the mainstay of the future trades. And finally, Slide 20. We delivered our best results in our 34-year history and are recommending a full year dividend payout of 66% of our underlying profit. Forecast dry bulk demand growth is expected to outpace supply growth in 2022, especially in our Handysize and Supramax segment and more so in 2023. We are well prepared to meet or exceed IMO carbon in tendency reduction rooms, which are likely to start forcing slower speed from 2024 and even accelerate scrapping of leased efficient ships which will reduce supply. As always, we will be monitoring all risks and drivers of our market closely, ready to respond to chains. We have optionality in our fleet, and we are nimble. The average age of our own ships is 12 years, which we consider ideal for optimizing our return on capital while minimizing residual value risk in the tradition over time to 0 carbon technology vessels. Our healthy balance sheet, large fleet and competitive cost structure positions us well drive in the current strong market and continue to deliver high return on equity and return cash to our shareholders. We are experiencing a solid start to 2022 with seasonally low rates having bottomed in early February, market taking the lead. The Atlantic is expected to soon benefit from the start of the South American grain season. And overall, we expect to see steady demand for commodities and tight fleet supply over much of this year. Ladies and gentlemen, I will now hand over to the operator, who will open the lines for any questions you may have. Operator, over to you.

Ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] Your first question is from Nick Harbinson from Tantallon Capital Singapore.

It's Nick Harbinson, Singapore. Two quick questions. I wondered if you could comment a little bit on the longevity that you see in this. You commented upon the spike in 2008, that was a spike. Do you see this sustaining for a significantly longer period? And secondly, one of you is in London, you're in Hong Kong. To what extent does the situation in Hong Kong make it your historic presence there increasingly something which you may need to consider? Various other people, as you will be aware, have been commenting publicly about the stresses of trying to run a global business out of Hong Kong. Is Hong Kong likely to continue to be the optimal place for you to be based?

Yes. Thank you very much for those questions. First about the market and how long it will last. It's always difficult to predict these things. I think what we see this year and also next year as we see -- when you look at the supply side, we see that as being very low also from historical perspective. And we don't see the ordering peaking at all. So in that sense, we can -- the supply side is quite visible, at least for the next couple of years until 2024. So as long as the world economy is moving in the right direction, then we think we will have a good market for a few years more and maybe even longer depending on what's happening on the ordering and of course, for the economy. But we are quite positive for this year and next year and maybe also longer, but let's see. In respect to Hong Kong, we are a global company, and we have offices around the world. We have 10 commercial offices around nearly any continent in the world. So in that sense, we are well positioned and we can run our business. We have a very strong organization here in Hong Kong, also local colleagues who are doing a really good job. And you can say, yes, we have the COVID and we have the situation here that Europe and other places maybe had a little bit earlier. We are managing that, and I think we're managing it quite well. And we are very pleased about being in Hong Kong and also being listed on the Hong Kong Stock Exchange. So we have no plans to move.

Your next question is from Andrew Lee from Jefferies.

Good results and a very nice dividend as well. I've got a few questions. My first question is on the impairment, right? Could you give us a little bit more detail in terms of -- in terms of basically how many vessels is this related to? And for these vessels that were impaired, these are the older and smaller vessels. Are there plans for these vessels to be scrapped within the next 1 to 2 years? So that's the first question, right? And also, on the impairment, the [ poll ] is basically how much the rates need to fall before you book an impairment going forward, right? That's the question one. Second question is on the Supramax fleet right. The long-term aim is to grow the fleet. Is that by owned vessels or via chartered? Because, as you mentioned earlier, the basically secondhand vessels are very expensive, right? So does that mean that you're going to try to lock in more long-term contracts? Third question is on the dividend side. Looking ahead, how much kind of special dividend be? Do you value -- do you look at that as a dollar amount? Or is it based on a payout ratio? That's it for now.

Yes. Thank you, Andrew. Maybe Peter, you will take question 1 and 2, and I can take the one about Supramax. Do you want to start, Peter?

Yes, I can do that. So thank you, Andrew, for your questions. So the impairment, we have 3 cash-generating units in the company. They are the small handy, the large handy and Supramaxes. The small Handies, I think there are about 16 ships, something like that, and the rest of the Handy fleet is in the large Handy, right? So the impairment in 2020 was on both the small and large Handysize CGU. So it was not on the individual shift. It was on the entire fleet. And the reversal of the entire impairment is, of course, they're back on the entire fleet again, right? So the -- it was a cost for 2 CGUs so sort of point to any particular vessel even though maybe on a percentage basis, in terms of reduction of value when you did the impairment, there was a bit more, of course, on the older, smaller ships on a relative basis. How much rates would have to fall before we take another impairment? I don't have the exact number. We'll have a number that I would be comfortable disclosing. But the -- it's not just the value in use, the NPV calculation that decides on impairments and reversals. We also have fair values, right? So the highest of those 2 is what you can use to underpin your book value. So I don't have an exact number today, what that would mean, but it would mean a pretty significant reduction from what we expect for us to take another impairment down in the future. So it's not something that we would expect to happen in the -- in the short term or medium term. But yes, I think that's as much as I can say at the moment. On the dividend, Andrew, I think we have the policy. We're going to distribute at least 50% of the profit. And then there might be a bit of a special extra dividend on top of that. It's -- we don't have a fixed policy to say that the special dividend always has to be a certain percentage of profit. It is kind of driven by what we see as the excess liquidity, where we see the market is going in the future. We also want to preserve certain amounts of capital for investments and other things, right? So there are no rules on that at the moment. What you remember is the policy is at least 50% of profit. And if we feel we have excess liquidity, if we feel the market is supportive, there could be distributions on top of that. But we'll take a view on that every earnings time -- every time we announced it and we'll take a view on that. So there's no hard and fast rules on that, Andrew.

Yes. And second for that, Peter. You're right a little bit about the scrip. I think we're quite far of that. We do have a ship that is built in [ 2000 ] ships have a value much higher than described earlier. So we're not even close to that at the moment, which probably also justify the reversal. And then you spoke -- you asked about the Supramax, old versus chartered. Yes. Yes, you're right. You can say the prices right now is also the second half is high, and we have sort of we have hold back a little bit since October on buying, and we are sort of following the market closely at the moment. If you look at the chartering, our long-term chartering fleet, we have 4 Supramaxes or Ultramaxes on longer-term charter. But we -- it's actually not that much. We have, of course, a lot of ships on short-term charter. So yes, you're right, that the options could be both ways, both to buy secondhand or to charter some ships. I think our presence is to buy them if possible. But yes, there could also be an option of taking a few ships on longer-term channel. We also have some optionality in the fleet we have today that, of course, we can use if the market continues to be good.

Your next question is from Parash Jain, who's from HSBC.

And I have 3 questions. And maybe first, I may start with where Andrew left to Peter. With respect to dividend, I mean, can you help us understand, say, I mean, hypothetically, going into 2022 and 2023, assuming that you will not be as aggressive buyer of the secondhand vessels as you have been. And if terms right, you will basically get rid of 1 or 2 we as we did last year. And at the same time, probably you used last year's cash flow to deleverage to an extent that the balance sheet is very, very robust, so carry excess cash on it. Is that the right way to think about when you will sit on -- when we propose to the Board next time on the dividend? And secondly, is there a way if you have a belief on the cycle to guide the dividend policy, and I'm saying it from the analyst perspective, I mean, special dividend has not been well appreciated in the sense that, that only has a onetime multiple compared to sustainable dividend policy. Secondly is more on the spread, and that has probably -- Martin can discuss. It has been all over the place last quarter. And I understand it was an extraordinary cycle. How shall we think about the spread for both Handysize and Supra- going into 2022? It's off to a great start. And my last question, if I may, would be on EEXI. The more I read, the more confused I get. For the sector as a whole, we see the impact in 2023 at the start like we saw with respect to, let's say, the switching of fuel 2 years back or it will start to in 2023 and the reduction in vessels of the speed will be a 2024 story.

Okay. Thank you. Thank you, Parash. On the dividend, I'll come back to this point. I mean, we've had -- I mean, we've had the same policy on dividend for a long time, right? At least 50% of profit.

Correct.

So what we're talking -- and that's going to stay, right? And what we're talking about now is what do we do with any excess cash, right? And do we want to formulate a policy today about what we're going to do with that. And I think the answer at the moment is, no, we don't want to do that yet, right? I mean, we've had -- I mean effectively, we've had sort of 9 months of good markets. So we're not -- we're still in the early part of the cycle. And clearly, we will have to see what happens I mean the development this morning, right? And I'm sure we'll talk about that later in Ukraine, et cetera. There's a lot of uncertainty. So I don't -- we don't believe at the moment that formulating a much more rigid strategy about dividend actually makes sense. We believe that we should have some flexibility to take decisions at every sort of earnings call or earnings time kind of judge where -- how did we do in the last period, where do we think the market is going. I don't believe that you should set 2 rigid rules for yourself in this particular market because what ends up happening is that you're going to have to change it and you lose your credibility, in my mind. So we're going to have to ease into this market a little bit. But as a general principle, it is not in our interest, and I don't think it's in our shareholders' interest for us to sit with massive amounts of excess cash, earning sub 0.5% return at the moment, right? And we are not engaging in a massive fleet expansion program at the moment with these ship values. So assuming the view on the market that we have today plays out, clearly, we'll be generating a lot of cash. So it is not unreasonable to believe that there will be more dividends coming. But we're not going to savor the rule yet. I mean give this market a little bit more time before we feel comfortable to kind of change our view on that, right?

Yes. Yes. I think it's probably a little bit about the buying secondhand and so on. I just want to remind you that a Handysize ship today, a 5-year-old Handysize secondhand ship costs around $28 million. I think that's up around 70% in 1 year. A new building is today a Handysize, nice new one is probably $32 million or something like that, delivery in 2024. That's up -- is around 33% in the year. So you can say, in the case last year when we bought 12 ship was quite clear that the secondhand ships were a lot better to go after. And now, of course, as the clarity on the market that is continuing, of course, then, of course, the asset measures for the secondhand shipments come up closer to the newbuilding. So we still like to do things. We are quite selective in what we buy. We want to have quality ships also because of IMO's rules coming into those and so on and something that match our current fleet. And it's not like there's a lot of those opportunities out there. But of course, we follow it if they come along, we will be ready. And as I also said in the presentation, we are also trying to sell some of our older ships maybe also the ones that we feel might have a little bit of a hard time with the new regulation coming up and, of course, also taking advantage of the increase in the second half price. In respect to the spread, I guess, you talk about our actual earnings versus the indexes?

Correct.

Yes. So you can say the challenges -- the good thing is, of course, that the good thing is actually, if we this year will just trail the index because that actually means that index will go up and up, and up. So you can say it's actually a bit of a positive thing -- you can say that, of course, you can see the cover that we have taken for the year. So we have some cover for the rest of the year as well. And that's, of course, a lower number or in line with the index today. If the index continued to increase the cover, of course, will track us down. So we will be running after the index for a while until the market then change again, and then we will do. I think we cannot run everything spot, and we also feel it's a thing to take -- we continue to do that. And also, if our customers, they want us to take a COA, of course, we will enter into that. So I think that is the -- also the explanation on the Handies that existing contracts we've taken during time. Of course, that tracks down on the market. And as soon as you saw the market change in fourth quarter, we are beating the index again. So we have to look at it over a cycle to see how well we're doing. But definitely, in January and February, as we took good cover coming into the year and the market came down, we will definitely beat the index in those months. But maybe rest of the year if the market continues to go up, we will be running after it. And that is actually a positive thing, funny enough.

Sorry, Martin, maybe on the operating margin on the short-term leads. Is it super normal, the kind of margin that you have made in the past 2 quarters? Or you think that the bar has shifted upward and you probably will continue to sustain relatively higher profitability than in the past cycle?

I think clearly, 1 year ago, the market for Supramax was probably, and also Max, was probably low [ 10 ], and the market just increased to, I think, in October, we were [indiscernible]. Of course, that is really the thing that really kicks in on this one. We still have some of those ships. We still have options and some of the ships and so on. So we're still benefiting. We have a good start to the year also on the operating part. But it's clear today, if you go out and take time capital ships, it is a different risk profile than compared to last year. But because the rates are, of course, somewhat higher probably in the mid-20s or so. So there's also a bigger risk in that market. And of course, the margins will probably be less per case, of course, unless the market really increases a lot more so. But we have had a good start to the year also in the operating part, but we'll have to see how it goes over the year. And we will continue to sort of optimize our earnings with the customers that we continue to seek and we leverage the relationship and the business we're doing to also do the operating linked to our core business. In respect to the EEXI, yes, I understand there's I think there's a lot of opinion about that. The way we see it, we also showed you the ranking we have from [ 8 to 3 ], I think it is. You can see in 2021, our rating goes down a little bit. And that's, of course, due to the regrowing free speed. That will probably also do this year, even though, of course, now oil prices and bunker prices have come up. But as the market is at the moment, I think there's a need that in 2023 there's 47 of our 121 ships, they have to get a power limitation installed, and we are already about to do that. So that would actually reduce power somewhat. As we see it, it will not impact speed assumption that much. You have to remember that half the time we are in port and half the time we're sailing. So already there, there's a limit to it. But actually, what we see is that every year from 2023 onwards, the CII will kick in and ask you to reduce again with 2%, 2%, 2%. And from 2026, the rules are actually not set yet, but we don't believe it's going to be less than 2% requirement. And that -- when that starts, that will definitely take supply out of the market and over time, also make some of the ships, I think, will have a hard time trading in the market to comply with the rules. But I think 2023 or we think 2023 will be sort of a transition year where everybody will get it on and then so on and so on. And then by 2024, you will have to comply with things. So that's how we look at it. I hope that clarified it a little bit.

A process line got cut a little while ago, but we will get back to them and try and get him back on the call if he has further questions. Thank you. [Operator Instructions] Your next question is from Yang who's from Pinpoint.

Actually, I have 3. Number one, regarding your forward cargo -- cargo cover, can you please remind us how much of this is backhaul booking? And what's the approximate rate of those backhaul booking, respectively, for Handysize and the Supramax? That's question one. Number two, I noticed your mortgage based on number decreased from this thing from the interim report. Is that the -- can I presume this -- of course, you paid down some ship financing, I suppose. Can I presume you're going to on mortgage more pledged vessels in the coming quarters? Question three, for the operating activities. I didn't catch what the -- I don't know if the other participants already asked that question. The operating activities generated over $3,700 per day. That's super high. Do you think there's something sustainable? Or is just something exceptional given the market conditions in the second half last year?

Yes. Thank you very much. Yes, I think the 90% of our sailing -- 90% of the time, we are actually in latent conditions. So a lot of our business is actually also backhaul or front haul. So it's all a combination thing. I do actually not have the numbers on exactly how much is the contract is backhaul. But we will look into that, of course, we will have it somewhere, but I don't have it right here. Peter, would you talk about the mortgage?

Yes. So the reason for the increased number of mortgage ships is mainly twofold. One reason is the vessels we have acquired in recent years we've not mortgaged. We bought them outright for cash because we didn't really need to. So they are -- they joined our fleet on mortgage and they remain unmortgaged. We also, last year, took some of the older ships out of one of our particular facilities, which that had the effect of reducing the average age of the asset pool of that facility, which enabled us to extend the facility. The bank's obviously happy to lend on a longer basis against a slightly younger fleet. So those 2 are the reasons why the number of our mortgage ships have increased. If we buy more ships in the future, we will keep them. We probably will not mortgage them at the moment, keep them as a reserve for the future. We are not planning to take any more ships out of existing facility, at least in the medium term. So new ships that we buy will add to the unmortgage pool. Otherwise, I wouldn't expect any big changes to that number.

Yes. And the final question is about the operating activities and the margins there. I think we have to remember that the earnings on the operating part in 2021 was about 10% of our net profit. So -- but of course, it's a lot of money. But still, it's -- our core business is still the own ships and the long-term charters. That being said, I would say that our chartering team has done quite well in timing our position last year. So when I look back at, I would say they did very, very well in reading the market early and taking ships on charter. And that's, of course, why we also have this high margin on the operating business on the Super Ultramax fleet. Can we repeat that this year? I would say we have actually had a very good start to the year. But as I also said earlier, I think now the rate level is high. So the risks are different. So definitely, if you want to take that risk, there should also be a good upside. So I hope -- but of course, we'll probably be a little bit more cautious this year due to the very high time charter levels, but let's see.

Your next question is from Anthony [ Mark ] from Capital For Business.

Yes, I have 2 questions. One thing which was mentioned at your previous discussion was the possibility of quarterly dividends. Now your cash flow is clearer. Is that something you plan to do? Or are you going to stay on a 2 dividend policy? And the second question is based on your acquisitions of larger Handysize and Supramax ships. Is your policy to gradually phase out the smaller Handysize ships.

So on the -- maybe I'll start on the dividend. There are currently no plans to go to quarterly dividends. At the moment, we only announced results twice a year, and we do a trading update without net result in for the first and the third quarter. So there's no plans to change that. So at the moment, we will stick with the bi-yearly dividend.

Yes. And Anthony, on the Handysize, the smaller ones, I would actually say we have a number of those in our charter team, they do quite well in employing these ships. So they're actually very good earners for us. But it's clear that when you buy secondhand ships and you want to have a little bit more modern ships, they will always be bigger, so that's 38,000 or even bigger. And of course, the smaller ones, they will age and of course, they will appear. So if you go a little bit like ahead, yes, our fleet will grow in size and become 38,000, 40,000 more of that than less of the others for natural reasons. But it's not an aim in itself, but that's just how it works.

Yes. I thought that was the trend that seemed to be becoming clear. And even then with the Supramaxes, you're also trending a little bit larger more to Ultramaxes?

Yes. I think it makes sense to go on the larger ones. So yes, we would prefer to go for the larger ones. But -- and I also think every time we buy secondhand, you saw the 12 ships that we acquired last year, they are a little bit more modern and therefore, they are Ultramaxes or large Handysizes.

Your next question is from [ Lee SuLee ] from [ Vati ] Securities.

I have 2 questions. First, Peter, could you please give the CapEx guidance for this year and next year? And second question, could you please talk about more you're saying the potential impact from the current Russian conflict for the industry. Also to [ PPI ], to what extent the [ PBC ] business it relates to the Russian customers or [indiscernible] area.

Okay. On CapEx, first of all, we had a very busy dry docking schedule next year, we are docking over 50 ships. So whereas under normal circumstances, I would say, we would have about $50 million of maintenance CapEx, dry docking CapEx next year will be a little bit higher than that, probably more up towards $65 million, $70 million.

Yes. And the other question finally came in respect to Russia and Ukraine. And it's a good question, of course. And I think we followed quite closely as well. Well, let me first say that in a bigger picture of the Pacific Basin, it's not a major trading area for us. I think it's less than 3% of our business has to do with Russia and Ukraine. Currently, we do not have any ships in the Black Sea. We do have some business with Russian accounts, but it's quite limited, I must say. So the impact of it, of course, that we also look at what will it do to us and what will it do to the market. And I'm sure that it all depends on how things are developing and how long it will take and all these things. So it's hard to reply exactly on it. But of course, when you look at Ukraine, Russia and you look at mainly the commodities, wheat and grain. And the wheat they do is 30% and the grain is 14% of the world total export. And on fertilizer, it's 8% of the world. So it's quite big volumes. Normally, out of the Black Sea is quite short haul, the transport of grain. So you could also say possibly the world has to replace the grain and things we get out of the Black Sea from other places and then they will be longer tonne mile that might actually be positive for our market. That market is normally what I would expect is the Panamax market. So more Panamaxes than the smaller sizes. I think what we, of course, also look a little bit into is that Russia is 10% of the world's oil production and I think it's nearly 20% of the world's gas production. That might have an impact on the coal volumes into different areas where we will be lacking gas and oil. But it's a little bit on speculation. So we'll just have to see how it goes. But I don't necessarily think it's going to be bad for our market. But of course, I also think it has to do with how long will it take, what will it do to the global economy. And normally, the volumes out of the Black Sea, Ukraine and Russia normally is mainly July onwards. So it's not right now that's in peak season for this. But it's a good question, and I'm sure we all sit and follow this and have to see how the world reacts and what are the next steps and how long it will take. I think it could be good for us. If you can say it like that, but of course, I don't think it might actually be good for the world, but let's see.

Due to time constraints, we'll be taking our last question from Nelson Garrett from [ Artem ].

That was amazing. So it was actually [indiscernible] from [indiscernible]. So I'm not sure what happened there. But all my questions have been answered.

There are no further questions. We will now begin our closing comments. Please go ahead, Mr. Fruergaad.

Thank you. I'd like to thank you again for joining us today and for your continued support of Pacific Basin. So thank you very much for calling in. Bye-bye.

Thank you. Ladies and gentlemen, this concludes our conference call for today. Thank you all for your participation. You may all now disconnect.