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

Welcome to today's Pacific Basin 2023 First Quarter Trading Update Conference Call. I'm pleased to present Chief Executive Officer, Mr. Martin Fruergaard. [Operator Instructions] Mr. Fruergaard, please begin.

Thank you very much. Welcome, and thank you for attending Pacific Basin's First Quarter Trading Update Call. My name is Martin Fruergaard, I'm Chief Executive Officer of the company, and I'm joined today by our Head of Investor Relations and Corporate Communications, Peter Budd. I will provide a brief summary of the main factors that influenced our first quarter results and discuss our market outlook before opening up for questions. Please turn to Slide 3. In the first quarter of 2023, rates bottomed as expected, with market spot rates for Handysize and Supramax ships averaging 8,330 and USD 9,660 net per day, respectively. Dry bulk market freight earnings in the first quarter are typically lower due to reduced activities -- activity during the Northern hemisphere winter and Chinese New Year periods, which are normally the weakest of the year. Demand has recovered following the Lunar New Year period, supported by China's post-COVID reopening and the Southern Hemisphere's grain seasons. This improvement in sentiment and demand was seen across all dry bulk segments which has supported significantly improved -- improving rates despite decelerating global growth, higher interest rate and inflation, the conflict in Ukraine and an unwinding of earlier port congestion. Please turn to Slide 4. Total minor bulk loadings decreased by 1% in first quarter this year compared to the same period last year. Agribulk and bauxite loadings increased by 7% and 1%, respectively, while cement and clinkers aggregates and steel loadings decreased by 13%, 6% and 4%, respectively. Weaker economic activity in the U.S. and Europe, coupled with a slow post-COVID economic recovery in China may affect minor bulk demand for the rest of 2023. However, reopening policies in China and the revival of infrastructure investments and residential construction activity could provide potential for growth. Grain loadings were 10% lower compared to the same period in 2022 due to the ongoing conflict in Ukraine and adverse weather in Brazil, causing delays in the harvest and transportation of grains. Brazil expects to set a record grain harvest in 2023, which could lead to higher loadings in the second quarter. Increased coal loadings resulting from recovery after the Indonesian coal export ban in 2022 was the main driver for higher total dry bulk loadings compared to the same period last year. China lifted its coal import despite higher domestic production, while Europe and India coal demand slowed due to a buildup of stockpiles as a result of mild winter demand. The conflict in Ukraine continues to have a positive tonne-mile impact as Europe source coal for more distant locations. Iron ore volumes rose 4% year-on-year to March, boosted by improved output in Australia and Brazil, increased demand from infrastructure and property construction in China, following its post-COVID reopening and restrictive emission controls during the 2022 Beijing Winter Olympics. While Chinese steel exports increased in Q1, the steel production is predicted to remain flat for the year due to stricter environmental rules to reduce pollution in some of the major Chinese steel production hubs and limited new investment in steelmaking capacity within China. Please turn to Slide 5. Our core business generated average Handysize and Supramax daily TCE earnings of $13,550 and $13,630 net per day, respectively, in the first quarter of 2023, which is a decrease of 43% and 58% from last year's very long first quarter. For the second quarter, we have covered 74% and 100% of our committed vessel days for Handysize and Supramax at $12,710 and $14,080 net per day, respectively. For the second half of 2023, we currently have covered for 25% and 45% of our core vessel days for Handysize and Supramax at $10,820 and $13,490 net per day, respectively. We have significant capacity to add cargo fixtures to our remaining 2023 book at rates which we expect to be higher compared to the first quarter, which is normally the weakest quarter of the year. Forward Freight Agreements commonly referred to as FFAs are for the second half of 2023 at a premium to current spot freight rates across all dry bulk segments reflecting market expectations of stronger demand fundamentals. Current FFA rates for Q3 and Q4 are at $14,520 and $13,910 per day and also $16,230 and $15,220 per day for Handysize and Supramax, respectively. Please turn to Slide 6. In the first quarter, our operating activity generated a positive margin of $1,090 net per day over 5,030 operating days. Our Handysize and Supramax daily time charter equivalent earnings continued to outperform the spot market indices by $5,220 per day and $3,970 per day, respectively. The Supramax outperformed -- outperformance benefited from the 33 scrubbers installed across our own fleet with scrubbers contributing $1,320 per day to outperformance over the period. The current value of Supramax scrubber benefits is approximately USD 740 per day. Please turn to Slide 8. China COVID reopening policies are supporting dry bulk demand. China increased coal imports compared to the same period last year despite boosting its domestic coal production due to a stronger economy after reopening post COVID. China has resumed importing coal from Australia, but still relies heavily on Indonesian and Russia for its coal imports, while Japan remained Australia's largest coal trading partner. China minor bulk demand saw stable growth following the reopening with the main minor bulk, including bauxite, forest product and petcoke. Please turn to Slide 10. During the period, Supramax vessel value softened due to market weakness, allowing us to make countercyclical purchases. We also focused on selling smaller, older Handysize vessels to optimize our fleet and meet environmental regulations. We acquired 5 Ultramax vessels, 1 Supramax vessel and 1 Handysize vessel while selling 1 Handysize vessel. For Ultramax vessels have been delivered to us while with the remaining vessels purchased expected to be delivered before July 2023. And delivery of the sold Handysize vessel expected to be completed by April 2023. From the second half, we will have 3 Japanese-built 40,000 deadweight Handysize new buildings to our core fleet through long-term time charter deals. Including all current agreed sales and purchase, our fleet will consist of 121 old Handysize and Supramax ships and including chartered ships, we expect to have approximately 263 ships. We are collaborating with our Japanese shipbuilding partner to develop a design for our first dual fuel Ultramax ships, which were run on green methanol or fuel oil. This is an important step towards securing zero-emission-capable vessels to renew and grow our fleet. Please turn to Slide 11. We have a positive outlook on the future of the dry bulk market and expect to generate more sustainable earnings in the long term due to positive underlying demand and supply fundamentals. We expect some positive support to come from higher tonne-mile demand in coal and grain due to changes in trade flows and global issues of food and energy security. Iron ore demand is expected to be supported by growth in emerging market economies and China's post-COVID government policies supporting domestic property, construction and investment in infrastructure. Minor bulk demand remains robust despite weaker economic activity in the U.S. and Europe as China's post-COVID economic recovery and global green transition initiatives support demand. We do not anticipate significant new dry bulk ship ordering due to high cost of new building, uncertainty over new environmental regulations and a higher interest rate environment. The low order book and efforts to reduce carbon intensity could lead to a shortage of ships and long-term structural undersupply in the market. We are committed to reducing the carbon intensity of our existing ships and pursuing complete decarbonization while also prioritizing ESG value across our business. We will leverage digitalization, innovation and collaboration to tackle decarbonization and other ESG challenges and differentiate our value proposition to our stakeholders. We're excited about the future of dry bulk shipping supported by our modern fleet, customer partnership and access to cargo opportunities. Ladies and gentlemen, that concludes our first quarter trading update presentation. I will now hand over the call to our operator for Q&A. Thank you.

[Operator Instructions] Please go ahead.

Martin, this is Parash here. Can you hear me?

We can hear you.

Martin, this is Parash here from HSBC. Thank you for your presentation. Maybe I just have 2 questions if I can get your thoughts. Firstly, so for the last 2 years, it was a very strong profitability. And as you guided, you distributed reasonably back to the market. Where we stand today, it's a profitable 2023, albeit at a lower level. How shall we think about your dividend policy, especially after purchasing I think half a dozen vessels. Is 75%, the new normal or 50% and then as the year progress, your return to shareholder policy might evolve. And my second question is, we have seen first quarter as a cyclical low. Going into the second half of 2023, while there is some amount of optimism and visibility with respect to import into China. How do you see rest of the world's demand panning out going into the rest of the year?

Thank you, Parash. Yes. So as always repeating myself, I would say our policy is to pay minimum 50% dividend and that is still our policy in it. We have, as you said, the previous years, paid a little bit extra as the Board decided that was the right thing to do. But the policy is still the 50%. As you rightfully mentioned, we did spend a little bit of money early this year. I think it was $177 million in CapEx for investing in the ships we talk about. So -- and of course, I should say, the earnings in the last couple of years, of course, were very exceptional and also they will be exceptional compared to this year, even though we are still feel that we are doing well this year. So I think the question about dividend will come down to the question about what kind of investment opportunities do we see here? Can we reinvest more money in our business or not. We have, as you know, a very strong balance sheet at the moment. So if the earnings continue as it is and if we can't find ways to invest the money, then I don't think we need more money on the balance sheet, if I can answer it that way. Yes, second half, as you rightfully say, you can say -- so the minor bulk, it's actually a bit difficult to see. It actually seems quite stable at the moment. And you can say the increase in the market has actually been driven by China early this year, who sort of started importing lots of coal and also iron ore. And that's, of course, quite beneficial for the bigger ships, but also filtering down to us. In general, our market has been fairly stable. China is actually not really a little bit better on the minor bulk, but not a lot. So you can say the remaining world has actually been quite stable all in all. So you're right, it will be interesting to see how the second half goes. We are positive about -- we see positive news around the world. But of course, it all depends on how all the inflation and how the economy will land in U.S. and Europe during second half. And I think we probably sit with the feeling that might be a little bit of upside in China. It actually seems that they are on the right track and then the question is, of course, how will the situation be in the U.S. and Europe, but we see a little bit more positive news in those places. It seems like they probably have a more softer landing than maybe expected.

Perfect. Thank you so much, Martin, and have a lovely day.

And the next question comes from the online. It comes from David Duval from Manulife. Could you please explain how you managed to achieve your high laden-to-ballast ratio above 90% and what is a sustainable level?

Well, I think actually, it is a quite sustainable level because I think Pacific Basin have done that over years. And I think that's probably one of the unique things about the company that we have been quite good at combining the backhaul business with the front haul and thereby reduce the ballasting. And I also think it's a little bit of a -- also a little bit of a typical for minor bulks as the sizes we are in that normally there is actually backhaul opportunities that brings the ships back to the normal loading areas. But we have been quite stable at it. And I think we usually also say that when you look at our contract cover, it is actually normally, and still it is quite backhaul heavy. So it's -- normally, we have many contracts that brings the ships from the discharge area back to the loading areas. And that's, of course, a big part of ensuring that we have very little ballasting.

And his second question is, what is the sustainable level in terms of your operating activity margins?

Yes. Again, I would say we did very well in the last 2 years where I think we made 60 -- can we remember that 60 -- No, I can't see that. Yes. So yes. So we can say the last couple of years, '21 and '22, of course, were quite exceptional years. I actually think the $1,000 level is historically is probably the right level on our operating activity. And then, of course, it comes down to how many days we can do. I think we did 20,000 days last year, and I think we've done 5,000 in the first quarter. So that actually adds up, so we have the same activity level, but the margins are, of course, somewhat lower here in the first quarter. Maybe also because as the market came down, we do have some ships that's overlapping from higher rates into first quarter, which, of course, takes out a little bit of the upside on the operating margin. But I think $1,000 is probably what we normally have done before COVID.

Again, we have no questions right now. [Operator Instructions] Parash, I see you have a question again. Go ahead, please.

Yes, sure. I'll take this opportunity. Martin, one of the question and which would be one more of a mid- to longer term. Do you see increasing risk of scrubber fitted Supramax or Handymax (sic) [ Handysize ] cannibalizing into the Handysize market, given $1,000, $1,500, $2,000 kind of spread that they have with respect to fuel, which means that there could -- in an event of weak demand, Supramax with the scrubber fitted can remain profitable while Handysize trade below breakeven. Do you see that possibility? And even when we look at your progress, most of your Supra Ultra are scrubber-fitted and you are slowly reducing your reliance on the Handysize. Do you see that trend? Or do you think that cannibalization can only be to a smaller level given the different cargo mix and the route mix that you operate?

Yes. You have a point in the sense that if demand is down and if supply exceeds demand, and there's a lack of cargoes. And then, of course, you can say the ships that are equipped with scrubbers, they have an advantage compared to the others to keep trading us. So they will probably be -- could be a little bit more aggressive, I agree with that. I don't think there's actually many scrubbers on Handysize ships. But of course, you can say probably Ultras there is, but many of those that are actually owned by us and a few others. So it's not -- in general, it's not like everybody has scrubbers on the ships. You can see the spread has come down somewhat since last year, actually. So it still makes sense for us on our ships. Also because we have paid back all the scrubbers already last year. So still now it's a good margin on the scrubbers. But I think there's a limit right now at the current spread, our aggressive people are on installing scrubbers on the ships. So I don't see it as a big fit. It's not the biggest fit I see, but you are right, incentive, fees and overcapacity of ships. I think the scrubber ships, they do have an advantage, of course, because they have an extra earning on the spread.

And with the whole China reopening, are you seeing Capesize cannibalizing in -- Capesize are handling more and more coal. I have seen even the Capesize gain market share with respect to bauxite as well because probably they were attractive in terms of the freight rate from the cargo owners perspective. Are you seeing one of the vessel classes penetrating into other segment with this whole China reopening versus rest of the world was doing well in the last 2 years?

I think what we see is that it's an advantage -- the best thing that could happen to us was, of course, that minor bulk increased a lot. That is not the case. It's keeping quite stable, as we also said. But in that sense, it's positive for us when we see a lot of coal and iron ore moving because that actually makes sure that the Capesize -- the Panamaxes they stay busy on that one and leave. So they do not cannibalize down because they have plenty to do. I do not know if the Capesize is cannibalized a little bit on the coal for the Panamaxes. But my feeling that, that might be the case. But I think Capesize ships they are also built to load coal also in all fairness, that probably makes sense for it.

The next question is coming from our online as well. It comes from Sean from JPMorgan. His question is, what is your secondhand vessel purchasing strategy going forward given your recent activity? And is Supramax, Ultramax your main focus? And what about your growth in your Supramax, sorry, your Handysize?

Yes. So our strategy has been to renew our Handysize fleet, and you can say that doesn't sound like growth. But the reason for that is that we actually do have a number of older ships. So just keeping up with that by buying new ships is -- so what we want to do right now is just make sure to renew and maintain the size of the Handysizes and then we like to grow on the Ultramaxes. So that has been the strategy. And we have been able to, I think, fairly well the last couple of years to buy ships at the right time. Strategy is still unchanged. We want to grow on the Ultras. We want to replace and modernize our Handysize fleet. And that's also what we did early this year. You can see the challenge, is not really a challenge, but the thing that's happened now is that actually the asset prices have gone up quite a bit. I think we have on Page 14. We have put in Clarksons classes record of where the prices are at the moment, and they are actually too low compared to the current market. Here we say 10-year-old Ultramax is $21 million. If somebody had such a ship, I would actually buy it. I think the prices are probably closer to $26 million, maybe even more and a new building at $32.5 million, that's also impossible to get. Now in Japan, you have to pay, I think, $37 million, maybe $38 million, and probably $35 million in China. So since early this year, I think the secondhand prices have come up 20%. And we feel that might be a little bit it's going to be difficult, of course, more difficult now to justify buying ships. So there's actually very little ships on sale, quality ships on sale at the moment. So -- and I guess that it also just indicates that people are quite optimistic and positive about the market going forward. But historically, we have always sort of -- we will wait and we'll see where the right opportunity comes along, and then we'll buy again. At the moment, we're probably selling still some of our older smaller Handysize ships as the market is improving on the asset prices.

Our next question comes from [ Tim Wu from Target Group ] His question is, what is the future strategy in relation to the unmortgaged vessels you have? And are the recent secondhand purchases funded by cash only?

What he said, last part?

Are these vessel purchases funded by cash only?

Yes. So you can say the acquisitions we have made in the last couple of years, they have all been cash payments. And then, of course, some of the earnings we made -- the last couple of years, we have used to, you can say, clean up our balance sheet. So we actually made it was a $1.5 billion. In the last 2 years, we paid out $1 billion in dividend and the rest, of course, in the balance sheet to fix that part of it. And today, we have available liquidity of $50 million, at least by end of the year last year, $59 million positive on the balance sheet. So we are in a very good position in that sense. And as you can say, is a sustainable strategy to buy ships, cash, maybe not, but it has been possible. And of course, what it does is that we have quite a number of ships that is on leverage. And we also have a very -- it's actually 59 ships that we have unleveraged at the moment. And of course, it makes our cash breakeven quite low, so you can say if you look at the risk of it -- of our business, it's, of course, decreasing as the cash breakeven becomes so low. I think it's in a very good position, and it also enables us maybe and hopefully, to make continues to make acquisitions as we go along. And maybe we could leverage a little bit of the ships if we wanted to and need it to as we go along.

If anyone else would like to ask a question today, [Operator Instructions] There are currently no other questions.

But then, I'd like to thank you again, for joining us today and for your continuous support to Pacific Basin. If you have any further questions, then please feel free to contact Peter Budd from our Investor Relations department. Thank you very much, and goodbye.