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

Welcome to today's Pacific Basin 2023 Third Quarter Trading Update Conference Call. I am pleased to present Chief Executive Officer, Mr. Martin Fruergaard and Chief Financial Officer, Mr. Michael Jorgensen. [Operator Instructions] Mr. Fruergaard, please begin.

Yes. Thank you. Welcome, ladies and gentlemen, and thank you for attending Pacific Basin's third quarter trading update. My name is Martin Fruergaard, CEO of Pacific Basin, and I'm pleased to have our CFO, Michael Jorgensen, with me today. Assuming that you have already gone through the presentation, I will briefly highlight some of the key points discussed in it, before we proceed with the Q&A session. Please turn to Slide 3. During the third quarter of 2023, there was a seasonal improvement in the market trade rates for Handysize and Supramax. Rates increased strongly from the middle of August and continued through September, ending the period at $10,558 and $13,339 net per day for Handysize and Supramax, respectively. The primary reason for this being the East Coast South America grain season, specifically in Brazil, which led to a significant increase in grain exports coupled with higher seasonal dry bulk demand. This improvement in sentiment and demand was seen across all dry bulk segments, which has supported significantly improving rates despite the accelerating global growth, high interest rate and increased business supply. Market spot rates for Handysize and Supramax vessels averaged $7,660 and $9,530 net per day respectively in the third quarter of 2023. Please turn to Slide 4. Minor bulk loadings in the third quarter were approximately 2% higher due to increased loadings of steel aggregate and bauxite, while forest products, cement and clinker, and alumina were the largest detractors. Iron ore load increased 2% in the third quarter due to higher production in both Australia and Brazil. There was growing demand for steel across multiple sectors including motor vehicle manufacturing, shipbuilding, infrastructure development and power generation. Despite earlier predictions that Chinese steel production would remain stagnant due to stricter environmental regulations and limited investments in steelmaking capacity, China actually has seen a 3% increase in steel production and a 27% increase in steel exports in the year leading up to August. In the third quarter of 2023, global grain loadings experienced a 5% decline compared to the same period in 2022. This decrease can be attributed to lower loadings from Argentina and the United States, as well as the Black Sea grain deal cancellation in July with limited Ukraine exports. However, Brazil emerged as a major contributors to grain loadings in the third quarter, loading an impressive 46.7 million tonnes of grains over 3 months representing a significant increase of 19% compared to the same period in 2022. A 1% decrease in global coal loadings in the third quarter of 2023 is attributed to a slowing of Indian imports. In contrast, China has been facing a low hydroelectric and energy security consumption concerns despite record domestic coal production. As a result, China has maintained a high level of coal imports during the third quarter. Please turn to Slide 5. Our core business generated average Handysize and Supramax daily TCE earnings of $10,200 and $11,540 net per day respectively, in the third quarter of 2023, being a decrease of 57% for both sizes compared to the much stronger third quarter of 2022. For the fourth quarter of 2023, we have covered 70% and 86% of our core committed vessel base at $11,250 and $13,214 net per day for Handysize and Supramax respectively. Our PL breakeven, including general and administrative overheads was $9,600 and $11,190 per day for Handysize and Supramax respectively in the first half of 2023. For the full year 2024, we currently have covered 22% and 25% of our core vessel days at $8,590 and $13,720 net per day for Handysize and Supramax, respectively. Supramax covered rates exclude any scrubber benefits, which currently is about $330 per day across our entire core Supramax fleet. We are currently focused on optimizing our short-term cover to maximize earnings over the first quarter of 2024, which is commonly a softer market during the Northern Hemisphere winter and Lunar New Year periods. For the first quarter of 2024, we have covered 29% and 33% of our core committed vessels days at $9,470 and $13,290 net per day for Handysize and Supramax respectively. Forward freight agreement, commonly referred to as FFAs for the fourth quarter of 2023 at $12,250 and $13,510 per day for Handysize and Supramax respectively. Please turn to Slide 6. Our Handysize and Supramax TCE earnings outperformed the spot market index by $2,540 per day and $2,010 per day respectively in the quarter. Our Supramax outperformance continued to benefit from the 33 scrubbers installed across our own fleet, the scrubbers contributing $450 per day to our outperformance over the period. Current value of Supramax scrubber benefits is approximately $330 per day across our entire core Supramax fleet. Our operating activity also contributed positively, generating a positive margin of $1,160 net per day over 6,810 operating days in the third quarter. Our third quarter operating days increased by 42% compared to the same period last year and we currently have approximately 145 short-term chartered Handysize and Supramax vessels servicing customers. Our operating activity provide us with an ongoing opportunity to leverage Pacific Basin's commercial and operations expertise as well as our global proximity to our customers to generate additional income for the business. Please turn to Slide 7. During the third quarter of 2023, we sold 3 of our smaller, older Handysize vessels and 1 older Supramax vessel. This year, we have sold a total of 6 vessels including 5 Handysize and 1 Supramax vessel with an average age of 19 years. In light of existing and incoming decarbonization regulations, we foresee older and less-efficient vessels will become increasingly challenging to operate. Therefore, we gradually wish to divest ourselves of our least efficient business. We believe asset prices for new and modern secondhand vessels will remain elevated due to increased new building input cost and limited yard capacity. To support the growth and renewal of our core fleet, we have entered agreement for long-term charter-in of Handysize and Ultramax vessels. In July, we took delivery of a 40,000 deadweight tonne Handysize build in Japan with 2 more scheduled to be delivered in November and December this year. In addition, 4 additional 40,000 deadweight tonne Japanese-built Handysize new buildings, all with scrubbers will be delivered during 2024 as well as 3 new building Ultramax vessels with 1 scheduled to be delivered in 2024 and 2 in 2025. Furthermore, each of these time charters comes with an option to extend the charter agreement period at a fixed rate and we have the option to purchase the vessels at fixed prices, which further expands our optionality. Including all current agreed sales and purchase, our core fleet consist of 135 Handysize and Supramax vessels. Including chartered vessels in our operating business, we currently have approximately 280 vessels on the water overall. Please turn to Slide 9. Despite the negative commentary surrounding China's post-COVID economic recovery, we see positive demand for commodities, which is supporting dry bulk demand through investments in infrastructure and manufacturing, commercial and industrial property construction and green transition initiatives. By reducing construction of new domestic housing in China is still having a significant negative impact on the country's economic growth and to the demand for some minor bulk commodities. This worth noting that new policy support is continuing to be implemented to further encourage the domestic property construction and increased investment in infrastructure. This suggests that the Chinese government is taking proactive measures to improve economic growth. Chinese import of coal, as I've mentioned earlier in combination with imports of iron ore, bauxite and other minor bond commodities as well as export of steel products has been a significant supporter of the market. Please turn to Slide 10. In the third quarter, there was an increase in the number of vessels scrapped with a total of 2.3 million deadweight tonnes scrapped contributing to a total of 4.9 million deadweight tonnes scrapped in the year so far. As of the year-to-date 2023, there has been a significant increase in scrapping of both Handysize and Supramax vessels compared to last year. While scrapping levels have been relatively low, we expect an increase in scrapping as environmental regulations make it more difficult for older, less-efficient vessels to compete and comply. The average age of Handysize and Supramax vessels scrap between 2019 and 2023 is over 30 years and could help to explain partly why we have seen only limited scrapping year-to-date despite the lower TCE rate environment. Clarksons Research reports at minor bulk vessels of over 25 years old, which are potential scrapping candidates, make approximately 8% and 4% of the global Handysize and Supramax fleets respectively. In regards to Handysize and Supramax vessels, Clarksons Research forecast scrapping of 0.7% for the full year 2023 before increasing to 1.3% in 2024. Please turn to Slide 11. Newbuilding ordering in dry bulk continues to be constrained with a near-decade low of 8.1% of the total fleet on order. In comparison to 2022, newbuilding ordering of Handysize and Supramax vessels decreased approximately 30% year-to-date and 64% in the third quarter of 2023. Dry bulk shipyard slots remain limited, resulting in a new ordering -- resulting in a new order placed today unlikely to be delivered before 2027 with the majority of incremental new shipyard capacity concentrated on nonbulk vessels. This provide us visibility on new vessel supply with 2024 being the peak for Handysize and Supramax vessels deliveries while vessel deliveries can be delayed, it is difficult for the 2026 delivery forecast to be meaningfully increased. We continue to believe that the high cost of newbuildings uncertainty over new environmental regulations at the higher interest rate environment will continue to discourage any significant new dry bulk vessel ordering. Continued low ordering efforts to reduce carbon intensity and increased scrapping in the coming few years could create a shortage of vessels and provide long-term structural undersupply to the market. Please turn to Slide 12. It is our belief that the implementation of decarbonization policies continues. Conventional investments will face increasingly pressure to comply. In our previous result call, we noted that the IMO in July adopted a more ambitious greenhouse gas strategy with the goal of achieving net zero emissions for international shipping by approximately 2050. While we continue to be focused on optimizing our fleet for compliance with these regulations, we would also like to mention the EU or the European Union Emission Trading System, which is set to be implemented on January 1, 2024. This regulation will require shipping companies that emit carbon to buy and surrender EU allowances for carbon emissions for voyages to, from and within the EU. With these carbon allowances currently costing approximately EUR 80 to EUR 100 per tonne of CO2. This entails a 3-year phase-in period, increasing scope from 40% of emissions in '24 and 70% in '25 and 100% in 2026. This incremental cost will be included, now freight costs, which will be covered by customers. We expect that this regulation will also drive a faster pace of decarbonization, with the near-term impact being that vessel speed will reduce over time to limit carbon emissions and the associated cost of EU carbon emission allowances with the benefit of lower vessel supply. We expect a further decarbonization regulations such as FuelEU, U.S. Clean Shipping Act, International Marine Pollution Accountability Act and IMO carbon pricing measure with slow global average vessel speed, increase scrapping and limit the appeal of conventionally fuel newbuilding vessels and further incentivized vessel owner over time to transition to green fuels. Please turn to Slide 16. In the short term, we expect coal and grain to continue to support drybulk demands for the remainder of the year due to seasonality, change in trade flows and global issues of food and energy security. In the longer term, we continue to believe that the high cost of newbuildings, uncertainty over new environmental regulations and the high interest rate environment will continue to discourage any significant newbuild, new dry bulk vessels ordering. The low order book and efforts to reduce carbon intensity will likely lead to slower speed and increased scrapping in the coming few years, which could create a shortage of vessels and provide long-term structural undersupply to the market. We are excited about the long-term prospects of dry bulk shipping, giving dry bulk demand, which remains supported by strong supply side fundamentals and ongoing implementation of existing and new decarbonization rules. We're optimistic about the future of the dry bulk market and anticipate underlying demand and supply fundamentals will allow us to generate steadier and more sustainable earnings over long term. Ladies and gentlemen, that concludes our third quarter trading update presentation. I will now hand over the call to our operator for Q&A.

[Operator Instructions] Our first questions comes from Parash Jain, please unmute yourself.

Can you hear me?

We can hear you.

Maybe my first question is for [ Michael ] Martin and if I can ask the other to Michael. So Martin, can you remind us the CapEx plan for this -- what is left for this year and what are you aiming for next year? My understanding is that with a lot of your scrubber -- large vessels are scrubber-fitted now and probably a lot of ballast water retrofitting is done, with probably lower CapEx intensity and no desire to invest into the newbuild, what is the best way to use the free cash flow that your business on a steady-state basis is likely to generate? Are there opportunities to continuously look for rightsized older vessels or you think that for the share holders could see the surplus cash flow coming their way? And if I may ask you want to answer this, and then I'll go to the next one.

Yes, if I try to answer first. So you can say you're correct, our CapEx at the moment is basically down to the dry docks of the ships. And you're right, we have probably scrubbers on as many of the ships that we need at the moment. And also the ballast water thing is progressing and properly finished. So yes, you're correct that sort of the firm CapEx is all about the dry docks at the moment. You can say we continue to -- our strategy is still to grow. We will continue to -- we are continuing to look for opportunities to grow, especially on the secondhand side of it, which we still feel is interesting. There's no doubt that period of time this year, the prices are high, very high for the assets. So of course, we have not been -- we were very active at the beginning of the year and we've been a little bit looking at the market for a while. We are still in the market trying to find good opportunities to buy and especially on the secondhand business. And I think it's fair to say, we have said it before as well, we are not buyers of newbuilding for conventional ships and especially at the regular price level that you see at the moment. So that is correct. And you can say, Parash, of course, you're right. If we can't find attractive investment opportunities and we have very positive cash flow, yes, as always, we will, of course, look how can we return that best to our shareholders.

Okay. I think that's very, very helpful. And my second question -- or rather I'll combine the second and third. So we talked about upcoming regulations and probably EEXI and CII in some shape or form in place. How soon you reckon we will see the impact in terms of growing capacity out of the market, whether it's in the form of flow stemming? And secondly is that given those environmental concern related expenses, what level of freight trade you reckon is kind of line on the sand, which will accelerate the scrapping? With its scenario of July, August, probably if it sustains, that will push. Because at the end of the day, even if the vessels are old and if the spot rate remains where they are, probably even the marginal guys are in the money and there are no incentive to scrap. So I just wanted to get your thoughts on probably any magic number in terms of freight rate where we could see scrapping and any near-term impact that you have seen with respect to EEXI and CII.

Yes. If we take the environmental regulations first price, then the fact is at the moment with the relatively high oil price, most of the fleet is already a slow speeding. So you can say the impact of the IMO rules is limited because we have already slow steaming in it. As we go along -- go ahead and proceed forward, we still have fairly high oil prices and had never high fuel prices. So I think the speed reduction will continue. So you probably won't see any sort of major impact within the next couple of years. But you can say if the market really recovers, what you will see is that it will be impossible for us to go back to full speed because then the impact of the rules will come in. Remember that from 2024, we have to reduce every year our emissions. So therefore, we have to reduce -- one of the ways to do it is to reduce your speed and we have already done that. So that's fine. But as we go along, we cannot just increase our or to full speed again because there will be a ceiling in respect to the IMO rules. I would try to be fair to say that we're still waiting for IMO to tell us how they want to enforce these rules, and I think that will only happen in 2025 in it. So I think the real impact of it will probably come towards '25 when we know exactly how it will impact -- how they will enforce rules. Yes. In respect to scrapping, yes, you can say, the last couple of years, there's been very, very little scrapping going on. So you can say the pool of scrapping candidates has of course increased. And of course, people have kept trading the shift because the rate has been so good. So there has been a positive cash flow even on the ownerships. That has -- that, of course, changed during the summer when the market was on a nice $37,000 or a nice $58,000, it was market was at $7,000 -- at least the index was at $7,000. At that level, a small Handysize and a small older Supramax will be in probably cash negative environment. And you can say if that level goes on for too long, of course, any owner will be hesitant to put the ship into dry dock and spend another $1 million for a ship that's actually generating negative cash flow in it. Now the market has recovered somewhat. And I think at the moment, at current rates, I do think actually, they are positive cash flow again. And I also think we have to remember that many owners probably have had a some good years and of course have a very nice balance sheet and probably can afford to take a chance on it. So maybe they go through one more dry dock. But reality is then probably next time it's going to be very, very difficult to do it again. So I can say the pool of scrapping candidate is just increasing in it. And I think that is when you come back to the supplier because there will be some ships being delivered next year but the pool of scrapping candidate is actually increasing. And I think that is quite interesting also for the future. That they will have to go for scrap at a certain stage. But as long as [indiscernible] there's a good positive cash flow, they can also justify a $1 million investment in a dry dock, I think you will, of course, try to keep it going on.

Our next question comes from an [indiscernible] user. Please unmute yourself and introduce yourself with your name and company.

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We can hear you.

It's Andrew from Jefferies. I'm not sure why my name has not popped up. So I'm not that tech savvy, it's okay. I blame it on that. Okay. I have a few questions, right? The first question I have is can you remind me how many new long-term charter did you have on both the -- well, Supramax and Handysize? Also, what's the length of these contracts? What's the charter rate? I'm trying to work out in terms of does it make a material change to your costs? That's the first question. Second question is related to -- you seem really optimistic, right, for the rest of the year, citing that coal, grain demand is probably stronger into -- for the rest of the year. Does that mean that you expect that spot rates will be higher? But if I look at the FFAs, it's probably close to where the spot rates are, right? So I'm just trying to gel those 2 things together. Third question I have is on the -- your expectations on the outlook. When you announced your results in your interim results versus now when you're announcing your third quarter trading update, I would say, are you a bit more optimistic or more bearish, right? Because my read through seems be as if you're pushing out the recovery into more of the longer term rather than into a medium term, right? Or did I get that wrong? And then finally, you talk about like potential returns to the shareholders. Would that be via dividends? Or do you think that will be via share buyback? That's the questions I have for now.

Okay. Let's see, Andrew, if I can remember all the questions. But I think we start with the long-term time charter deals. We are already of course, in our existing fleet have some long-term time charter deals, but we actually have 10 ships coming. One is actually already had been delivered, and we have 9 more coming of long term -- what we call long-term time charter deals. And that is besides the 1 we already got, it's 6 Handysizes, additional Handysizes, and then 3 Ultramaxes 43,000 deadweight. One is out of docks in China and the rest is from Japanese shipyards. It is, in total, 4 to 5 years of time charter commitments that we have taken, it is Handysizes -- total 7 Handysizes, it is from 3 to 5 years charter with options for additional years. And for these Ultramaxes, it's 5-year charters, also with additional years of options and all ships is with purchase options. And you can see it a little bit as we sold a number of our smaller, especially our Handysizes, and we have taken these a little bit as going in again and having some nice modern ships with a little more optionality into the business, which we actually like. Of course, in combination with many ships that we own, we think this is a good combination. We normally give the freight to TCE rates hitted. We'll look at that if we have to come back on that one but I think we have a very good name in Japan and we normally get -- we've also done this good timing, I think so. We have a very competitive time charter levels when you compare to what's been done in Japan lately. And you can say the another advantage of these time charter deals, Andrew, is that, of course, with the increased interest rate level, these are fairly cheaper relatively to buying. I hope that was a good answer on that one of them. And then in respect to the spot rates, you're right that the rates are up, very strongly at the moment, actually. But they are -- but if you look at the FFAs, our derivatives going forward, they are coming down, especially in first quarter. I think it's also fair to say if you look at the physical time charter level for 1 year, it's actually higher than the index or the derivative markets. So there is probably at the moment, a little bit where -- actually the physical market looks a little bit more positive in the future than the derivatives at the moment. You can say we are also entering the contract season and that's actually quite nice to do that at a time and place where actually the indexes, the market is at a good level. So we, of course, hope to be able to use that market to take a little cover for next year because I think when we look ahead for next year, there is a little bit back to this where the seasonality of the market, the normal seasonality is back. And we do actually see first quarter as normal will be a little bit weaker than the current market. That's also what the derivative, when you look at that one, what also that indicates in it. But if you look at full year next year on the derivative, it actually doesn't look that bad. But yes, right, it's less than current index for next year. You're absolutely right when we spoke about the outlook when we had the interim result. We did -- I think we -- the word we don't like to say too much, but we did talk about headwind at that time. And I think we were actually correct because it was $7,000, at least index was $7,000 at certain stage. So I think it was fair to say that it was a little bit headwind at that time. I think actually, we're not surprised about that the market came up now. But it came actually driven also by China, which I think maybe we're a little bit pleased about, actually. We still lag the 8% congestion that would help us a little bit. But we do see congestion coming up in South America. We also see congestion in Panama due to order level and so on. And let's see what's going to happen in the U.S. when they start exporting grain. Now there are some issues on the Mississippi River with low water level and high barging cost and so on, which might cause some delays and issues. Yes, I think we are more optimistic now than we were at the half year. But still, we feel first quarter, but there's still a little bit seasonality into that. But we actually do see a year next year where we do see a more positive outlook for minor bulk volumes. And of course, we have a hope and I believe that the Chinese government will succeed with attending to maybe -- I wouldn't say we energize the market, but maybe get the property markets going again because that would be quite helpful for minor bulk. And we probably have a feeling that the U.S. is not doing too badly and hopefully, there will be a soft landing in the U.S. And based on that, we are actually quite optimistic about next year. In respect to return and dividend or share buybacks in it, I think we are, as always, looking at share buybacks. And it's clear that if -- and that is actually the case at the moment that we are trading at a discount to our NAV. So we again feel that our share price is unfair and unreasonable in it. But so you can say the asset values are extremely good at the moment. And then when you look at our share price, we are trading at a discount to NAV. So that would actually indicate that maybe share buybacks would be an option to do. I think we take that decision. And of course, by the end of the day, the Board decides exactly how they we are going do that. I think our discussion is always that we would love to find good investment opportunities and spend the money in growing the business, and hopefully, there will be some opportunities coming up with that. If hopefully, good results and if there's an opportunity to pay out to our shareholders, we will, of course, do so. And we will, of course, evaluate the best structure of doing that if it should be dividend or even share buybacks. So we'll come back to that when we come into February and the full year result.

[Operator Instructions] Our next question comes from Nathan Gee. Please unmute yourself.