Earnings Call: Q1 2019

Apr 11, 2019

Welcome to today's Pacific Basin twenty nineteen Q1 Trading Update Conference Call. I'm pleased to present Chief Executive Officer, Mats Berglund, for the first part of this call. Participants will be in a listen only mode and afterwards there will be a question and answer session. Mr. Berglund, please begin. Thank you very much. Welcome, and thanks for joining us here today. I'm joined by our CFO, Peter Schultz. And as mentioned, I will start with a brief presentation and then we will invite you to ask questions. Please turn to Slide two, where we get straight into the first quarter numbers. We made $9,080 per day on our Handysize ships during the first quarter and $10,400 per day on our Supramax ships. The market was very weak in the first quarter and index rates were down with 2926% respectively year on year, while our rates were down with 38% year on year, respectively. So strong outperformance in the first quarter, outperforming index rates with about $3,000 per day in both segments. For the remaining nine months of the year, we have 36% of our Handysize days covered at $9,360 per day and 58% of our Supramax days at $10,690 per day. In the first quarter, we took delivery of three vessels and we handed over an older, smaller Handysize that we sold late last year. We operated two twenty ships overall on average during the quarter. Year to date, so in the first quarter this year, we have committed to buy another three secondhand Supramax ships. And that will take our own fleet to 115 ships by July. Please turn to Slide three. As mentioned, we had a weak start of the year. You can see the index rates in these two graphs, Handysize rates to the left and supermax rates to the right. And the main reason in our view for the weakness is primarily The U. S.-China trade conflict and specifically the lack of U. S. Soybeans moving to China. We also had Chinese restrictions on coal imports and other custom clearance issues like canola, for example, And of course, the tragic incident in Brazil not affecting our segment directly, but certainly indirectly sentiment wise. And also, we have weather disruptions in Australia. The Handysize and Supramax markets did improve significantly though during the second half of the first quarter. In contrast, the bigger ships have not really improved, and we see a decreasing correlation between Capesize rates and the smaller vessel segments in which we own and operate. Turn to Slide four. This explains a bit why we're seeing better rates for the smaller ships carrying primarily minor bulks and agri products, while the larger ships primarily carrying iron ore and coal are struggling. In January and February, minor bulks into China grew with about 7% and then we're including grain, while iron ore and coal declined with about 3%. The graph to the right shows you, if you look at the 2019 bar, that Clarkson expects Miner Bulk to continue to grow solidly with about 44.3%, the Bluefield, and that they expect Grain to bounce back to growth of about 4% to 5% this year. But you see reductions in iron ore, and they expect about 2% coal growth. Slide five, we're turning to the supply side. And look at the right graph on this slide that shows the fleet development for Handysize and Supramax combined. And you will see by way of the line, which is the net of deliveries less scrapping, a very steady decreasing trend with declining net fleet growth from 5.7% in 2015 down to 2.4% for last year, 1.9% expected for this year and 0.6%, so almost no fleet growth expected for 2020. And scrapping remains very low, and there is potential for more scrapping. On Slide six, we show this just in a different way. We like to have a low order book and a larger older fleet like we do have in the Handysize segment, not the other way around like we have in Capes and larger segments as you see on this slide. Slide seven, the point of showing the fleet growth being low is that we can afford a slowdown in the world economy due to the fleet growing even slower or slowing more, so to speak. The top right graph on this slide, we put the minor bulk demand growth expected by Clarkson against the net fleet growth in the Supramax and Handysize segments combined. So you see demand for minor bulk expected to slow, but from five to four, maybe even to below four. But the fleet is the net fleet growth is slowing from 2.4 to 1.9 and to very close to zero expected for 2020. Slide eight. This shows newbuilding values and secondhand values. The upper line is newbuilding values and the lower line is the typical price of a five year old ship. Supra to the right and Handy's to the left. Secondhand values have held up reasonably well in spite of the weak first quarter. And the gap between newbuildings and secondhand prices remain large, and we still see significant upside in secondhand values. The Slide nine, wrapping up a little bit outlook wise. We have what we believe is quite an uncertain situation causing more volatility than usual this year, and we've seen that so far this year. The key factors is, of course, firstly, the world's economic growth. IMF has taken down their forecast from 3.9% to 3.5% now to 3.3%. And there's nothing wrong with 3% growth. That is enough for us in our segment given the slow fleet growth. And IMF do expect that the economy will slowly strengthen again in the second half this year and into 2020, partly supported by Chinese economic stimulus and continued loose monetary policy in The U. S. And the Chinese are really doing what they can to counteract the slowdown in the economy by way of stimulus. The second point is, of course, the trade war. And as you know, this swings back and forth. One day, it's positive, optimistic and the next day, not. So we believe that this has a significant impact in our trades, and we would get a very welcome boost from a resolution to The U. S. And China negotiations. The third thing we do want to mention is the IMO 2020 sulfur cap coming and the fact that we believe that this will lead to supply contraction. And there's also a scrapping potential that comes with this. Again, we believe that demand in our sectors, Minor Bulk and Grain will grow significantly more than the net fleet will grow, and that's what we base our statement that we believe the longer term fundamentals of our vessel segments are positive. Slide ten and eleven shows our business model, which continues to deliver strong results. I'm not going to go into it here and now, only mentioning on Slide 11 that it's not only on the TCE level that we perform strongly and outperform, but we also have very competitive cost structure both on OpEx, G and A and capital costs. And I would encourage you to benchmark our numbers with other companies that do report their numbers publicly. Slide 12 sets out our strategic direction and priorities, and there's nothing new here compared to what we presented at the annual results, just emphasizing the point that we are still more a buyer than a seller. We do look at continuing to buy secondhand ships. But having just bought three ships in the first quarter expect us to grow a bit slower. But we do have capacity to buy more ships and something really attractive comes our way, we are continuing to look at secondhand ships. And the second thing just to mention again is all the work that goes into prepare for IMO twenty twenty this year is not to be underestimated. This involves fuel contracts, cleaning of tanks, charter party clauses and installation and testing of scrubbers on some of our Supramax ships. We have installed scrubbers on two of our Supramax ships so far. Finally, on Slide 13, we believe that we are well positioned for the future. And just maybe wrapping up with a couple of reminders. First, for those of you using our rates and sensitivity to forecast our results, remember to adjust for the fact that we no longer have the onerous contract write backs in 2019. In 2018, we had €16,000,000 positive effects of the reversal of the previous provision that we took for the long term charter contracts that were out of the money. That's no longer there and time charters are accounted for in the balance sheet from 2019 onwards. Second reminder, we have the €125,000,000 convertible bond. There's a put option on July 3, and it's likely that we will repay that this summer. We are very well prepared for that by way primarily of the refinancings that we did already last year. We had $342,000,000 of cash at December 31. And a third reminder, subject to the AGM on April 17, we expect to pay a dividend of €0.37 around May 7. And you will recall that we paid €2.5 as interim dividend earlier in the year. So the total dividend is €6.2 for the full year. And with that, we invite for questions. Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Please press the pound or the hash key. We will now begin the question and answer session. If you have a question for any of today's speakers, please press star one on your telephone keypad and you will enter the queue. After you are announced, please ask your question. If you find that your questions has been answered before it's your turn to speak, please press the pound or the hash key to cancel your question. Again, it's star one on your telephone keypad. We have the first question from the line of Barash Jain from HSBC. Please ask your question. Thank you, and thanks, Matt, for the presentation and a very resilient performance, I must say, given the backdrop. I have two questions, one for you and one probably perhaps Peter can address. First, on Slide three, when we look at the performance, we have seen perhaps mostly due to the seasonality, but the trade rates started to trend lower in April. Is it anything more than the seasonality, which probably is a month earlier than probably last year? Or you think that a sustained below operating cost level of Capesize rates eventually has some bearing on Panamax, which subsequently start to hurt Handymax or Supramax for that matter? And my second question to Peter would be for your leased vessels, the long term leased vessels, will Pacific Basin also be impacted because of IFRS 16? And if so, are we start to quantify that, how that how your balance sheet or P and L will look like in that event? Thank you. Thanks, Arash. The timing of the weakness is about the same, in fact, if you look at the graph there, right, of 2018 and 2019. But I think it's a combination of factors. The trade war effect is certainly still there. And the sentiment is really also affected not only by the trade war, but also by the extremely weak iron ore market. We also have the coal reductions that we mentioned, some restrictions into China and also some negotiations or whatever you want to call it between China and Australia affecting the clearance of the import of coal cargoes, etcetera. So I think we cannot point to something real specific on one factor that I explained. It's a combination of factor, and it is also seasonal. Peter, you want to jump Hello, Paresh. On IFRS 16, yes, we are impacted by the capitalization of long term leases. You will see in the balance sheet at the interim exactly what that impact is. But I think we don't expect the impact to be that material. Current indications would say about $100,000,000 of right of use and lease liability would be added to the balance sheet. But we will see more clearly at the interim. Given that our balance sheet is over $2,200,000,000 it's a very, very small effect. Yes. So that makes sense. If it is $100,000,000 all around, yes, it will be fairly small. Thank you for the clarification both. We have the next question from the line of Rahul Sharan from Jure. Please ask your question. Yes. Hi. It was really a very nice presentation. I have just a small question. You are saying that the minor bulk trade is going to be good this year. So my question is, would you like to name some commodities within minor pulp? And on what on which routes? Thank you. So we're pointing to the fact that the demand fundamentals for minor products looks reasonably good with Clarkson expecting around 4% demand growth. That is a combination of a lot of different commodities. The ones that's growing most strongly recently have been bauxite, the nickel and manganese ore. Copper has grown strongly as well, while we've seen weakness in soybean, etcetera. But it's very difficult to and it doesn't matter that much. We carry 25 different commodities and the importance is the is really driven by world economy. World economic growth is not a bad proxy for minor bulk demand. I think you have if you go back and look in our annual presentation, there's some commodity specific forecast that you can look at. It's Slide 30 of this appendix as well. You can see it's commodity by commodity. We are not making specific rate forecasts, right? You mentioned that we're forecasting, right? We do not do that. But we do say that the fundamentals look positive for our segments. And we base that really more on the supply side than on the demand side, right? The supply side is what looks more favorable and the growth is continuing to slow down. Thank you. We have the next question from the line of Andrew Lee from Jefferies. Please ask your question. Yes. Hi. Thanks for your time. I have two questions. The first question is you mentioned that the you installed two scrubbers on the Supramax. I was just wondering, is the performance in line in light way in line with what you're expecting? Can you just give me a little update in terms of what you're expecting? How does it look? And are the plans to install more scrubbers? Second question is, if I look at the press release, right at the bottom, there's a line that says we no longer benefit from the utilization of onerous contracts. So if I look on Slide 29, you give the chartered in commitments. Is that what we should use in our model? I assume that the Honors contract is referring to the 16,000,000 that you mentioned earlier. Thanks. Thanks. The scrubbers, yes, so far so good. We are not we will install on more ships, but we are not quantifying it because we will see how it goes. So we have some flexibility there. But so far, so good. And yes, expect us to install on more scrubbers during the rest of the year. And Peter? Hi, Andrew. The information on Page 29 is forward looking. So it obviously does not include any utilization of onerous contracts, which ended in 2018. So for the long term rates you see here, I think they can be used for forecasting. The short term rates that you see here was a snapshot at the end of the year. And of course, that changes every day with the market as we take in new ships. So that business, as we always keep reminding people, is more perhaps a margin business since it doesn't have a fixed cost base. Okay. That's great. Thanks for your time. Once again, ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, The next question comes from the line of Binding Rong from Berenberg. Please ask your question. Hi, Matt. Hi, Peter. Two questions from me. The first is I see the revenue days dropped total revenue days dropped on a year on year basis. Can you please elaborate a little bit on why is that? And how do you see the trend getting to the next few quarters without considering new vessels coming in? This is one. And two is when we are if we look forward on new revenue days to be covered, how do you see the trend of the rates TCE? Is this could be lower than the number we show for 2Q to 4Q? Or is it should be stabilized or going higher? Thank you. Yes. If you look at the maybe in our announcement on the first page there, you have the dates graphically, right? We have committed so far, we have slightly fewer handysize days, but we have more Supramax days and that's offsetting each other. So I think you should the best guess at this point would be flat, right, and continuing to increase the owned vessel portion and redelivering shorter ships, replacing with more owned such that the total fleet remains about flat, right? We said we had about two twenty ships on the water during the first quarter. We had two thirty four at the March. I think if you look at one of the other slides, it's just two twenty is the average for the period and two thirty four at the March. Correct, right? Yes, two thirty four. So this is opportunistic, and this varies a little bit up and down, but expect it to be flat year on year. Does that answer your question or? Yes. I got you. Thank you. Thank you. I apologize. We have a question from the line of Bending Rong from Boeing. Please ask your question. Sorry, I was cut off. Thank you for your first question. And what about the second one regarding the rate outlook? Sorry, I missed that. Well, we don't give a rate outlook, unfortunately. We do show the rate that we have covered so far, right? And you have that on the second slide, right? So we're with 36% covered for the remaining nine months at 9,000 36058% covered at 10,690 on the Supras. But we do not provide a specific rate outlook. Sure. Well, can I say that the outperformance actually, you guys did a very good job in the first quarter? Can I say there's a chance for the outperformance to narrow in the second quarter or in the next few months? Yes. You as we always try to guide, right, that you should expect the outperformance to narrow in a rising market. And we're what we're interested in is obviously the total rate. And we're hoping for a better rate environment in the second part of the year. But it was an unusually high outperformance, as you can see, in the first quarter, but that's partly to do with the dropping of the rates, right? And when rates fall, we tend to outperform more. And it's a short period. You should look at this over twelve months rather than a three month period. There's also a lag involved here, right, because we fix with a forty five day lag typically on average. Okay. That's very clear. Thank you very much, Okay. Once again, please please go ahead, sir. So if no further questions, I will thank you again very much for your interest and for listening, and see you next time. Thank you very much. Thank you, sir. This concludes our conference call. Thank you for attending.