Earnings Call: Q1 2018

Apr 12, 2018

Welcome to today's Pacific Basin twenty eighteen First Quarter Trading Update Announcement Call. I am pleased to present Chief Executive Officer, Mr. Mads Berglund. For the first part of this call, all 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 everybody for dialing in and welcome to our first quarter twenty eighteen trading update call. I have with me here today also our CFO, Peter Schultz And I hope that you have access to our slide presentation. So I'll refer you to the various slides starting on Slide two. Our market view and guidance remain unchanged from the annual results call some six weeks ago. So we continue to be cautiously optimistic for a continued market recovery with some volatility along the way. The first quarter improvement year on year is encouraging. The supply fundamentals continue to look good. And I will take you straight into the TCE numbers on Slide three. We made for Handysize $9,360 per day in the first quarter, outperforming the index with 16% or almost $1,300 per day. For our Supramaxes, we made $11,250 outperforming the index with 10% or $10.60 dollars per day. These are significant improvements compared to the first quarter last year. For the remaining three quarters of this year, we have fixed 44% of our Handysize days at $9,710 per day, so slightly higher than we did for the first quarter. And for the Supramax ships, we have fixed 66% of our days at $11,490 per day. For the full year of 2018, this means that we have fixed 61% of our days of the committed days for Handysize at $9,540 per day and 79% of the committed supermax days at $11,370 per day. If we compare those year to date 2018 numbers with the full year actuals for 2017, you can see that we are so far $12.20 dollars above last year levels for Handysize and $17.60 dollars above for the Supramaxes compared to last year. You will recall that we are guiding that $1,000 per day improvement in the rates makes about 35,000,000 to $40,000,000 improvement on our bottom line. And you should remember, we'll come back to that, but we have 80 owned Handysizes and 25 owned Supramaxes. So the Handysize rate and change is the bulk of our days, especially on the owned vessel side. You will find further details in the appendix on Slide 23 as regards to number of days for the first quarter, etcetera. We had about the same number of days in the first quarter twenty eighteen as we had in the 2017 with the difference that we now have more owned ships and less chartered in ships due to the growth in our own fleet. If I can make you turn to Slide five, you have here the index rates and how they have developed, Handysize rates on the left and the Supramax rates on the right index rates. We're following the same pattern pretty much as the prior two years. You see the weaker period during Chinese New Year, but we bottomed out at significantly higher level than last year again. It's quite a solid trend with year on year improvement for quite a while now. First two months of this quarter, we don't have all the stats for March yet, but first two months demand was strong. 9% increase in Chinese drybulk imports for these two months and even stronger for minor bulk, 17% year on year increase for January and February. Electricity production was up 12% in January and February in China, so very strong activity there. Elsewhere in The Pacific, rates were supported by a continuing recovery in demand for concentrates and logs. And in The Atlantic, Brazil and Argentina, agriculture bulk exports grew strongly year on year, partly offset by weaker U. S. Exports. The downturn in the last few weeks, more so on Supramax than Handysize, probably due to somewhat slower activity in March, maybe a little bit influenced by the sentiment created by the trade tariff announcements. We will revert to that shortly. But we are hopeful that the underlying positive fundamentals will make the rates even out a bit again. The larger ships have turned around the last couple of days. So we remain cautiously optimistic. If I can ask you to turn to Slide six, and we'll talk briefly about these trade tariffs. First section of this slide, you have round one, so to speak, which was about steel and aluminum tariffs into The U. S. And these tariffs will have a very small minimal impact on us and in the dry bulk market in our view. There is, as you know, almost no steel moving from China to The U. S. And the other big exporters got exemptions, etcetera. So we don't see that this first round, which is now effective, have any significant implications on the drybulk trade. Round two in April, what's relevant there for drybulk is the Chinese 25% tariffs on agricultural volumes. What's important there is the soybean. U. S. Doesn't export any corn, not much wheat, some sorghum, but again, the big volume from U. S. To China is the soybean, and that's where the 25% tariff will likely have an impact if this becomes reality. It was 32,000,000 tons of soybean moving from U. S. To China in 2017. China takes even more from Brazil, 54,000,000 tons from Brazil. This has gotten a lot of press in recent weeks or weeks, and we'll try to help put this into context a bit. There are several important things to bear in mind as regards to impact on the drybulk industry. First, These 32,000,000 tonnes of U. S. Soybean exports to China represents only 0.6% of the total drybulk trade. And a majority of these volumes move in Panamax and CAMSAMAX ships. We did not move any soybean from The U. S. To China. We moved soybean elsewhere and from other sources, primarily from Argentina in our case, but also from Brazil. We moved from U. S. But to other destinations than China. No implementation dates for the tariffs have yet been set. And the impact on these trade volumes in the medium term would likely be limited since the high season for U. S. Soybean exports only starts in the fourth quarter. U. S. And South America take turns in their high seasons and exporting to China. So important to remember these tariffs are not in effect yet. And even if they come into effect in a while, it doesn't mean much because volumes out of U. S. Is very small anyway. So there is time for these countries to work this out hopefully. And we also point out that while Chinese buyers will still depend on significant soybean imports from The U. S, China will likely continue to buy more from Brazil. Brazil is already a much larger supplier as we mentioned. So we believe that these actions will have limited a impact and will be largely outweighed by the positive drybulk supply fundamentals and continued global drybulk trade growth overall. The trend is obviously not good with protectionistic actions, and it doesn't help sentiment. But if you put these numbers into context, they are very small. And these volumes are movable. It will shift around and these volumes will not disappear. Slide seven, moving to the supply side. And this continues to look good. You see here the total drybulk order book situation on the left. And on the right graph, you have the situation for Handysize and Supramax combined. First note in the left part of these graphs, the very significant continued shortfall. We are surprised to continue to see 44%, 45% shortfall in the first quarter. And this is obviously positive. So the remaining order book and also for the coming years, you should note that this is the stated order book and what tends to deliver actually continues to be significantly lower than the stated order book. We could feel our chartering guys felt the fewer ships being delivered into the Pacific Region during the first quarter. And this was one of the drivers for the improved freight market during the first quarter twenty eighteen. The combined Handysize and Supramax order book is now at the lowest level since the late 1990s. And note the significant difference in the future order book for Handysize and Supramax versus the larger ships or the order book overall, especially for 2019 and beyond. If you look at 2019 column here, for the total order book, you see 3.4% scheduled deliveries for 2019. But for Handysize and Supermax combined, you have 1.8%, so significantly smaller and even bigger difference if you go to 2020 and beyond. Turn to Slide eight. We use this slide just to highlight further the difference between the different sizes. And this just emphasizes that the majority of the drybulk order book is in the Capesize and up segment. Note that actually quite few of that volume is Capesizes, it's Valemax's and Newcastle Max's, which is far removed from our minor bulk and grain trade. And the Handysize profile, in particular, looks much better with a much smaller order book and more older ships. Turn to Slide nine, where we combine supply and demand overall in one graph. So note that this is total drybulk and it's very difficult to separate this for the various segments. So this is total drybulk. These are Clarksons forecast and you can see that they expect somewhat slower demand for 2018, 3.5% growth, but still well above the net fleet growth that they have at 2%. With shortfall so big in the first quarter, we may see the net fleet growth if shortfall continues to be significantly lower than 2%. But we do believe that demand will continue to grow faster than supply. And hence, we are optimistic on a continuing tightening market. And hopefully, this will look a bit better for our segments than it will for the overall drybulk market. Slide 10, we show the development of the asset values with handysize graph to the left and supras to the right. And the top line here is a generic price of a new building and the lower of a five year old ship. These are kind of some average between Japan and China. You can see that Handysize newbuilding Clarkson now has at 22,500,000.0 and a five year old has now come up to $15,500,000 And note that it's only now at 15,500,000.0 that we have reached the low point of $20.12 and 2013, and we still see upside in secondhand values. In a strong market, as you can see from the history here, a five year old secondhand ship tends to touch the newbuilding price in value or at least go much closer to the newbuilding price than what we have today. And this is continues to be helpful to prevent newbuild ordering from taking off, right? This significant gap, it makes a lot more sense to order a or to buy a secondhand ship if you want to buy something rather than a newbuilding because this price difference is so good. And we also continue to have this uncertainty on the newbuilding technology, which makes many people hold off, including us, hold off on ordering new ships. If I can take you to Slide 12, where we are just reminding you of our owned vessel breakeven levels, dollars 8,300 per day for the owned Handysizes to the left and about 9.1 a day for the Supramaxes to the right. And we compare that with the actual earnings of 2017, where we just got above these levels, primarily on the Supramax side, right? And you will recall, we made about $3,000,000 in 2017, so about breakeven levels. And that the year to date numbers for 2018 is just about 9,500,000.0 a day on the Handy sizes, which again is about $1,200 per day better than last year. Again, if you apply this to our sensitivity of thousand dollars difference making 35,000,000 to $40,000,000 on our bottom line, remember that this applies to the owned ships only because the short term operating activity is a margin business and doesn't vary with the market, right? So we tend to make a margin whether the market is big or low and the profitability of that business doesn't necessarily change with the market level. And that's the owned ships. We have much more Handysize ships than Supramax ships, right? So 80 Handysize ships and 25 Supramax ships. So you need to apply more weight to the Handysize delta than to the Supramax delta. Page 13, The slide and the rest is really just to wrap up, and I will not repeat the business model that we show on Slide 13, but just emphasize that we continue to outperform, and that is due to our business model with all the components on the left of the slide, and the outperformance continued in the 2018. Slide 14, we just repeat the much larger owned fleet that we have equipped ourselves with, which we will benefit from as the market gets above the breakeven levels. The benefit with a larger owned fleet is, as you know, that the costs remain substantially fixed. And we also remind of the competitive cost structure that we have. And we have reduced that significantly over the years. And our guidance remains that it is very difficult to continue to get these costs down. And you should not expect that to happen, rather a slight inflation, if anything, on these levels. It won't stop us from trying to reduce these numbers, but it's very tough to get them down lower given that we have grown the business significantly, the own ships and the market is improving. Again, the sensitivity guidance remains unchanged with $1,000 per day changing our bottom line with roughly 35,000,000 to €40,000,000 Finally, Slide 15. As regards to outlook, I repeat, Q1 rates continued above last year levels, and we remain cautiously optimistic. The supply side continues to look good. The sanctions so far, we do not think will have a material impact, definitely not on our trades. We continue to see upside in secondhand values, and we are looking at attractive secondhand ships, but we'll continue to be very picky and only buy ships that are very suitable for our trades. And we're not looking at new buildings for the reasons laid out in the annual report in quite some detail, the uncertain technology, etcetera. And we think that we are well positioned to both navigate and take advantage of the recovering markets with our larger owned fleet and our competitive cost structure. So with that, I would like to invite for questions from the participants. Thank you very much for listening. We will now begin our question and answer session. Your first question comes from the line of Parrish Chen from HSBC. Please go ahead. Thank you. Hi, Matt. Hi, Peter. Yes, my question, can you hear me? Yes. We can hear you, Parash. Go ahead. Okay. Lovely. My question is if I can refer you to Slide five. If you can talk us through while first quarter so far pretty much trending the pattern of last two years, the recent hiccups perhaps largely due to sentiments, how do you see that seasonal pattern going into second quarter, especially when you look at Supramax rates? It looks like it's trying to break that trend. Would you attribute it all to sentiment? Or there is something on the ground that we should be aware of? And my second question would be with rates forming up with order book as low as it could ever been, Do you see more any sign or do you see ship owners getting excited to enter into the new built market? Or probably your thoughts on those two would be very helpful. Thank you, Parash. I don't think that we should pay enormous relevance to the recent volatility in rates. It went up much deeper than last year, as you can see, especially in the Supramax side, right? I think you're referring primarily to the Supra drop, right? So the upturn in the last in March was much bigger than last year, and then it's come down a bit, right? But we're still well above last year levels. So there will be volatility along the way here. And again, I think we saw again, as we mentioned, the China grew incredibly strong from what we can see in January, February. It probably was a bit slower in March. These are fairly small changes in the big context of things. So we continue to believe that the underlying fundamentals will drive the market tighter over time. And again, there are so many factors playing into this that a little bit volatility along the way we have to anticipate. We're now in the second quarter. South America is just about to take over as regards to grain season. And the crop in Brazil is large. It looks good from what we can see. Logically, with these potential soybean tariffs coming in, we don't know if they will come in, but logically, you would think more would move earlier. That could change things, right? I remind you of the coal imports to China that is much, much bigger than the soybeans that we're talking about, right? The U. S. Soybean is 32,000,000 tons. Chinese coal imports is 300,000,000 tons, if you analyze it to January, February. And that can swing much more than the soybean, including on rain in China and all kinds of things, right? So we will have some volatility, but we continue to be optimistic that we will see continued improvements based on last year. The newbuilding ordering activity remains touchwood limited in our segments. Renewable activity that we have seen, you've seen a big increase in the Capesize and up order book during last year, right? But again, that is Valemaxes and some Newcastle Maxes, some Kamsarmaxes. But for Handysize and Supramax, the annualized newbuild ordering activity is around 1% or I think the last number I saw was 0.9%, right? So it's very few orders added still. And logically so, right, due to the reasons that we have spoken about before, secondhand prices are more attractive. Today's new billing is still a ship that is designed to burn HFO. And you're sticking out your neck ordering a new ship believing that, that ship will be viable for twenty five years to come, right? We will have CO2 emissions coming and maybe fifteen or twenty years from now, ships will also, in our segment, will run on LNG, etcetera. So these factors lead to limited ordering. And note that $9,000 per day ish where Handysize rates are at the moment is not enough to make sense of a new building, right? It's to be pushed up. And that's what we are hoping and expecting to see driven by the stronger demand and supply. Thank you. Yes, perfect. Thank you. Your next question comes from the line of Joe Liu from Deutsche Bank. Please ask your question. Hi, good evening, Matt. Good evening, Clear. I wanted to ask another question on Slide five. Why do you think Handysize rates have held up relatively well over the last month versus Supramax and also versus the general BDI market? They always do, so to speak. I would be tempted to answer. There is there tends to always be less volatility in Handysize. The activity is more industrial. It's not it's spread over so many different commodities, over so many different regions, over so many different ports. So the variations tends to be less. So more volatility in supermax is not unusual and not surprising. So would you say that from your perspective, demand from customers has still been relatively stable? No, it's been increasing, right, which is driving up rates year on year. And we pointed to some areas in that slide there, right? We've seen more logs out of Australia and New Zealand. We've seen more copper concentrates out of Indonesia. And we've seen continued strong South American grain And in particular, China, demand for mining bugs have been very good. Okay. I also had a question on Slide 12, which is the slide showing cover rates and breakeven rates. Has there been any significant change in costs for your Handysize and Supramax vessels for this year versus last year? You should probably draw the conclusion that the answer is no since we're continuing to give this guidance, right? But we are not disclosing the exact details of the P and L in this trading update call. We continue to guide that these costs will continue to be substantially the same, possibly with a slight inflation, and we're working hard to offset that with continued efficiencies, but assume roughly the same. Okay. And remind me, when bunker costs go up, does that is that reflected in the OpEx? Or is that taken out and just passed on to the customer? Yes. TCE is after voyage costs, including bunkers. So variations in the bunker cost and other voyage costs do not affect the TCE level and these costs. So in effect, bunker cost is passed through to the customers. And the market is all owners, operators, they run the TCE calculation and the market effectively works on a TCE basis. So you should assume that the bunkers is passed on to the customer. All right. Thank you. Thank you very much. That's all the questions I have. Thanks, Joe. Your next question comes from the line of Andrew Lee from Jefferies. Please ask your question. Yes. Hi. Thanks for your time. I have two questions. On Slide seven, you gave here the shortfall, right, which is 44% and then 45% for the combined Handysize and Supramax. What's the reason do you think is behind that? And the 44%, do you think that's sustainable for the full year? Second question I have is on vessel speeds. Are we seeing a pickup in vessel speeds? I think you mentioned previously on the results that the current speed was around 11 to 12 Is that still the same? Or has that increased? Thank you. Thanks, Andrew. On the shortfall, we continue to be surprised by this high shortfall. Clarkson is anticipating that, that shortfall will reduce significantly during the rest of the year. And again, we continue to be surprised of that shortfall continuing to be significant. I think you have to assume that it will reduce logically as freight rates increase, etcetera. But there continue to be more orders in there than reality. The shipyards are known for overstating their order book because they need to or they want to, etcetera. And the actual ships coming out is smaller. I think you have to assume that this shortfall will reduce. If nothing else, because there's some won't be many chips left in the order book, right? So then there will be no shortfall. But yes, expect it to reduce. It has to start to reduce. But even so, right, these order book numbers are very low even without shortfall. And the second question was on vessel speed. Yes, the speed is a consequence of two things: one, the freight rate and two, the bunker price. So to answer your question, I would say the speeds are substantially the same as we guided last time. We were varying it on every voyage we fix, right? So our average speed now is around 12 knots. The average world fleet is more like 11 or 11.5 and depends on how you define this and so on. But there hasn't been a significant change. So we like, as you know, as strangely as it may sound, a high bunker price because that pushes all things equal, the speed down and that tightens up the market. And that's why this upcoming low sulfur regulation is interesting, right? Because all things equal, a majority, especially of the smaller ships, will need to burn the low sulfur, more expensive fuel. And all things equal, that will drive the speed down and that will tighten the market if that happens. Practical high speed is about 13% and practical low is about 10 Thank you, Andrew. Your next question comes from the line of Elizabeth Stone from Pinebridge. Please ask your question. Hi, Matt and Peter. Thank you for the presentation. Just a quick chat. You mentioned that the protection of this U. S. Restrictions is actually counted by China's trade with Brazil. But if this was going to be prolonged, do you think that, that would have a much more negative impact on the drybulk industry generally? And does it affect the freight rates? Because obviously, Brazil to China versus U. S. To China, that kind of routing. I'd like to hear some of your thoughts. Thank you. Yes. We do not think one, they're not in effect yet, right? And they may not even come into effect if they talk and agree something. It means a lot more to The U. S. Farmers than it means to the drybulk industry. And I'm sure there will be a lot of lobbying going Washington to make the U. S. Administration act to get away from this 25% tariff on The U. S. Soybean exports. But again, it's a rather small part of the overall drybulk trade, consider that the overall drybulk seaborne trade is 5,200,000,000 tons. And here, we're talking about 32,000,000 tons, which is 0.6% of the total trade. And this trade will not go away, right? Some will probably shift to be sourced from elsewhere. It's difficult to use other crop because soybean has so much more protein in it. But certainly, if this comes into effect, China will do what they can to buy from primarily Brazil, more from Brazil and more from Argentina and elsewhere. And some will may well stay going from U. S. To China with the tariff, but it's a small part of the trade. Distances is it depends on a bit of which size ship it goes and so on. But in our size vessels, a shift to South America increases the ton mile effect because it is longer from Brazil to China via the Cape Of Good Hope, South Of Africa than it is from The U. S. Via the Panama Canal to China. So you compare these two distances, it's four days longer, 10% longer, roughly one way from Brazil to China than via the Panama Canal from The U. S. But if it moves in the bigger in a CAMSARAMX ship, for example, you have the opposite effect where you're not going to the Panama Canal, you're going from The U. S. Gulf via South Of Africa to China. And then it's closer to Brazil than from The U. S. If you go both via Africa. Now we're getting into very much detail, but put this trade into context and volume wise and consider that very likely, if these tariffs comes into effect, this trade will shift, it will move around and all of it all these volumes will simply not go away, right? U. S. Will sell their soybean elsewhere, etcetera, and it will be replaced by various alternatives, etcetera. Hopefully, will come to their senses and talk to each other. Right. Thank you. Thank you. There are currently no questions. All right. If no further questions, thank you very much again for dialing in and for your interest in our company. Thank you very much. This concludes our conference call. Thank you all for attending.