Grindrod Shipping Holdings Ltd.
Q4 2018 Earnings Call Transcript

Published: 2 Mar 2019

[Operator:]

Good day and welcome to the Grindrod Shipping Conference Call to discuss the Financial Results for the Second Half and Full Year Period ended December 31, 2018. [Operator Instructions]. Additionally a live webcast of today's conference call and company presentation is available at Grindrod Shipping website which is www.grinshipping.com. Hosting the call today is Mr. Martyn Wade, Chief Executive Officer of Grindrod Shipping and Stephen Griffiths, Chief Financial Officer. I would now like to introduce Grindrod Shipping's Chief Executive Officer, Martyn Wade and hand over. Please go ahead sir.

[Martyn Wade:]

Thank you operator. Welcome everyone and thank you for joining call for the second half and full year 2018 ended July 1, 2018. Let me refer to Slide 2 with the forward-looking statements regarding our future financial and operating performance. These statements include information regarding future time charter contracts, outlook for the drybulk and tanker markets and other operating matters. These statements are based on release and expectations of management as of today. Our actual results may differ materially from our expectations. Investor should [indiscernible] carefully the risks and uncertainties described in the slide presentation and in today's press release. As well as the risk factors including in our filing with the SEC. we assume no obligation to revise or update forward-looking statements whether it's result of new information, future events or otherwise except as required by law. In addition during this call, we'll be discussing certain non-GAAP financial measures. For additional disclosures or [indiscernible] these non-GAAP financial measures including reconciliations for most directly comparable GAAP measures. Please see today's press release in Pages 13, 26 and 27 of the slide deck which is posted on our website. Now to start, please turn to Slide 4, our second half 2018 financial highlights. Financial results for the second half and full year was stronger than the first half across the majority of income metrics. Revenue in the second half of 2018 includes $168.2 million compared to $158.8 million in the first half. Gross profit increased to $8.7 million in the second half of 2018 from $2.4 million in the first half. Adjusted EBITDA in the second half of 2018 includes to $1.6 million from the loss of $1.7 million in the first half. Net loss improved to $7.2 million in the second half 2018 and $13.5 million in the first half. Loss per share EPS of $0.38 in the second half of 2018 was an improvement compared to the loss per share of $0.71 in the first half. On the drybulk side; market drivers during the period included overall rates improving as the TCE per day earned by our Handysize and Supramax/Ultramax vessels in the second half of 2018 increased to $9,066 per day and $12,795 per day respectively compared to $8,997 per day and $11,092 per day respectively in the first half. In addition minor bulks; the key cargoes for Grindrod's vessels enjoy high demand growth in part due to Chinese stocking ahead of the Chinese New Year. Counteracting the positive market in drybulk, the tanker market spent much of the second half 2018 in a weak earnings environment though that changed in November with a resurgence in spot rates. The stronger performance in late 2018 was unable to overcome the previous weaker months overall and while the stronger performance persisted into 2019 has recently declined from the highs in late 2018. Now turning to Slide 5, highlights of our core fleet development. Regarding our drybulk fleet we finalized agreements to charter in three Japanese new building Ultramax “eco” drybulk vessels upon delivery. The IVS Phoenix expected to deliver in the second quarter of 2019 and charter-in for minimum of three years with extension options. And the IVS Pebble Beach and IVS Atsugi expected in the third quarter of 2020 and both chartered in for minimum of two years with extension options and purchase options in favor of the company. Including previously announced acquisition of two owned new building resale “eco” Ultramax vessels expected to be delivered in the third quarter of this year, we're adding a total of five new building Ultramax vessels to our drybulk fleet. In August 2018, upon the completion of a 10-year charter, we redelivered the Handysize drybulk vessel IVS Shikra, the only long-term charter-in vessel in our Handysize fleet. We initially sold the 2004-build IVS Kanda for $8.7 million in October, 2018. The vessel was approaching 15 years old with a special survey due in the near term. Regarding our product tanker fleet, in December 2018 we sold for $7.6 million the 10-year old Chinese-built Small tanker the Berg, we owned in a joint venture with Engen Petroleum. Upon expiry of its charter in 2018, we redelivered the 14-year old charter-in Medium Range tanker Coral Stars. Now can I please ask you turn to Slide 6, with highlights of the company's recent developments. The company agreed to extend the IVS Bulk joint venture termination date from December 31, 2018 to April 30, 2019. We remained in active discussion with our partners regarding further terminations, date extensions and other potential transactions. We have commenced the unwinding of the Leopard Tanker joint venture by acquiring the four vessels between the partners. This resulted in Grindrod acquiring 100% of the 2013-build MR Product Tanker Leopard Moon and Leopard Sun for total purchase price of $54 million. Commercial and technical management for the vessels remain with Vitol. We entered into a new $29.9 million credit facility to finance a portion of the acquisition cost. The acquisition of the Leopard Moon and Leopard Sun allows us to fully consolidate the operational results in our financial statements following delivery of these vessels to us. In February 2019, we agreed to sell the 2010-build MR Product Tanker Lavela that is held in the Petrochemical Shipping joint venture with Engen Petroleum for $14.8 million. The sale of Lavela along with previous sale of Berg will result in the windup of this joint venture. Now turning to Slide 7, our chartering performance relative to industry benchmarks continued to outperform benchmarks in the second half of 2018. Handysize time charter earnings of $9,066 per day versus $8,329 per day for the Baltic Handysize Index adjusted for 5% commissions outperformed by approximately 8.8%. Supramax/Ultramax time charter equivalent of $12.795 per day versus $11,267 per day for the Baltic Supramax Index-58 adjusted again for 5% commissions outperformed by approximately 13.6%. Our commercial performance on the drybulk targets reflects on our key competitive advantages. Our ability to maximize revenue through the use of in-house commercial ports [ph] and a significant cargo base. Medium Range Tanker time charter equivalent of $10,950 per day versus $8,573 per day for the Clarksons Medium Range Clean Average Earnings assessment outperformed by approximately 27.7%. Now I'll pass the floor over to Stephen Griffiths, our Chief Financial Officer who will go on with financial highlights and performance for the second half for the year of 2018. Steve?

[Stephen Griffiths:]

Thank you Martyn. Let's turn to Slide 8. In comparison for the results for the second half of 2017. The results for the second half of 2018 were impacted by the sale of two non-core businesses on January 1, 2018. In the drybulk business our Handysize and Supramax/Ultramax operating days to 6,279 days for the six months ended December 31, 2018 from 7,676 days for the six months ended December 31, 2017. Primarily as a result of reduction of short-term charter-in days. The significant portion of both our drybulk and tankers fleet continue to be exposed to the spot markets in the second half of 2018. Supramax/Ultramax drybulk spot markets were generally stronger in the second half of 2018 than they were in the second half of 2017. On the other hand while it was an improvement in the MR Tanker market from November 2018 to second half of 2018 in this sector was generally weaker than the second half of 2017. Total revenues were $168.2 million for the six months ended December 31, 2018 and $215.5 million for the six months ended December 31, 2017. Cost of sales decreased by $43.6 million for approximately 21% from $203.1 million for the second half of 2017 to $159.5 million for the second half of 2018. The largest component of cost of sales was voyage expenses which decreased by [indiscernible] or 5% from $84.5 million for the second half of 2017 to $80.2 million for the second half of 2018. The second largest component of cost of sales was charter hire expenses which decreased by $17.1 million or 27% from $63.5 million for the second half of 2017 to $46.4 million for the second half of 2018. Gross profit decreased by $3.6 million from $12.4 million for the second half of 2017 to $8.7 million for the second half of 2018. Other operating income was $3.4 million for the second half of 2018 compared to $2.8 million for the second half of 2017 primarily due to the increase in foreign exchange gains for the six months ended December 31, 2018. Administration expenses were $14.3 million for the second half of 2018 compared to $19.3 million for the second half of 2017. The higher level of administrative expenses in the period ended December 31, 2017 was primarily due to $2.4 million of costs in the six months ended December 31, 2017 relating to our spin off from Grindrod Limited as well as other administrative costs relating to the two non-core businesses sold on January 1, 2018. Other operating expenses were approximately $3.4 million in the second half of 2018 down by 92% compared to $37 million in the second half of 2017. The decrease in operating expenses for the six months ended December 31, 2018 was primarily due to impairment losses on vessels of $16.5 million, impairment losses and goodwill and intangibles of $12.1 million and impairment on assets of the two non-core businesses sold on January 1, 2018 of $5.1 million recorded in the six months ended December 31, 2017. Share of results of joint ventures was a profit of $0.9 million for the second half of 2018 compared to share of loss of joint venture of $11.8 million for the second half of 2017. The improvement for the six months ended December 31, 2018 was primarily due to the recognition of impairment losses on vessels in our joint ventures for the six months ended December 31, 2017. We recorded an impairment loss on financial assets of $1.6 million in the second half of 2018 and no impairment loss on financial assets in the 2017. Interest income was $1.8 million in the second half of 2018 and $3.9 million in the same period of 2017. The decrease in interest income for the six months ended December 31, 2018 was primarily due to repayment of certain loans to our joint ventures. Interest expense was $3.6 million in the second half of 2018 and $3.5 million in the same period of 2017. Income tax expense for the six months ended December 31, 2017 was $1.3 million compared with an income tax credit of $0.8 million for the six months ended December 31, 2018. The reduction of income tax expense for six months ended December 31, 2018 was primarily due to the exclusion of the two non-core businesses sold on January 1, 2018 from our results since that date. Loss for the six months ended December 31, 2018 was $7.2 million compared to the loss of $53.9 million for the six months ended December 31, 2017. For the 12 months ended December 31, 2018 revenues were $319 million, gross profit was $11.1 million with a loss for the period of $20.6 million. the table of Slide 8 shows the details of our financial results for the year 2018 compared to 2017. As indicated on the slide a significant portion of our business through our joint ventures which are accounted for on an equity basis and are not consolidated in our financial statements. Now turning to Slide 9, with respect to the balance sheet total assets which include cash and bank other current assets ships, property, plant and equipment, interest in joint ventures and other non-current assets at December 31, 2018 with $447.6 million. Long-term debt was $96.1 million while non-current liabilities were $2.3 million and equity attributable to owners of the company amounted to $292.5 million for the year. Please that balance sheet does not reflect adjustments for the recent acquisition and financing of the Leopard Moon and the Leopard Sun. As you can see from the chart on the right, our debt repayment profile increased payments of $17.8 million in each of the next two years and then increased to $29.7 million and $32.1 million in the subsequent two years. The following slide will provide you with a few key figures of our joint ventures, so that you have a more complete understanding of our overall business footprint. Continuing on Slide 10, this slide contains a close look at our joint venture, financial highlights for the full year 2018. Our joint ventures owned 13 vessels of our total fleet. The proportionate share of our joint ventures are not reflected in our condensed consolidated and combined statement of profit and loss, but is in reflect in our segment results. However, as mentioned earlier we have been working to restructure our joint ventures with the objective of consolidating some or all of our joint venture vessels in our consolidated financial and operational results. as mentioned, the Leopard Tankers joint venture with Vitol is in the process of being unwound, with each party taking full ownership of two MR vessels. We took delivery of Leopard Moon and Leopard Sun in January and February 2019 in our own name and the operational results will be consolidated into our financial statements following the delivery of these vessels to us. Furthermore, we agree to sell to third party the one remaining vessel in our joint venture. the nine-year old non-eco Medium Range tanker Lavela. As a result, the Petrochemical Shipping joint venture with Engen is expected to be unwound in March 2019 following the delivery of the vessel. Okay, let's turn to Slide 11, we will now briefly discuss results in the drybulk and tanker business. As a reminder, segment results of operations include the impact of the proportionate share of joint ventures which is not reflected in our unaudited interim condensed consolidated results of operations. In the drybulk business, Handysize total revenues were $72.9 million for the six months ended December 31, 2018. For this period Handysize TCE per day was $9,066. Vessel operating costs were $5,167 per day and our long-term charter-in cost per day was $8,600. For Handysize fleet we had a total of 3,366 operating days out of which 2,616 were fulfilled with owned long-term charter-in vessels and 750 days with short-term charter-in vessels. We achieved a fleet utilization of 99.5%. In August 2018, we redelivered the IVS Shikra which was our only long-term charter-in Handysize vessel. For the Supramax/Ultramax segment total revenues were $73.6 million for the six months ended December 31, 2018. For this period the segment TCE per day was $12,795, vessel operating costs were $4,667 per day and long-term charter-in cost per day 12,668. For our Supramax/Ultramax fleet we had a total of 2,913 operating days out of which 1,464 days were fulfilled with owned long-term charter-in vessels and 1,449 days with short-term charter-in vessels. We achieved a fleet utilization of 99.7%. This slide also shows the details of our operational performance for the 12 months ended December, 2018. The average long-term charter-in cost per day for the Supramax fleet for the remainder of 2019 is expected to be approximately $12,700 per day. charter rates have weakened considerably on the drybulk side in the new year as of February 25, 2019 we have secured the following TCEs per day thus far for the remainder of 2019. In the Handysize, approximately 1,479 operating days at an approximate average TCE of $6,738 per day. Supramax/Ultramax approximately 1,467 operating days at an approximate average TCE of $10,912 per day. On Slide 12, tanker segments operating performance. In the tankers business, our Medium Rangers tankers total revenues was $19 million for the six months ended December 31, 2018. For the period, the MR tankers TCE per day was $10,950, vessel operating costs were $6,502 and long-term charter-in cost per day $15,972. For our MR tanker fleet, we had a total of 1,349 operating days out of which 808 days were fulfilled with own vessels and 541 was long-term charter-in vessels. We achieved a fleet utilization of 98.1%. In the Small Tankers segment, total revenues were $12.2 million for the six months ended December 31, 2018. For the period, the small tankers TCE per day was $11,453. Vessel operating costs were $6,390 per day and we had no long-term charter-in vessels. For our small tankers fleet, we had a total of 623 operating days all of which were fulfilled with owned vessels. We achieved fleet utilization of 99.8%. This slide also shows the details of our operational performance for the 12-month ended December, 2018. The average long-term charter-in cost per day for the medium range fleet for the remainder of 2019 is expected to be approximately $15,400 per day. charter rates have remained stronger on the tanker side and as of February 25, 2019 we have secured the following TCEs per day thus far for the remainder of 2019. Medium Range, approximately 396 operating days at an approximate average TCE of $16,500 per day. small tankers approximately 164 operating days at approximately an average TCE of $10,100 per day. Now turning to Slide 13, this slide shows the owned fleet cash breakeven analysis for the full year 2018. Our drybulk owned fleet cost cast breakeven rate for the year was $9,790 per vessel per day, long-term charter-in breakeven was $13,690 per vessel per day and core drybulk breakeven with $10,970 per vessel, per day. our tanker owned fleet cash breakeven rate for the year was $12,920 per day so per vessel per day. Long-term charter-in breakeven was $16,170 per vessel per day and core tanker breakeven was $13,730 per vessel per day. The cash breakeven rate per day includes operational expenses net G&A, interest expense and debt repayment. Please turn to Slide 14, this slide shows 2018 TCE revenue sensitivity to charter rates. To the [indiscernible] positive $1,000 change in TCE per day it equates to about $12.5 million of additional, annual TCE revenue. Please note that this refer to our combined fleet and includes our drybulk and tanker vessel operating days. As Martyn will be discussing in ensued slides we believe that both the drybulk and the product tanker markets have positive long-term fundamentals and we believe that both sectors should strengthen as we move towards the second half of 2019. With that, I would like to turn the call back over to Martyn and ask you to turn the market highlights on Slide 16.

[Martyn Wade:]

Thanks Steve. Our outlook for the long-term drybulk fundamentals is positive given the reduced supply outlook combined as steady demand especially for the minor bulks which are typically carried by Grindrod ships. Fleet growth has been steady at approximately 3% per year although scrapping is expected to pick up due to Ballast Water Treatment in IMO 2020 regulations. The drybulk order book is esteemed at 11% of the fleet. Deliveries expected at approximately $33 million tonnage deadweight for 2019 and vessels older than 15 years [indiscernible] 19% of the drybulk fleet. Asset prices remained largely flat over the year and we believe represent attractive entry points for quality assets. If I can ask you to please to turn to Slide 17, the drybulk market in 2019 shows signs of weakness reflecting the Vale dam disaster, trade wars, Chinese New Year seasonal, holiday new year season impact and slowdown in Chinese imports and other external market disruptions. As I mentioned the long-term fundamentals appear positive reflecting the reduced supply outlook combined with steady demand for minor bulks, the key cargos for our ships with approximately 3.2% expected growth rate in 2019. Furthermore, the implementation of IMO 2020 regulations is also expected to have a positive impact on supply as a result of higher scrapping rates, increased off hires and slow steaming. Now please can we turn to Slide 18 for the tanker segment, on the product tanker side we also expect the market to improve. Weak tanker earnings encouraged scrapping in 2018. We shall mitigate fleet growth. The medium range order is estimated at 10% of the fleet. Product tanker fleet growth in the 10,000 deadweight plus category is estimated at 3.3% in 2019. We should note that, 20% of product tankers in this category are 15 years older. Asset prices have been gradually recovering despite weak charter market conditions due to increased new building prices. Now please turn to Slide 19, we expect demand in the tanker segment to remain firm at approximately 3% growth rate in 2019. Growth in refining capacity and dislocation between refiners and end users is expected to boost demand in 2019. Product tanker demand is expected to be helped by the implementation of the IMO 2020 low sulfur regulations for bunker fuels. These regulations are expected to disrupt trading patterns and cause in increase in vessels used for storage and cargo repositioning. Spot earnings were weak for most of the year before a surge in November to over $17,000 per day and so the strength was carried into the beginning of 2019. Finally, please now turn to Slide 21 to cover our conclusion and strategy. We continue to operate a diversified fleet of drybulk and product tanker vessels which affords management the opportunity to pursue potential consolidation and growth opportunities in both sectors thereby enhancing shareholder value. Current market conditions in both the drybulk and tanker sectors may present attractive growth opportunities. We are confident that Grindrod Shipping is well positioned to take advantage of them. While some shipping companies have to outfit their vessels with exhaust gas scrubbers, we have elected not to do so. The modernity and high quality of our fleet has been a key factor in our decision to adopt new strategy. We believe there are potential negative environment affects that are starting to emerge with increased scrutiny of this technology. Regardless of the environmental impact, we are not convinced with the economic return on the scrubber installation cost will be sufficiently attractive and the vessel categories which we operate due to the high quality and fuel efficient characteristics of our vessels and their trading patterns. We'll continue to leverage our competitive advantage which includes; modern and high quality predominantly Japanese-built fleet. Our ability to maximize revenues through the use of in-house commercial pools, significant cargo base and our close commercial relationships with global and regional industry players. With this, I thank you all for joining our call today and look forward to reporting further progress as Grindrod Shipping continues to grow. And with we'd like to open up for any questions operator.

[Operator:]

[Operator Instructions] and your first question comes from the line of Brad Hathaway from Far View. Please go ahead your line is now open.

[Brad Hathaway:]

Congrats on another half year under the belt and also some positive progress I guess cleaning up the structure. It's good to see a lot of JVs being consolidated. I had a couple of questions for you; one is, on the Leopard Tankers debt. I think you mentioned $70 million in the press release and then there's also obviously the fleet snapshot you gave in the presentation. Can you just provide the net debt number for that JV as of the end of the year? Just to help people understand how things are going to change once that gets consolidated.

[Stephen Griffiths:]

The $70 million is - the liability reserved for the bank and the remainder of debt is shareholder loan, so that was put in equally valid two partners. So basically we have to raise our own debt, which we have and we've have raised our own to debt to the tune of $50 million.

[Brad Hathaway:]

Got it. So the other 29.9, correct?

[Stephen Griffiths:]

29.9. Yes. So obviously there's a shareholder loan, which obviously once all the assets and liabilities of the joint venture was settled. The indications at the moment show that there's going to be a shortage of cash to pay us back. But what that means is that, there'll be lots and liability back to the shareholders but no cash to pay it. So it will be forgiven inside the JV which will effective we have a joint venture profit which will be offset by right of investment and the consolidated.

[Brad Hathaway:]

Got it. So basically of the remaining - there was $70 million to the bank which you satisfied your 50% share through the.

[Stephen Griffiths:]

[Indiscernible]. Yes.

[Brad Hathaway:]

The $30 million that you raised and then probably another $5 million of cash and then you basically forgiven the shareholder loan for Leopard Tankers and as a result of that, you've been gained ownership of Sun and Moon.

[Stephen Griffiths:]

Yes.

[Brad Hathaway:]

Okay, great. That's helpful. And yes as I said at the beginning I appreciate that you're winding up Leopard and Petrochem I believe. With regards to IVS bulk as I think more you can say about some of the options available to you to kind of move forward, with that joint venture?

[Stephen Griffiths:]

No at this stage. We're still in discussions with our partners as we've said there, we've extended the JV agreement from December 31 to 30 April and I guess that's right, that's what we can say at this patch [ph].

[Brad Hathaway:]

Okay, is the goal still to kind to get to where you can consolidate on your balance sheet?

[Stephen Griffiths:]

Absolutely, yes.

[Brad Hathaway:]

Okay, great. Excellent and then I appreciate the discussion of the kind of drybulk supply and demand. I wasn't - a look here, so if you can maybe be a little more specific as to what you saw is the kind of supply dynamics especially really in your size areas because I think that was - your supply discussion was more kind of overall market.

[Martyn Wade:]

There's a given order book at any one time and we always look with interest at the beginning of the year and then compare to the end of the year. And the figures that we're seeing are interesting last year's order book somewhere in the region of 20% of the handy's and 25% of Supra/Ultra's didn't actually deliver. Now some people call it slippage it's probably cancelation and so we have the same. We have an order book but we're seeing it. I think all notion to - on the fact that a chunk of the order book for delivery this year. They haven't even started construction that should see it. So this is what - what have to battle with order books in terms of what is real, what is phantom, what is actually there. I think we're probably working on 3%, but I believe say we change the regulations, [indiscernible] comes in that might actually reduce a bit.

[Brad Hathaway:]

Okay.

[Martyn Wade:]

And that is - no order book. It gives for [technical difficulty] very much so.

[Brad Hathaway:]

Okay, so 3% stated supply growth in your areas and then, obviously any kind of cancellation and then any kind of retirement due to IMO 2020 for Ballast Water would obviously lower that?

[Martyn Wade:]

Correct yes.

[Brad Hathaway:]

Okay, got it. Actually that's very helpful. I appreciate also you're putting in the time charter rate sensitivity in the deck that's always very helpful for everyone and appreciate the efforts cleaning up the structure and looking forward to seeing how the company performs in 2019. Thank you.

[Martyn Wade:]

Okay, thanks Brad.

[Stephen Griffiths:]

Thank you.

[Operator:]

Thank you. And your next question comes from the line of Harshal Goel [ph] from Blue Shore. Please go ahead your line is open.

[Unidentified Analyst:]

I would love to get more color on the market from your side because unusually in the last few months the smaller vessels classes actually sold off very heavily as compared to the last few years which they demonstrated lot of strength and so I would love to get an idea of what you saw that could possibly be driving that. Is this China demand slow down or is it really the trade volume pacts because it seems some of that the impact should have been occurring the second half of last year. But the smaller vessels classes are actually pretty strong during that period.

[Martyn Wade:]

This is Martyn. The trade war. What was interesting of course shall we say the soybeans that China stopped important from America? The [indiscernible] every time from Brazil and Argentina to the degree that both countries are actually importing American soybean for their own domestic use so they could export onto China and it was a definite building up of stockpiles ahead of Chinese New Year same with coal and then China announced that the anti-pollution measures again for the winter so having imported a lot of coal by then slowed that down. And it's generally I think to be honest I think this trade war as we can see is effecting China and certain other countries and it doesn't take much where these China producers trade half billion tons of coal a year and they suddenly stop imports, slow down imports by 50 million and produce more themselves. It has quite an effect on their market. So it doesn't take much to change things and you're right. It's always an issue where you have the western holidays and then you have a kind of five week gap before the Chinese New Year. How much it comes off. But yes it was so surprising the speed and the scale of the selloff. But it was literally it went very, very quiet and we're now seeing conversely the activities picking up again. We're seeing same thing as they had for the last four years now to which they low point just as Chinese New Year starts it looks like being the same again this year. But it was quite severe, the year, the selloff, yes.

[Unidentified Analyst:]

Yes, it's just surprising, the industry seemed to be making a lot of progress the last few years and to see such a sharp selloff was surprising. I have a few more questions. When it comes to - we talk about the smaller vessel classes. But if we look at what's happening with the cape and the Vale Dam disaster and other supply shock. Is it realistic to assume that the smaller vessel classes will remain immune if the cape market is depressed or conversely? Is this sharp selloff in capes [ph] right now is more driven by sentiment versus actual impacts of the damn? I would love some view on that from you.

[Martyn Wade:]

Obviously we're not in the cape market anymore. But traditionally the cape market, the Q1 is always tough. You have the weather issues in both Brazil and Australia; the Vale Dam has been a huge hit. Chinese stockpiles as we know were at record levels coming into the end of last year's so they've been using a lot of that stockpiles. Going forward, capes, iron ore take it by 95% and then a bit of coal on top. Can you have - you can have a disconnect but potentially it can't last. Traders get very creative and if cape rates and say how Panamax rates, then they'll take more Panamax's in substitute that way around and then the Panamax's will come off to the [indiscernible] and vice versa it does tend to be a bit of a cascade down. Obviously the trade market these days with the amount of Vale Max is a bit of being and being built. You get 3.5, 4, 5 million tons that way you can [indiscernible] Brazil Vale Max has a huge effect on the market. But on the smaller size, we don't see it. But yes it will be a tough one to expect handy's and Supra/Ultra's to being double digits and the capes below that for any length of time. I think as we've seen in the product tanker market where the traders have been using [indiscernible] new building to clear out of the yards to transport cargoes and I said, traders get very creative and if there's a particular target of vessel that's very cheap, they'll look to use it. So it's generally - we need to all sizes is to be functioning to be honest as a healthy market.

[Unidentified Analyst:]

Great, that's what I was - and that's what I assumed. Now when we think about the IMO impacts in the later part of this year. I've been hearing a conflicting messages on how companies that chose to use compliance fuel versus scrubbers. How does the process work in cleaning out the engines, will be there any off hire time or is that something that does not require off hire time because I heard about? Could you comment on that please?

[Martyn Wade:]

We - technical department and our bunk supplies. We already have a plan and we will start to look as we head towards the fourth quarter running off the HFO and replacing with low sulfur. If certain ships if they need to be, they'll be adapted to tap extra fuel tanks. But at the end of the day for years now, [indiscernible] into Europe and America and parts of China, you have to eco areas where you have to build low sulfur MGO switch over - reflecting the modern ships, switch over very, very easily. So we don't see any off hire. It's just a matter of planning to make sure that you basically have burnt all the HFO by the time, the end of December comes it's not something you can leave to the last minute. But it has to be a plan there will be disruption. I'm sure there's some people won't get it right and it should - around trying to clean. Either you really want to be employing shore typically in your tanks. With planning you can burn the fuel and then wash them through with cleaner fuels, gas oil and diesel and do it. Yes, it is going to take over some planning.

[Unidentified Analyst:]

Okay, but it's unlikely to acquire any off hire time because assuming, if we're seeing significant portion of the fleet all fired. I imagine there will be some impacts, but I'm guessing there won't be that, that will not happen.

[Martyn Wade:]

We don't think that's going to happen. I think you'll get off hired from the owners that are retrofitting the scrubber systems where we hear various integrations from 10 to 30, 40 days we don't know what it will be. But there will be a chunk of off hire as the ship have to go off into drydock or being port. But for the rest of the fleet. Yes there will be few issues, but we're not anticipating that's going to be - have a major effect on the market. We think what will happen of course is that, as everyone switches over to the clean the fuel, ships will steam ever slower which also has the effect of course reducing CO2 and greenhouse gases. So that's fine, we believe this is the way to go for the future.

[Unidentified Analyst:]

Okay, great. When you mentioned the slow steaming? How come there hasn't been more slow steaming right now considering that bunker prices are relatively high and rates are so low? Why is there not been a similar impact in the first quarter?

[Martyn Wade:]

Slow streaming. A lot of the fleet it's all steaming at 14 not desired speed, it will be going around 12, 12.5 knots. It's also an interesting fact that not all ships are created equal and the Japanese have been designing ships that can slow steams since 1980s. for a lot of other countries should we say China in particular slow steaming this is only really, probably sensitive out in 13 should we be able to, when I say slow steam or ships can go slower. But they're going to commensurate saving in bunker consumption. So at the end of the day ships will be steaming around. But not all ships can get down to 10 or 11 knots. So when if we do get this price disconnect and $200, $300 differentials I believe maybe for a short period then you'll see every ship trying to go - every operator ships will try steam slowly if they can and mostly efficiently. There's a power curve. There's a consumption ratio by the optimum speed and consumption is. But the fleet has been probably the last 10 years steaming an awful lot slower than it was during the heavy times. Where the heavy times. They've all steamed full speed because when you fixed again it was at a higher rate. But we - form what I research it suggest that the fleet can slow down further and every 1 knot reduced is 0.7% or 0.8% reduction in fleet capacity so it's very, very meaningful.

[Unidentified Analyst:]

And then from your research assuming prices bunkers are at where MGO [ph] let's say right now. What type of reduction in average speed do you see say in the first half or first year 2020 period? Do you see a 1 knot reduction or more?

[Martyn Wade:]

We could see, quite - half a knot, not to 1 knot reduction in the ships that can do it. I'll say 1 knot, if it goes that you reduce the fleet by 7% or 8% literally overnight, which will be very exciting. But even half a knot would be very, very meaningful. So it's positive. Slow steaming, less greenhouse gas, less CO2 emissions. It is very, very positive for everyone.

[Unidentified Analyst:]

Great and just my last question on IMO. When we think about how the transition is going to proceed actual the detail? In light of the fact that the carriage ban comes into effect on March 1, 2020 and January 1 is the compliance date. Do you see a lot of the vessels are more bulkers fueling with compliant fuels in the fourth quarter or potentially sooner or is it something that we might see just in the say in December of this year?

[Martyn Wade:]

It gets back to the discussion on the cleaning of the tanks. It will have to happen before December you're going to clean those tanks through and be prepared. You can still carry HFO after the 1 January you just can't burn it. And I see those announcement the other day about suggestion that the owners can get temporary. I think it's a FONA [ph] a temporary exemption. But I think that is now being clamped down whereby the exemption doesn't apply, if there's a great fuel you can burn. So I think owners are going to have to make plan. Obviously it's a million dollar question, if we would switch over too early and be burning expensive fuel, will we get the return that will depend on the market. But I assume most - we'll be looking October, November, realistically because you just can't run the risk. And also remember ships are at sea for 30, 40, 50 days you can't. You've suddenly find that you've overrun, you're in January and you still got 400 or 500 tons of HFO on board. So this could be quite some planning, it's quite exciting times. It's a major change.

[Unidentified Analyst:]

Okay, great. So we're looking really at the October timeframe as when this all process gets started by really the fourth quarter then.

[Martyn Wade:]

Yes, that's what our planning is now thinking is, yes.

[Unidentified Analyst:]

Okay great and I'll leave you with this. Any thoughts on risks of IMO release delay or any sort of experience building phase risks? I know we have the carriage ban. But I guess there's always that risk. Do you have any thoughts on that? And thank you very much for taking the time today.

[Martyn Wade:]

Supposedly it can't happen but then again BREXIT wasn't supposed to happen, who knows. But I don't think so. I think the IMO have written this one. I think a lot of planning is being done and everyone fitting the scrubbers, if it gets delayed. It's both sides. So no, I think and I believe is that, we have to clean up our industry. This is a great start and it must continue and owners will adapt accordingly.

[Unidentified Analyst:]

Excellent, thank you very much.

[Martyn Wade:]

Thank you.

[Operator:]

Thank you very much. There are no further questions at this point. Please continue. Thank you. And I would now like to hand the conference over to Stephen Griffiths and Martyn Wade for closing remarks.

[Stephen Griffiths:]

Thanks everyone for joining us.