Grindrod Shipping Holdings Ltd.
Q4 2020 Earnings Call Transcript

Published: 28 Feb 2021

[Operator:]

Thank you for standing by, ladies and gentlemen. And welcome to the Grindrod Conference Call on the Second Half and Full Year 2020 Financial Results. We have with us Mr. Martyn Wade, Chief Executive Officer; and Mr. Stephen Griffiths, Chief Financial Officer of the company. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. I must advise you that this conference is being recorded today. We now pass the floor to one of your speakers today, Mr. Wade. Please go ahead, sir.

[Martyn Wade:]

Thank you, Operator. Welcome, everyone. And thank you for joining our call for the second half and full year 2020 ended December 31, 2020. Let me start by referring you to slide number two with the forward-looking statement disclaimer.

[Stephen Griffiths:]

Thanks, Martyn. On December 1, 2020, a loan of $4 million provided by Grindrod Shipping for IVS Bulk was converted to equity, thereby increasing our shareholding by 2.11% in IVS Bulk from 66.75% to 68.86%. The loan was initially provided on September 30, 2020, with interest calculated at LIBOR plus 3.1%.

[Martyn Wade:]

Thanks, Steve. We have agreed to extend the charter-in of the 2014 built Japanese eco Supramax vessel, the IVS Crimson Creek, for a period of 11 months to 13 months from April 1, 2021, at a variable rate based on the BSI-58 TC Index with both a floor and a ceiling. Now turning to slide eight. This slide illustrates our historical commercial outperformance in both of our core segments, the Handysize and Supramax/Ultramax sectors. A second half 2020 Supramax/Ultramax TCE per day was $10,887 a day versus $9,811 a day for the BSI-58, an outperformance of $1,076 per day or 11%. Our 2020 full year Supramax/Ultramax TCE per day was $10,072, a $7,779 a day for the BSI-58, an outperformance of $2,293 a day or 30%. Please note that as of January 1, 2020, the Baltic Exchange discontinued publishing the Baltic Handysize-28 TC Index and posted it with the Baltic Handysize-38 TC Index. The new Handysize-38 TC Index no longer reflects the ship types comparable to our Handysize fleet, and therefore, we do not believe it is an appropriate benchmark for our fleet going forward.

[Stephen Griffiths:]

Thanks, Martyn. Let’s turn to slide 10. Revenue was $112.1 million for the six months ended 31st of December 2020, compared to $163.8 million for the same period in 2019. Cost of sales was $105.9 million for the six months ended 31st of December 2020, down from $149.2 million for the same period in 2019. Gross profit declined to $6.2 million for the six months ended December 31, 2020, from $14.6 million for the same period in 2019. We were able to reduce our administrative expenses to $12.4 million for the six months ended December 31, 2020, from $15.1 million for the same period in 2019. Interest expense was $8.3 million for the six months ended December 31, 2020, and $6.1 million for the same period in 2019. The increase in the six months ended 31st of December 2020 was primarily due to the consolidation of IVS stock in February 2020. Loss for the six months ended 31st of December 2020, was $28.8 million and $24.5 million for the same period in 2019. Aiming to effect the impacts of the freight market volatility on our performance, every $1,000 change in TCE per day equated to $5.7 million of TCE revenue during the second half of 2020. Now turning to slide 11. With respect to the balance sheet, we finished the year with cash, bank balances and restricted cash of $50.6 million, while bank loans and other borrowings were $278.4 million. Considering the weak markets for much of 2020, we are pleased to complete the year with increased liquidity relative to the end of 2019. As a reminder, the financial statements of the second half of 2020 include the consolidation of IVS Bulk. On slide 12, our debt repayment profile includes scheduled amortization payments of $27.6 million in 2021 and the remaining amount due on the Sankaty debt facility. I would like to remind you that the refinancing of Matuku and early repayments of $10 million of the senior secured credit facility with Sankaty enabled us to reduce our net interest expense and also materially reduced our remaining scheduled maturities in 2021. Now let’s turn to slide 13. We will now briefly discuss results in the drybulk and tanker businesses. In the drybulk business, Handysize TCE per day was $7,535 as per day for the six months ended December 31, 2020 and $8,551 per day for the same period in 2019. We achieved a fleet utilization of 97.1% in the second half of 2020. Vessel operating costs per day were $5,242 per day.

[Martyn Wade:]

Thanks, Steve. And I ask you please to turn to slide 17. Let’s look to the fundamentals of the drybulk sector and how they have been developing against the new market environment. The drybulk cargoes hit hardest by the global pandemic continue to be coal and minor bulks, while iron ore and grains have been more resilient, due respectively to Chinese stimulus measures once their lockdown was lifted and crop shortages in China due to severe flooding.

[Operator:]

Thank you. Your first question comes from the line of Poe Fratt from Noble Capital Markets. Please go ahead. Your line open.

[Poe Fratt:]

Good morning. And I’d like to ask you about just your forward cover looks reasonable for the first half of the year on both the Handysize and the Supramax. Can you put that in context with the recent move in the market and how you are trying to capture that move and just how you are approaching with the 58 TC spot market above $20,000 and it looks like the Handy equivalent, it’s closer to 15. Can you just talk about how you are trying to capture some of that move?

[Martyn Wade:]

Thanks, Poe, and hi. Yes, it’s an interesting one, because obviously, we are very bullish of the market. But as we go, if you take from the beginning of the year, basically the industry have climbed in a straight line, and obviously, we had some quite a lot of ships covered November, December into January. So as those ships come open, we capitalize on the market as it was in January into February. And while we are our spot market traders, with a small element of contract cover, we are also looking to secure a little bit of forward cover. When I say forward cover, three months to five months, four months to ix months because as we know, we are shipping, it’s so volatile, while I am a believer, you never know what might happen. So what we have been doing is we have been increasing the earnings of the ships, obviously, the figures we are now reporting are up until, as Steve said, 22nd of February. If you look at the fixtures and what we are doing going into March and into April, they are substantially higher again as we capitalize on the market. So a combination of spot, yes, Supramax Index of $20,000 like the hand is, but also the period rates have been very good. So what we are doing is we are just averaging up, capitalizing as much as we can on spot, while also having one eye on -- now if you are being offered $15,000, $16,000 on a Handy for three months to five months, you have kind of got to say thank you very much and fix one or two of them out at those levels and keep on averaging up as we go forward. So from an owner’s perspective, it’s wonderful after 10 years and it’s a nice position to be in, and I think as we are seeing today, the paper selling off a little bit and no doubt that there will be people out there trying to talk it down. So I think it’s a combination of being supremely bullish times, but also taking some money off the table and fixing ever higher levels as we go forward.

[Poe Fratt:]

And then, I guess, a second question on that, Martyn, would be you mentioned the paper market. It seems like a lot of the upward movement might have been driven by the paper market. So can you just stress some of the durability of the high rate environment, what you think -- how much longer you think it will last? Shifting as somewhat cyclical, it’s been maybe the secular trends are a little more positive this year and you have gotten that black swan event that you have gotten over the last two years, whether it’s Coronavirus or the Vale Dam and the year before. But can you just talk about the durability and sort of what -- how you are thinking about, you talked about your chartering strategy a little bit, but just from a macro standpoint, just how long do you think this will last?

[Martyn Wade:]

Well, it is interesting, and actually I would argue that the physical led the paper as we came into the year that the forward curve on Supramax was -- I don’t even think it was even in double digits, and of course, we had pure backwardation. And I think what’s happened, of course, is that the paper has, of course, caught up. But very much on the short-term, if you are looking forward, it’s in severe backwardation now which is always very positive. So I think it’s charters that are used to minimizing their risks by looking at the paper, taking trips have been forced to pay up on the paper as owners increase their levels. So, yes, that the papers are huge vast market, far bigger than the freight. But ultimately is the freight market that will dictate those rates and I think we are in a position where the physical will have to lead the way. From a macro perspective, what I have been saying for a while, it -- in the old days, we had or recently we had just in time -- so we had just in time stockpiles. Now we are getting just in case stockpiles as countries throughout the world after what’s happened can’t afford to let stockpiles dry up. Obviously, as I said, we have had massive floods in China last year and they have been buying record amounts of U.S. grain actually on a par with what the Russians did after -- has been very positive. You add in the trade spat between China and Australia with coal, where China refusing to buy Australian coal. So they are buying from the U.S. and Canada, Colombia, the Black Sea. In the meantime, Australian coal became very cheap. So Australia began importing it into India, which was South Africa’s normal market. So that South Africa is now shipping to China, and of course, coal is going to Europe. And you overlay that this time of year with the La Nina weather effects, which has ended up with a brutally cold winter, as you saw in your part of the world recently and throughout Europe, and in particular, in China and Korea and Japan, which has caught them short on coal. So in that respect it’s been the perfect storm. And going forward, we are playing catch up. The seaborne trade is still growing and if we play catch up from last year, it obviously declined at 1% or 2%. No was quite sure of the figures and this year if we then grow back again at 3%, 4% against fleet growth of a couple of percent, it’s very positive. You add-in that congestion is growing. The issues for some owners the ESG is going to bring with older ships. We have high bunker prices, which is very positive, not that we have scrubbers, but for the rest of us, it means slow steaming. And all in all, I think it’s a very, very positive outlook, which after 10 years, I think we are entitled to, and it’s now at the time of drybulk shipping again. And yes, you never know, as you say, Black Swan events and I don’t want to jinx anything. But the supply demand figures, what’s going on in the world and all we can hope for now is that President Biden starts on some infrastructure spending, then it will get very exciting.

[Poe Fratt:]

Great. Can you just talk about the factors that you see that have limited the order book growth and then the fact is that should mute that order book growth in looking out a couple of years?

[Martyn Wade:]

Yes. It’s -- the auto is very positive. There are no orders out there. Obviously, no one has any cash after 10 years of an awful market, allied to the fact that with new rules, regulations. You have got to be a brave owner if you are going to order a new building now for delivery in 18 months, two years, with in effect a fuel oil burning engine, which could well be redundant, as long as we trade ships for 20 years, 25 years, it could be redundant in 10 years. And you add on that, whether there’s going to be problems with port, state, countries, insurance issues. So that is a natural cap, allied to the fact that there are a lot of our eastern yards the capacity has reduced a lot, can’t afford to build ships of the future. So it’s kind of chicken and egg, we need a better market for us owners to actually go and order the ships and what the ships are going to be. I mean, even at our side, it’s not LNG. Is it ammonia, is it biofuels, is it going to be hydrogen in 10 years and I think that, for the time being, is going to keep a natural cap on it. Now will the lemmings flow to the yards, again, if we get a seriously hot market, I have no doubt. But what’s positive is that, that order book can’t change for the next couple of years and that is very positive, and in two years’ time, where is the world going to be in terms of regulation, existing technology will be moved on. So I think it’s very much a wait and see attitude. And we have enough ships out there, so if anyone wants ships, they can buy secondhand.

[Poe Fratt:]

Understood. Thank you. Can we talk about a little bit more at the micro, if you could give us an idea of sort of how your cost structure -- your operating cost structure looks over the first half of 2021? And then highlight any potential downtime that you might have over the course of the year?

[Martyn Wade:]

Steve?

[Stephen Griffiths:]

Yeah. Martyn, yes, I will take this. Yeah. Just a bit of background. Yes, Poe, in terms of what we have done already in our salary related expenses makes up around 64% of our total expenses. Since December 2018, we have reduced our salary bulk by 18%, admin expenses have reduced from 2020 by 13%, our net G&A costs have also reduced by 13%. And clearly, with, let’s say, the sale of the tankers, there will be further reductions in our costs in 2021, once those three vessels have been sold. So, as I say, G&A has come down from $1,180 to $1,030 and we see that reducing further in 2021.

[Poe Fratt:]

Great. And any downtime?

[Martyn Wade:]

Yeah. We had certain issues last year. We -- obviously with corona and that still goes on, where we are actually planning, we were obviously living in Asia, we were aware of corona or COVID by middle of January. So we kind of went into survival mode and what we need to do with the ships and planning the crews and I got to give credit to all our marine staff and operations. We -- I think we have handled that pretty well. There were a couple of issues with a couple of ships with the changeover from heavy fuel oil to low sulfur where there was -- with actually three ships where there was an issue with the engines, which took us a couple of months to sort out. But going forward now, I would like to think that the downtime should be okay, and it’s us is perennial COVID panning forward for crew changes and making sure that whatever delays there are minimized.

[Poe Fratt:]

Okay. Great.

[Stephen Griffiths:]

Yeah. And if I can -- if I can add to that, sorry, if I can just add to that. We brought ourselves on being as close to 100% fleet utilization as close to that as possible. And this year because of all the reasons that Martyn has just discussed, we have been at 97% in three of our sectors. So we do look to close the gap back towards at 100% over the coming year.

[Poe Fratt:]

Great. And then if you could just talk about how you are going to address the, you paid off $10 million of the roughly $36 million on the subordinated debt and just can you talk about how you are going to address that maturity this year?

[Martyn Wade:]

Yeah. Sure.

[Stephen Griffiths:]

You are talking about tankers.

[Martyn Wade:]

Tankers.

[Stephen Griffiths:]

As we exit the tanker business, we have 2 MRs and $16,500. The MRs have been on the market. Obviously, that market is pretty appalling in terms of values. But we have a price in mind which we think is realistic. The tanker market is interested in the S&P that you still get the bottom crawlers but there are a few serious people there and everyone writes off the tanker market so quickly as they wrote off dry cargo 12 months ago. I think some of the -- should we say the smarter tanker owners are realizing that. Maybe it is going to be a tough 12 months or just maybe six months from now, it could be very different. So we will sell those ships which will pay off that debt. And the way this dry cargo market is going, that we will be generating surplus cash, which we can also use it to pay down debt as well.

[Poe Fratt:]

Yeah. I mean, you do have the $41 million at the end of the year and what -- can you just highlight how much additional capacity you have under your any credit facilities beyond that $41 million and talk about total liquidity?

[Martyn Wade:]

Steve?

[Stephen Griffiths:]

No. We -- yeah, there’s no extra capacity on our current facility and if I read, there is a one thing I just wanted to add to what Martyn said is that on this loan, while we have until 2021 to execute, which is the maturity date, we have got an option to extend. It’s not our first prize, our first prize is to sell these ships and pay it back that we have got flexibility if we don’t get our desired price on these tankers. So that really is the flexibility that we need to the extent and we have negotiated that already. But haven’t pushed the button because we are still quite a way away from there, but we will use it if we need to.

[Poe Fratt:]

Great. I really appreciate your time and your answers. Thank you.

[Martyn Wade:]

Thanks, Poe. Appreciate it.

[Operator:]

Thank you. Just to advise, Mr. Wade and I am just going to reconnect Mr. Griffiths again.

[Martyn Wade:]

Okay.

[Operator:]

Sorry, sir. And Stephen Griffiths is back now. I will hand it...

[Stephen Griffiths:]

Yeah. Sorry about that.

[Operator:]

Oh! Thank you. Thank you very much, sir. I will hand back for closing remarks.

[Martyn Wade:]

Well, thank you, everyone, and appreciate you attending it, and I say that, yeah, I think things are hopefully looking more positive, finally. Thank you.

[Stephen Griffiths:]

Yeah. Thanks, everyone.

[Operator:]

Thank you. Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.