Grindrod Shipping Holdings Ltd.
Q2 2019 Earnings Call Transcript

Published: 29 Aug 2019

[Operator:]

Good day and welcome to the Grindrod Shipping Conference Call to discuss the Financial Results for the 2019 Half Year Financial Results for the six months ended June 30, 2019. As a reminder today's call is being recorded. Additionally a live webcast of today's conference call and an accompanying presentation is available on 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. Please go ahead.

[Martyn Wade:]

Thank you operator. Welcome everyone and thank you for joining our call for the 2019 half year financial results ended June 30. Let me refer you to Slide number 2 with the forward-looking segment disclaimer. On this call we will make certain forward-looking statements including regarding our future financial and operating performance. These statements include information regarding future time charter contracts, outlook for the dry bulk and tanker markets, and other operating methods. These statements are based on the beliefs and expectations of management as of today and actual results may differ materially from our expectations. Investors should read carefully the risks and uncertainties described in the slide presentation and in today's press release as what is the risk factors included in our annual report and our other findings with the SEC. We assume no obligation to revise or update forward-looking statements whether as a result of new information, future events, or otherwise except as required by law.In addition during this call we will be discussing certain non-GAAP financial measures. For additional disclosures relating to these non-GAAP financial measures including reconciliation to the most directly comparable GAAP measures please see yesterday's press release on pages 27 through 29 of the slide deck which is posted on our website and our filings with the SEC.Now to start please turn to Slide 4, which shows our first half 2019 financial highlights. Financial results for the first half of 2019 were stronger than the first half of 2018 across the majority of income metrics. Revenue in the first half of 2019 increased to $167.2 million compared to $150.8 million in the first half of 2018. Gross profit increased to $5.9 million in the first half of 2019 from $2.4 million in the first half of 2018. Adjusted EBITDA in the first half of 2019 increased to $14.7 million from a loss of $1.7 million in the first half of 2018. Net loss increased to $19 million in the first half of 2019 from $13.5 million in the first half of 2018. Loss per share, EPS was $1.09 -- was $0.99 in the first half of 2019 compared to loss per share of $0.71 in the first half of 2018TCE per day earned by our Handysize and Supramax/Ultramax vessels in first half of 2019 decreased to 7030 per day and 10,481 per day respectively, compared to 8997 a day and 11,092 a day respectively in first half 2018 as charter rates declined overall in the markets for our drybulk business. Despite the decline we continued to outperform the relevant industries by 1,277 per day and 2,674 per day for our Handysize and Supramax/Ultramax vessels respectively.Counteracting the decline in drybulk our tankers enjoyed a stronger winter which led to a year-on-year increase in tanker rates. TCE per day of 14,276 and 12,015 for our Medium Range and Small Tankers segments, respectively, in the first half of 2019 compared to 11,570 per day and 11,323 per day respectively in the first half of 2018. Overall results were enhanced across the freight due to a decline in operating expenses in all four of our reporting segments, as well as a decline in our administrative expenses, the extraordinary costs associated with the spin off were not repeated.Reported EBITDA was positively affected by the required adoption of new IFRS 16 accounting standard beginning in 2019. Net loss was negatively impacted by $4.3 million impairment loss on vessel sales in the first half of 2019 while in the first half of 2018 we had a onetime gain of $3.3 million on the sale of business in conjunction with the spin off so that the net of negative $7.6 million.Now turning to Slide 5, a good fleet development in the first half of the year. Regarding our drybulk fleet we sold the 2005 built Handysize IVS Kawana for a gross price of $7.8 million with delivery to the buyers in April 2019. We took delivery of the IVS Phoenix, a Japanese built eco Ultramax drybulk carrier new building in June 2019. As previously disclosed, the vessel has been chartered in from its owner for a minimum period of three years with options to extend for up to two additional years, at Grindrod Shipping’s election. We also completed a financial arrangement with a Japanese shipowner relating to the 2010 built Handysize vessel IVS Knot for a net amount of $13 million. The transaction generated net proceeds of $6.3 million after settling the debt associated with the vessel. The IVS Knot continues to be considered as part of our owned fleet.Regarding our product tanker fleet, we announced the wind up of the Leopard Tankers JV with Vitol, resulting in the company acquiring 100% ownership of the 2013 built Medium Range eco tankers Leopard Sun and Leopard Moon in January and February, respectively, for $27 million per vessel. Our joint venture with Engen Petroleum sold the 2010 built Medium Range tanker Lavela for a gross price of $14.9 million with delivery to the buyers in March of this year. The vessel was the last vessel owned by our 50

[Stephen Griffiths:]

Thank you Martin. Let's turn to Slide 8, revenue increased by $16.4 million or proximately 10.9% from $150.8 million for the six months ended June 30, 2018 to $167.2 million for the six months ended June 30, 2019. Cost of sales increased by $12.9 million or approximately 8.7% from $148.4 million for the six months ended June 30, 2018 to $161.3 million six months ended June the 30, 2019. The largest component of cost of sales is voyage expenses which increased by $2.9 million from $71.5 million for the six months ended June 30, 2018 to $74.4 million for the six months ended June 30, 2019. The second largest component of cost of sales is charter hire expense which decreased by 23.6 million from 54.3 million for the six months ended June 30, 2018 to 30.7 million for the six months ended June 30, 2019.The increase in cost of sales is due to the cost of sales related to the sales of one Handysize drybulk carrier, one Medium Range tanker, and one small tanker. This increase was partially offset by lower charter hire costs as drybulk spot charter rates decreased in the first half of 2019 as well as the impact of IFRS 16 on cost of sales. The implementation of IFRS 16 has decreased cost of sales so charter hire cost decreased and depreciation and amortization of active use assets increased by a lesser amount and increased interest expense.Gross profit increased by 3.5 million or 145.8% from 2.4 million for the six months ended June 30, 2018 to 5.9 million for the six months ended June 30, 2019. Primarily as a result of the improved rates in the tanker spot market and the six months to June 30, 2019 which was offset by the decrease in the drybulk spot market in that period. Other operating expenses income decreased by 10.8 million or 180.0% [ph] from the 6 million less operating income for the six months ended June 30, 2018 to 4.8 million operating expense for the six months ahead June 30, 2019. For the six months ended June 30, 2019 we incurred a net foreign exchange loss of 0.3 million compared to a net foreign exchange gain of $2.9 million for the six months ended June 30, 2018. As a result of unrealized valuations of foreign currency bank balances, vendor balances, and customer balances at period end as well as realized gains.The sale of our ACL and Unicorn Tanker unique one bank of businesses resulted in a net profit of 3.3 million in the six months ended June 30, 2018 and in payment of vessels in the first half of 2019 amounted to 4.3 million. Administrative expenses have decreased by 4 million or approximately 23.1% from 17.3 million for the six months ended June 30, 2018 to $13.3 million for the six months ended June 30, 2019 primarily as a result of expenses relating to the spinoff. Share of the joint ventures remained relatively flat from a loss of 1.4 million for the six months ended June 30, 2018 to a loss of $1.5 million for the six months ended June 30, 2019. Interest income decreased from 1.9 million for the six months ended June 30, 2018 to 1.2 million for the six months ended June 30, 2019. This decrease was primarily due to the repayment of a portion of a shareholder loan provided to a joint venture.Interest expense increased from $3 million for the six months ended June 30, 2018 to $5.8 million for the six months ended June 30, 2019. The increase in interest expense was primarily due to the implementation of IFRS 16 which is decreased charter hire cost, increased depreciation and amortization of right of use assets, and increased interest expense. As well as additional debt facilities and a higher LIBOR rate. Income tax expense decreased from $2.1 million for the six months ended June 30, 2018 to $0.6 million for the six months ended June 30, 2019. Income tax expense for the six months ended June 30, 2018 was related primarily to a capital gain on the sale of the Unicorn Tanker business. Our loss for the six months ended June 30, 2019 increased from a loss of 13.5 million for the six months ended June 30, 2018 to 19 million for the six months ended June 30, 2019 for the reasons set forth about. As indicated on the slide a portion of our business is 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 our total cash position including restricted cash increase 50.5 million while right of use assets amounting to 67.9 million was introduced as a result of IFRS 16. Total bank loans and other borrowings increased to 132.5 million as a result of the financings associated with the acquisition of the Leopard Tanker vessels and a sale and leaseback of IVS Knot. In addition 67.9 million of lease liabilities were introduced offsetting the aforementioned introduction of right of use assets to our asset base. As you can see from the chart on the right our debt repayment profile includes payments of 9.3 million in the second half of 2019 and 18.5 million for the next two years. Then it increases to -- and 30.2 million in the subsequent two years before dropping back down to 19 million in 2024 and expect it to drop further to 6.1 million in 2025 and beyond.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. Please turn to Slide 10. This slide contains a closer look at our joint venture financial highlights for the first half of 2019. Our joint ventures owned 13 vessels of our total fleet. The proportionate share of our joint ventures is not reflected in our content -- in our condensed consolidated and combined statement of profit and loss but is reflected 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 ventures into our consolidated financial and operational results. We round up the Leopard Tankers JV with [indiscernible] resulting in the company acquiring 100% ownership of the 2013 built Medium Range eco tankers Leopard Sun and Leopard Moon in January and February respectively for $27 million per vessel.Our joint venture with Engen Petroleum sold 2010 both Medium Range Tanker Lavela for a gross price of $14.9 million with delivery to the buyers in March 2019. The vessel was the last vessel owned by this joint venture. Subject to completion of financing we have agreed in principle to acquire the 33.25% spec of one of two JV partners in IVS Bulk which would result in increasing our ownership percentage to 66.75%. We are currently in advanced discussions with lenders to refinance all of our existing bit of obvious bulk as well as provide a sufficient capital to acquire a additional 33.25%. The remaining partner intends to retain his 33.25% stake in IVS Bulk. We can provide no assurance that we will be able to complete the acquisition until such time that agreements have been executed and the financing conditions have been met. Our agreements in principle to acquire a spec of one of our JV partners in IVS Bulk will allow us to consolidate the 12 vessels in the JV in our financials going forward.Let's turn to Slide 11. We will now briefly discuss results in drybulk 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 time charter equivalent per day decreased about $1,967 per day or approximately 21.9% from $8,997 per day for the six months ended June 30, 2018 to $7,030 per day for the six months ended June 30, 2019. This decrease was due to a decline in Handysize charter rates in the first half of 2019.Supramax/Ultramax TCE per day decreased by $607 million per day for approximately 5.5% from $11,092 per day for the six months ended June 30, 2018 to $10,481 per day for the six months ended June 30, 2019. This decrease was due to a decline in Supramax/Ultramax charter rates in the first half of 2019. On the cost vessel operating cost per day declined in both the Handysize and Supramax/Ultramax segments which has been a key operational focus of the group. The average long-term chartering costs for the Supramax fleet for the remainder of 2019 is expected to be approximately $12,735 per day. As of August 23, 2019 we have secured the following time charter equivalent per day thus far for the remainder of 2019. In Handysize we have approximately 1,360 operating days at an approximate average time charter equivalent of $8,210 per day. On the Supramax/Ultramax approximately 1,410 operating days at an approximate average time charter equivalent of $11,560 per day.On Slide 12 is the tanker segments operational performance. In tanker business Medium Range tankers time charter equivalent per day increased by $2,706 per day or approximately 23.4% from $11,570 per day for the six months ended June 30, 2018 to $14,276 per day for the six months ended June 30, 2019. This increase was due to an improvement in Medium Range tanker charter rates in the first half of 2019. Small tankers time charter equivalent per day increased by $692 per day or approximately 6.1% from $11,323 per day for the six months ended June 30, 2018 to $12,015 per day for the six months ended June 30, 2019. This increase was due to an improvement in small tanker charter rates in the first half of 2019.As in the bulk [ph] business we were able to achieve reductions in additional operating expenses -- in both tanker segments. The average long term charter in costs per day for the Medium Range fleet for the remainder of 2019 is expected to be approximately $15,300 per day. As of August 23rd we have secured the following TCE per day thus far for the remainder of 2019. Medium Range we have approximately 370 operating days at an approximate average time charter equivalent of $9,460 per day. In the Small Tankers segment we have approximately 120 operating days at approximately an average time charter equivalent of $12,020 per day.Now turning to Slide 13, this slide shows the core fleet cash breakeven analysis for the first half of 2019. Our drybulk owned fleet cash breakeven rate for the first half was $9,570 per vessel per day. Long-term chartering breakeven was $13,750 per vessel per day and overall core drybulk breakeven was $10,760 per vessel per day. Our tanker owned fleet cash breakeven rate for the first half was $12,210 per vessel per day. Long-term charters and breakeven was $16,350 per vessel per day and over bulk core tanker breakeven was $13,020 per vessel per day. The cash breakeven rate per day includes operational expenses, net G&A, interest expense, and a prepayment.Please turn to Slide 14. This slide shows time charter equivalent revenue sensitivity to charter rates for the last 12 months for our core fleet. To the extent there is a positive $1000 change in time charter equivalent per day it equates to about 11.5 million of additional annual time charter equivalent revenue. Please note that this refers to our combined core fleet and includes our drybulk and tanker vessel operating days.As Martyn will discuss in the ensuing 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 in the second half of 2019. With that I would like to turn the call back over to Martyn and ask you to turn to the market highlights on Slide 16.

[Martyn Wade:]

Thanks Steve. The dry cargo market in the first half of 2019 showed weakness reflecting the Vale dam disaster, trade wars, swine flu in China, and a slowdown in Chinese commodity imports. Again long term demand fundamentals appear positive as steady demand for minor bulks, the key cargos for our ships combined with longer expected cargo distances will lead to strong ton sea mile demand growth forecast.Please turn to Page 17. Fleet growth has been steady at approximately 3% per year. Though scrapping is expected to pick up somewhat due to due to ballast-water treatment and of course the IMO 2020 regulations. The drybulk orderbook is estimated at 11% of the fleet with deliveries expected at approximately 33 million dead weight for 2019. The fleet profile and orderbook for Handysize Supramax are more favorable than the larger vessel besides the Supramax orderbooks are the smallest in the dry cargo fleet at 5% and 8% respectively. We also have vessels older than 15 years that represent 19% of the drybulk fleet and should encourage scrapping.Now please turn to Slide 18, Handysize and Supramax TC rates have rebounded stronger since the end of June after a weak first half. As of August 27th the BHSI is at 9250 and the BHSI 58 is at 42,507. Asset prices remained largely flat over the last year and we believe represents attractive entry points for quality vessels. After a strong start to the year the first half was impacted by height, sorry my apologies, I was sort on the tanker market. After a strong start to the year the first half was impacted by higher refinery turnarounds in anticipation of IMO 2020 changes. But our tanker demand is expected to be helped by the implementation of the IMO 2020 low sulphur regulations for bunker fuels. Growth in refining capacity and dislocation between refiners and end users is expected to boost demand in second half of 2019. The IMO 2020 regulations are expected to disrupt trading patterns and cause an increase in vessels used for storage and cargo repositioningNow turning to Slide 20, the product tanker orderbook is estimated at 7% of the fleet, that is the lowest in over 20 years. The product tanker drew 10,000 plus fleet growth is estimated at 1.7% in 2020. 20% of product tankers that's over 10,000 dead weight of 15 years or older products. For Medium Range product tankers Asset prices have been gradually increasing and recovering due to increased expectations for charter markets with the aforementioned IMO 2020 changes on the horizon.Finally turning to Slide 22, to our conclusion and strategy. Our core focus since listing has been to simplify the Grindrod story with investors by reducing the number of off balance sheet joint ventures to better reflect the Company’s financial performance. To that end, we have wrapped up the Leopard Tankers and Petrochemical Shipping joint ventures while agreeing in principle to acquire control of the IVS Bulk JV, which would allow us to consolidate the financials of the business going forward. This represents material growth potential for the Company, as 12 vessels would be fully integrated into our financial statements at a time that charter markets appear to be tightening. It also should lead to a capital structure and operations that are easier for investors to track and understand.While some shipping companies have chosen to outfit their vessels with exhaust gas scrubbers, we have elected to not do so and will instead use compliant clean fuel. We believe that there are potential negative environmental aspects that are emerging with increased scrutiny on the scrubber technology. We are also not convinced that the economic return on the scrubber installation cost will be sufficiently attractive in the vessel categories in which we operate due to the high quality and fuel efficient characteristics of our vessels and their trading patterns. We have concerns regarding high sulphur fuel availability in many of the smaller ports in which we trade.With that I thank you for joining us on our call today and look forward to reporting further progress as Grindrod Shipping continues to grow. And with that we would like to open up for questions. Operator.

[Operator:]

[Operator Instructions]. Thank you. First question comes from the line of Brad Hathaway from Far View Capital. Please ask your question.

[Brad Hathaway:]

Hi Martin and Stephen. Congrats on the progress with IVS Bulk. Is there any more color you can provide in kind of timing and it seems like the structure of is obsolete cash, is it roughly -- or any more kind of details you can provide on that?

[Stephen Griffiths:]

Brad, our plan is to finalize all the -- everything in principle, all the financing in principle and the agreements with the joint venture partner is a new principle agreement by the end of September. And to finalize documentation and achieve go down before the end of October. That's where our plan is at the moment. So it will be a Q4 integration into our books.

[Brad Hathaway:]

Got it. So you'll probably have more details for us in late September or early October?

[Stephen Griffiths:]

That's about it. As soon as we finalized the deals we'll provide further information on how it structures and what it means to the holding company and the consolidation of our accounts.

[Brad Hathaway:]

Got it and this has been a huge -- I mean IVS Bulk is obviously kind of the big step you've been waiting on to kind of clean up the structure. So now that you're nearing completion on that, do you have thoughts on kind of your next key strategic priorities as we look into 2020?

[Martyn Wade:]

That's an interesting one. I mean we got one other small joint venture with Mitsui where we will close that out. We're still looking to sell or will be selling a couple of our older ships. Obviously the market hasn't been receptive to that but with the move in the indices which moved up even further today we are starting to see interest in older second hand ships. So there will be one or two of those ships going. And with that we are in a very strong cash position and I think to be honest I think as soon as you get a better market I think people's perceptions change and opportunity arises. So it's very much make it there, we have done that. The market is looking positive and we think opportunities will open up for us. But also to be honest with our core business, with the comp the way we operate to keep on doing what we're doing.

[Brad Hathaway:]

Okay, so to clean up the other kind of JV -- the other meaningful JV and make it even an greener story and then kind of see the opportunities that come to you via the market given your strong capital position, is that a fair assessment?

[Martyn Wade:]

Yeah, I think as you can see from our performance that we are performing well and that there will be opportunities out there and this whole IMO 2020 story I think we will evolve and there will be winners and losers. And from that I think opportunities will definitely arise.

[Brad Hathaway:]

Got it. As you mentioned obviously the operations performance on the revenue side has been great and you have improved the cost side significantly in the first half of the year. And the company also has a -- you note a strong balance sheet, it doesn't suffer from any kind of real corporate governance concerns that plague a lot of shipping companies. Yet you trade by my calculation that significantly less than half of NAV, so what do you think about that kind of and why you think maybe that is the case and what you think about kind of your options to either take advantage of that or close that gap?

[Stephen Griffiths:]

Well, it is frustrating, there's no doubt and we do seem to try it out a bigger discount to some of our peers. Obviously I think there is an element of that is scale which we accept. I think we need to be bigger and I suppose it's a matter of getting our story out there. But yes, it is mad and to be honest when and we believe that our share price will recover, that opportunities are going to arise for us to then grow accordingly. It is quite strange for the market -- obviously we are all caught up in the trade war and the negative press but the shipping markets are up 50% if not more in the last couple of months and ourselves and all the rest of our peers the share prices have gone down. I think I can understand why investors are very wary but at the moment the earnings are looking a lot better and it's positive. And then from our point of view well as you know Brad, we have the right to buy back shares and it is something that we have in our armory and we will be looking at quite closely going forward.

[Brad Hathaway:]

Got it, I understand obviously you have to weigh that against other potential uses of your capital because you are one of the few ship owners that actually has had new ships delivering this year. I know in the past there has also been talk about further kind of simplifying the story by maybe perhaps becoming -- using your public listing to perhaps become a bulk or tanker player is there any kind of thought -- that going forward?

[Martyn Wade:]

No, not at the moment but of course in our IMO 2020 we're very hopeful it will be positive for both wet and dry. And I think again you get a better market on both sides. I think it does definitely give options and it is something that we can look at. Now there is an advantage to being in both wet and dry having a mix feed by the same score it could is one off opportunities and I think the important thing for us is that with the better share price kind of more reflecting NAV then I think the options start to open up for us, there's no doubting.

[Brad Hathaway:]

Understood. Well congratulations on continued strong operational performance. Obviously that's what you can control and appreciate if we see continued outperformance on that side and hopefully as we look into 2020 the market will give you a nice tailwind and we will start to see some earnings [ph] kind of flow through. Thank you.

[Martyn Wade:]

Thank you Brad.

[Operator:]

Thank you. [Operator Instructions]. Thank you, there are no further questions at this time.

[Martyn Wade:]

Okay, thank you very much.

[Operator:]

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