Grindrod Shipping Holdings Ltd.
Q4 2019 Earnings Call Transcript

Published: 26 Feb 2020

[Operator:]

Good day and welcome to the Grindrod Shipping Conference Call to discuss the Financial Results for second half and full year period ended December 31, 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 Mr. Stephen Griffiths, Chief Financial Officer.I would now like to hand over to introducing Grindrod Shipping's Chief Executive Officer, Mr. Martyn 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 2019 ended December 31, 2019. Let me start by referring 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 included 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 well as 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 32 and 33 of the slide deck which is posted on our website and our filings with the SEC.So to start please turn to Slide 4, our second half 2019 financial highlights. Financial results for the second half of 2019 were stronger than the first half of 2019 across the majority of income metrics. Revenue in the second half of 2019 was $163.8 million compared to $167.2 million in the first half of 2019. Gross profit increased to $14.6 million in the second half of 2019 from $5.9 million in the first half of 2019. Adjusted EBITDA in the second half of 2019 increased to $25 million compared to $14.7 million in the first half of 2019. Net loss decreased to $16.4 million in the second half of 2019 from $19 million in the first half of 2019. Loss per share, EPS improved to $0.86 in the second half of 2019 compared to loss per share of $0.99 in the first half of 2019.TCE per day earned by our Handysize and Supramax/Ultramax vessels in the second half of 2019, increased to 8551 per day and 13,624 per day respectively. This was in comparison to 7,030 per day and 10,481 per day respectively in the first half of 2019. We continue to outperform the rate of indices by $662 per day and $2538 per day for our Handyzie and Supramax/Ultramax vessels respectively in the second half of the year.Tanker rates increased marginally on average relative to the first half of the year but there was market volatility within this period with the second half started lower than the first half averages before strengthening material in the later portion of the period.TCE per day of $14,409 and $12,441 per day for our Medium Range and Small Tankers segments, respectively in the second half of 2019 compared to $14,276 and $12,015 per day respectively in the first half of 2019.Net loss was negatively impacted by $10.1 million of non-cash impairment losses in the second half of 2019. We repurchased a combined total of 299,641 ordinary shares from the NASDAQ and the JSC at an average price of $6.62 per share and ZAR 97.13 based on an indicative ZAR/USD exchange rate of 14.68, before costs.Now can I ask you please turn to Slide 5 to look at Fleet developments in the second half of the year. In August and September 2019, we took delivery of two Japanese Ultramax ECO new buildings the IVS Okudogo and the IVS Prestwick respectively. We drew down $15.7 million in financing with the IYO Bank in conjunction with the delivery of each vessel resulting in a total financing amount of $31.4 million.In September 2019, we completed a financing arrangement with a Japanese ship owner relating to the 2011 built Handysize size vessel IVS Kinglet for cash amount of $12.5 million before commissions but net of charter pre-payments. Transaction generated net proceeds of $6.1 million of successfully the debt associated with the vessel.November 2019, we completed a similar financing arrangement with a Japanese ship owner relating to the 2011 bill Handysize vessel IVS MAGPIE for cash amounts of $10.3 million again before commissions but net of charter pre-payments. The transaction generated net proceeds of $5.3 million after settling the debt associated with the vessel. We agreed to extend the chartering of the 2014 built Japanese ECO Supermax vessel the IVS Crimson Creek for a period about 15 to 17 months from December 2019 at a revised variable rate structure. The bareboat charter of the 2016-built MR product tanker Matuku was extended for a further two years until May 2022.Now please turn to Slide 6, highlights of the company's recent developments. Effectively February 14, 2020 we acquired an additional 33.25% ordinary and preferred equity interest in our IVS Bulk joint venture for Regiment Capital Limited, one of the partners in the joint venture for a combined amount of $44.1 million, taking our interest to 66.75%.IVS Bulk’s twelve vessels are modern Japanese built ECO vessels. We entered into a new shareholders agreement with Sankaty, the remaining partner, that grants us control of key aspects of the corporate governance of the joint venture and, as a result, the financials of IVS Bulk will be consolidated into our financial statements following the acquisition of the additional 33.25% rather than being accounted for under the equity accounting method, as has previously been the case.The acquisition was financed from cash on hand and new debt with no equity dilution to our shareholders. Further details and pro forma financial statements reflecting these transactions are set out in a subsequent section of this presentation.We have tendered notice of redelivery of the long-term chartered-in vessel IVS Augusta and expect the vessel to redeliver on or about February 28, 2020. We sold the 2010-built small product tanker, Kowie, for an amount of $9.2 million before costs with delivery to a new owners planned on or about February 28, 2020.Now turning to slide 7, now chartering performance relative to industry benchmarks in the drybulk segment continues to outperform in the second half of 2019 or the medium range tankers lag slightly behind. Any size TCE of $8551 per day versus $7889 per day for the Baltic Handysize index net outperformed by approximately 8.4 %. Supermax/Ultramax TCE of $13624 per day versus $11,806 per day for the Baltic Supermax 58 index net earnings outperformed by approximately 22.9%.Our commercial outperformance on the drybulk side reflects one of our key competitive advantages our ability to maximize revenue to the use of in-house commercial pools and a significant cargo base. Medium rage tanker TCE of $14,409 per day versus $15,033 per day for the classes medium ange clean average earnings assessment underperformed by approximately 4.2%.Now I'll pass the floor to the Stephen Griffiths, Chief Financial Officer will go over financial highlights and performance for the second half of 2019.

[Stephen Griffiths:]

Thank You Martyn. Let's turn to Slide 9. Revenue was $163.8 million for the six months ended December 31, 2019 and $168.2 for the six months ended December 31, 2018. Cost of sales was $149.2 million for the six months ended December 31, 2019 and $159.5 million for the same period in 2018. Gross profit was $14.6 million for the six months ended December 31, 2019 and $8.7 million for the same period in 2018. The other operating expenses for the six months ended December 31, 2019 included non-cash impairment losses of $10.1 million recorded in the six months ended December 31, 2019.Administrative expenses were $15.1 million for the six months ended December 31, 2019 and $14.3 million for the same period in 2018. The increased level of administrative expenses in the six months ended December 31, 2019 was primarily due to an increase in professional fees including fees incurred in relation to the refinancing and acquisition of our IVS Bulk joint venture, partially offset by decrease in salaries.Interest expense was $6.1 million for the six months ended December 31, 2019 and $3.6 million for the same period in 2018. The increase in the six months ended December 31, 2019 was primarily due to the recognition of interest on lease liabilities following the implementation of IFRS 16 on January the 1, 2019. Loss for the six months ended December 31, 2019 was $16.4 million and loss for the same period in 2018 was $7.2 million.As indicated on the slide portion of our business is through IVS Bulk joint venture which was accounted for an equity basis and was not consolidated in our financial statements that will change going forward.Now turning to Slide 10. With respect to the balance sheet, total assets were $527.2 million which include cash bank balances and restricted cash of $45.2 million while bank loans and other borrowings were $165.2 million. 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 an audited interim convinced consolidated results of operations.In the drybulk business Handysize TCE was $8551per day for the six months ended December 31, 2019 and $9066 per day for the same period in 2018. We achieved the fleet utilization of 99 % in the second half of 2019. Supermax/Ultramax TCE per day was $13624 per day for the six months ended December 31, 2019 and $12795 per day for the same period in 2018.We achieved the fleet utilization of 99.5 % in the second half of 2019. The average long-term charter in cost per day for the Supermax fleet for the first half of 2020 is expected to be approximately $12330 per day. As of February 20, 2020 we have secured the following TCE per day thus far for the remainder of 2020. Handysize approximately 1,400 operating days of an average TCE of $6420 per day. The Supermax approximately 1,420 operating days at an average TCE of $9,830 per day.On slide 12 is the tanker segments operational performance. In the tanker business medium-range tankers TCE per day was $14,409 per day for the six months ended December 31, 2019 and $10,950 per day for the same period in 2018. We achieved a fleet utilization of 100% in the second half of 2019. Small tankers TCE per day was $12,441 per day for the six months ended December 31, 2019 and $11,453 per day for the same period in 2018. We achieved a fleet utilization of 99.7% in the second half of 2019.The average long term chartering cost per day for the medium-range fleet until the expiry of chartered in 2020 is expected to be approximately $15,300 per day. As of February the 20, 2020 we have secured the following TCEs per day thus far for the remainder of 2020. Medium-range approximately 360 operating days of an average TCE of $19,600 per day. Small tankers approximately 112 operating days at an average TCE of $12,800 per day.Now turning to Slide 13. This slide shows the owned fleet cash breakeven analysis for the second half of 2019. Our drybulk and fleet cash breakeven rate for the year was $9750 per vessel per day. Long-term charter in breakeven was $13,830 per vessel per day and core drybulk breakeven was $10,950 per vessel per day. Our tanker owned fleet cash breakeven rate for the year was $11,960 per vessel per day long-term charter in breakeven was $16,480 per vessel per day and core tanker breakeven was $12,900 per vessel per day. The cash breakeven rates per day includes operational expenses, net G&A, interest expense and debt repayments.Please turn to Slide 14. This slide shows TCE revenues sensitivity to charter rate for the last twelve months. Every $1,000 change in TCE per day increases to about 11.1 million of annual TCE revenue. Please note that this refers to our combined fleet and includes our drybulk and tanker vessel operating days.Please turn to Slide 16. A subsidiary of the Company, Grindrod Shipping Pte. Ltd., or GSPL, acquired the 33.25% ordinary and preferred equity shares held by Regiment for a total consideration of $44.1 million, thereby increasing its stake to 66.75%. The ordinary equity portion was acquired for $35 million while the preferred equity component was $9.1 million representing Regiment’s 33.25% share of the $27.3 million preferred share capital in IVS Bulk. The acquisition was funded through a combination of cash on hand, proceeds received from IVS Bulk following a refinancing of the IVS Bulk capital structure, and a new loan at GSPL.Existing credit facilities at IVS Bulk were refinanced with two new loans totaling $127.3 million representing an approximate 55% loan-to-value at drawdown with maturities both scheduled for 2025. New Credit Facility one, is $114.125 million with pricing at LIBOR + 3.1% per annum. And new credit facility, two, is $13.13 million with pricing at LIBOR + 2.75% per annum.Proceeds of the refinancing and release of restricted cash under existing credit facilities at IVS Bulk, utilized to repay in full $116.9 million in existing credit facilities, $10.9 million of shareholder loans and redeem a $7.7 million portion of the preferred share capital. In addition, Grindrod Shipping agreed to a new financing in the amount of $35.833 million with Sankaty. The facility bears interest at a rate of 7.5% per annum and is repayable at maturity in June 2021. It is redeemable by the Company at any time prior to maturity, subject to a 6-month interest make-whole provision.Please turn to Slide 17. Here we are planning detail the sources and use of the funds of IVS Bulk transaction.Please turn to Slide 18. The unaudited pro forma condensed consolidated financial information is provided for illustrative and information purposes only and is not necessary indicative of our future results of operations or financial conditions. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable but actual results may differ from the pro forma adjustments. These adjustments are subject to change.Our pro forma consolidated cash position will increase to $56.4 million while our bank loans and other borrowings will increase to $325.1 million on a consolidated basis. The acquisition and consolidation will also add $242.2 million of ships, property, plant and equipment to the asset side of our balance sheet. Now we can turn to slide 19. Here we have the unaudited 2019 pro forma income statement. Adjusted EBITDA for 2019 including the IVS Bulk acquisition would have been $59.0 million, an increase of $19.3 million or 48%.Please turn to Slide 20, our debt repayment profile includes scheduled amortization payments of $28.8 million and $31.3 million respectively in 2020 and 2021, while the new $35.8 million loan for the IVS Bulk acquisition matures in June 2021.Turning to Slide 21. Here you can find the snapshot of our Dry Bulk core fleet as of February 26. As you can see the 12 IVS Bulk vessels that are highlighted are all Japanese built ECO vessels that ideally compliments our cargo operations. The next slide shows our product tanker core fleet.With that I would like to turn the call back over to Martyn and ask you to turn to slide 24.

[Martyn Wade:]

Thanks Steve. On the left chart the Dry Bull market trade developments are illustrated. In 2020 [indiscernible] projects the total growth to be 1.9 % and 1.8 % in 2021. This seems to be steady demand for minor bulks which are the key cargos for Grindrod Shipping vessels. In 2020 minor bulk demand growth is forecasted to be 2% one in 2021 it is forecast to increase by 2.6 %.The current market environment presents unique near-term challenges as a result of the Corona virus which has disrupted demand and trading patterns for both the drybulk and product tanker markets and has shown the high degree of interdependence of all regions in industries in this era of globalization.We look to the positive fundamentals of both the drybulk and product tanker sectors which were expected to take effect once the current crisis dissipates. The long-term demand fundamentals appear positive, a steady demand for minor bulks combined with and longer expected cargo distance leading to strong ton-mile demand growth forecasts.Please turn to page 25. Fleet growth has been steady at approximate 3% this year as scrapping is expected to pick up due to ballast water treatment, IMO 2020 regulations and of course the current low market.The drybulk order book is estimated only 9 % of the fleet, deliveries net of expected scrapping are estimated at 30 million dead weight for 2020. The fleet profile and order book of the Handysize and Supermax vessels are the smallest in the drybulk fleet at 4.2% and 6.5% respectively. This was older than 15 years represent 19 % of the drybulk fleet and should encourage increased scrapping.Now please turn to slide 26. Handysize and Supermax TCE rates declined recently due to reduced seasonal activity which always happens around Chinese New Year and the Corona virus. Asset prices remained largely flat over the last year and we still believe represent attractive entry points for quality assets.Turning to Slide 27 to look at the product tanker demand. On the left chart the product tanker market trade developments are illustrated. 2020 Clarksons projects the total growth to be 3.2 % and 1.6 % in 2021. After a weaker period during the third quarter rates increased materially in the fourth quarter in the lead-up to IMO 2020 despite an overall contraction in the seaborne product tanker demand due to market disruptions such as the attacks on the Saudi oil facilities.Due to increasing ton-miles of worldwide product movements product tanker demand projected to increase even more than the cargo base demand with gross of 4.8% and 2.5 % respectively in 2020 and 2021.Growth in refining capacity and dislocation between refiners and end-users is expected also boost demand in 2020. The IMO 2020 regulations are disrupting trading patterns and causing an increase in vessels used for storage and cargo repositioning. Spot earnings of MR tankers remain elevated since October due to increased storage and product movement and anticipation of the IMO 2020 changes.Now turning to Slide 28, stronger earnings help contribute to higher than expected fleet growth in 2019 with slower growth anticipated going forward. Product tanker alter book is estimated 7% of the fleet which is the lowest in over 20 years. Product tankers that is the 10,000 dead weight plus fleet growth is estimated 2.4 % in 2020, 24 % of product tankers in the 10,000 size and above are 15 years or older. Stronger earnings help to contribute to higher than expected fleet growth in 2019 with slower growth anticipated going forward. The media range product tanker asset price have been gradually recovering due to stronger charter markets.Finally, let's turn to Slide 30 for our conclusion of strategy. Looking beyond the near-term uncertainties our strategy remains deliberate growing our shipping strengths and competitive advantage which include our modern high quality Japanese built fleet, our ability to maximize revenue through the use of in-house commercial pools and access to cargos and our close commercial relationships with global and regional industry players and continuing with our 40 year concentration on the Indian Ocean market.Core focus is listing has been to simplify the Grindrod Shipping story with investors by reducing the number of unconsolidated joint ventures. To that end we are wrapped up to the Leopard tankers and petrochemical shipping joint ventures and acquired control of the IVS Bulk joint venture leaving us with anyone on consolidated joint venture vessel.The IVS Bulk acquisition represents material growth potential for the Company, as 12 modern, Japanese built ECO vessels will be fully consolidated into our financial statements.While some shipping companies have chosen to outfit their vessels with exhaust gas scrubbers we have elected not to do so and instead are using compliant fuel. We believe that there are potential negative environmental impacts of effects that are emerging with increased scrutiny on the scrubber technology.We are not convinced that the economic return on the scrubber installation cost will be sufficiently attractive in the vessel categories in which we operate is the high quality and fuel-efficient characteristics of our vessels and their trading pattern.Fuel spreads between high and low sulfur have already contracted materially since the start of the year. Product tanker market remains strong thus far in 2020 having to mitigate the negative effects of Corona virus on the drybulk charter market.Despite the near term negative drybulk demand impact the Corona virus has caused market expectations suggest a strong recovery later in the year as China restarts its manufacturing and commodity demand.With this, I thank you all for joining our call today and looking forward to reporting further progress at Grindrod Shipping as we continue to grow.And with that, we like to open up to the questions. Operator?

[Operator:]

Thank you, Sir. [Operator Instructions] Thank you. And we do have a question from the line and it's from the line of Poe Fratt from Noble Capital. Your line is open.

[Poe Fratt:]

Good morning, Martyn. Good morning, Stephen.

[Martyn Wade:]

Hi, Poe.

[Stephen Griffiths:]

Hi, Poe.

[Poe Fratt:]

I was just wondering if you could sort of highlight if you would, if there's any change in your short-term strategy or short-term chartering strategy on the drybulk side. You mentioned that the Corona virus is having an impact across all market, so across all segments. And I'm just sort of wondering what your response has been?

[Martyn Wade:]

A very topical question. Thanks, Poe. All the shipping based in Asia, we have been very aware of this, it’s well over a month now. And our first concern of course was staff and ship crew. We're actually are three members and staff. One had recently been in charter and two returning to do this self-imposed quarantine at home and thankfully they did the quarantine and no effects.And we obviously had a number of ships in China at that time which we immediately instigated various measures including masks, temperature checking and everything that was required. So in that respect, it's an interesting one because it caused China to have slow down; there's no doubting, the Corona virus combining with Chinese New Year.And with that, we have adopted a pretty conservative approach we say for the first three day Q1 and Q2. It is way too early to say when China will normalize manufacturing and commodity imports. Obviously, they're doing everything they can; we see that in the press every day. Second largest economy in the world.They need to feed and they need the economy to pick up. But I think we are very much conservative approach, we've got a number of ships out of the Pacific because of course the Pacific is very much focused on China. And we have been looking to where we can at attractive levels increased their commodity base, or cargo base.And also to be honest, we've started to see some interesting charter opportunities where their own is out there now looking to cover. So it's something we're weighing up, that's timing. But this is having a big effect and we have had to adapt. I mean, we don’t try it a huge amount in the Pacific at times, it's more Indian Ocean, Atlantic.And we're now thankful we adopted that. So we're having to be very very careful because are we going to get false measure issues in China. All ports, countries in the world going to maybe quarantine ships just like the old days and the old days quarantine was 40 days. So let's see.So we're very aware of ships we've had there where they're trading next and what goes on. So we're doing everything we can but fundamentally adapting or adopting a very we started kind of a month six weeks ago a conservative approach going forward. Let's not bet when this will end. Obviously when it does end, it could be interesting or very interesting because China will have to rebuild the stock piles it's using at the moment.And as we see in other factors, all will have to stimulate the economy. But let's wait for that to happen at the moment.

[Poe Fratt:]

And it would seem like the same comments would be impacting your potential acquisition strategy or growing the drybulk side, clearly having the IVS Bulk JV acquisition done is a nice step forward because it take lots of your attention. But same comments for the acquisition side?

[Martyn Wade:]

Yes. I mean obviously any market like this are after the last seven eight years we've had and then we get this black swan event. It is Steve's doing looking after the balance sheet cash. But we also, I mentioned in my commentary that this graphing will increase out there. And there's no doubting that there will be stress among some people and there will be some attractive opportunities.But it's something we're obviously looking at continually. I think it's probably a little too early to call when but you can sense so much we say that the great pile is kind of sensing it's a good time to buy those that are in the position. I think we will be at the same very selected opinion but at the moment let's just get through Q1 and let China risk an early restarting the cold burn.Thermal cold burn is increasing between the gates, factories are getting back to work. Congestion in Shanghai, Beijing, all over China is slowly but surely picking up. In the gating there's more guys, people are getting back to work. But I keep on stressing, let's be a little conservative for the next couple of months and see where this takes us.

[Poe Fratt:]

Understood. And then, anyway to quantify the impact of IMO 2020 as far as the increase this you've mentioned disruption and then also increased storage bed. Any way to quantify that and then potentially you can look at how long you think it's going to last?

[Martyn Wade:]

The IMO 2020 wasn’t interesting because it caused, it started at the beginning of the year, so it combines with Chinese New Year and the Corona virus. So for two three weeks, the price of clean fuel spiked very high and 95% of the fleet wanted it. And that combined with a weaker market.And that was quite an issue in terms of rate stumbling. And I think people have been discussed with the boarder exchanged that you haven’t factored in the massive differential in the fuel price. That seems to be evening out with the average of the world now is quite to guess is about a $170 differential.In some countries it's a little over a $100. What has happened of course with which was with the higher fuel price and also the market is that ships have slowed down even more which of course is always very positive for shipping.But on the tanker side, it is in because of course in some of Chinese exports so that in the clean product trades are fallen which means that other countries have taken up the slack and that is in some areas has increased ton sea miles and where we're seeing some new trades developing.But we don’t generally see where countries are always being dependent on China having to source there in our case jet or gasoline from other countries. So as usual with shipping, it's always one door shut another one open; there's always opportunity.And of course and I had mentioned, you've got this disastrous locust situation in East Africa where the national geographic not prone to exaggeration has got it at biblical proportions. And they're talking there are maybe a billion, billion and a half, people being affected.And that's where what you're seeing Grind going in. So, that’s again conversely as usual with shipping and if one disaster happens we suffer, another one happens it becomes opportunity. So all-in-all it's as usual with this industry; it's a rollercoaster.

[Poe Fratt:]

And then, if you could highlight your approach to the buyback program looking into 2020 or for the rest of the year. How are you approaching the buyback, the stock is reflecting a lot of the concerns about global economic growth, you highlighted the factors there. But how are you approaching the stock buyback program?

[Stephen Griffiths:]

So, the -- just to remind everyone, we have both factory 100,000 ship, pre our closed period to early December; represents about 1.5%. We've got approvals to buy back up to 10%. So, yes we have it our armory and it's an ongoing discussion that at board. And nothing firmly we can sell the market but certainly it's on our agenda. I think that's probably all we can say.

[Poe Fratt:]

Great, thank you so much.

[Martyn Wade:]

Thanks, Poe.

[Operator:]

Thank you. [Operator Instructions] There are currently no further questions coming through, Sir.

[Martyn Wade:]

Okay, thank you. Thank you for that.

[Operator:]

No further questions on the phone line, so I’ll hand the call back to yourself. Thank you.

[Martyn Wade:]

Okay. Thank you, very much. And thanks for everyone for dialing in. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, that concludes today's teleconference. We'd like to thank everyone for their participation. Have a wonderful rest of the day. Thank you.