2018 Annual Results Presentation Transcript 28 February 2019 Speaker: David Turnbull Slide 0 – Cover Welcome ladies and gentlemen, and thank you for attending Pacific Basin’s 201 8 Annual Results conference call and live webcast. My name is David Turnbull, Chairman of Pacific Basin, and I am joined by our CEO Mats Berglund and our CFO Peter Schulz. We are pleased to report that Pacific Basin delivered a strong performance in 2018. The Company generated significantly larger operating cash flows and our strongest earnings since 2010. In view of our return to a meaningful level of profitability, the Board is recommending a final dividend of 3.7 Hong Kong cents per share. Combined with the 2.5 cents interim dividend distributed in August, this represents half of our net profit for the full year, which is consistent with our dividend policy. Despite a weaker than expected start to 2019, the long term fundamentals for our minor bulk segment look encouraging. And while we are bracing ourselves for increased freight market volatility in 2019, as we have shown before, Pacific Basin has what it takes to navigate such turbulence adeptly. Mats will now present our 2018 results and dry bulk market review. Peter will follow with a review of our financials, Mats will wrap up with an outlook and strategy summary, and I will then invite you to ask any questions you may have. Over to you Mats. Speaker: Mats Berglund Slide 2 – 2018 Annual Results Highlights Good afternoon ladies and gentlemen. Please turn to slide 2. We made a much improved net profit of US$72.3 million in 2018 and EBITDA of US$215.8 million. The freight market strengthened again in 2018 which, combined with our larger owned fleet, high laden utilisation, continued TCE outperformance and competitive cost structure, enabled us to record these much improved earnings. We continue to maintain good control of our owned vessel operating expenses which were kept substantially flat at a very competitive US$3,850 per day. We acquired seven modern vessels during the year including four funded 50% by issuing shares, while selling one older vessel. These transactions have increased our owned fleet to 111 ships on the water at the end of January and grown the proportion of our owned ships, especially in Supramax. Two of the seven vessels purchased and one sold during the period are scheduled to deliver by end March 2019. We also closed competitively-priced revolving credit and bilateral term loan facilities amounting to US$365 million. Peter will tell you more about these shortly. In 2018, Pacific Basin won Dry Bulk Operator of the Year at the Lloyd’s List Global Awards, and we won the Customer Care Award at the International Bulk Journal’s IBJ Awards. These awards specifically acknowledged our commitment to quality operations and our commitment to placing customers at the focal point of our business. 1
Slide 3 – 2018 TCE Performance & 2019 Cover Slide 3. Driven by strong growth in minor bulk demand against a muted increase in global Handysize and Supramax capacity, 2018 Handysize and Supramax spot market rates continued to recover from the cyclical low in 2016. Our Handysize and Supramax net daily TCE earnings of US$10,060 and US$12,190 increased 21% and 27% year on year, and outperformed the Baltic Handysize and Baltic Supramax spot market indices by 22% and 12% respectively. As at mid-February, we had covered 44% of our Handysize days for 2019 at about US$9,370 and 63% of our Supramax days at about US$10,570 per day net. Slide 4 – Three Years of Improving TCE Slide 4. The blue bars in the graph represent our average quarterly TCE earnings against average quarterly spot market earnings. Our outperformance increased during the year both on Handysize and Supramax, and our fourth quarter TCE earnings were our highest since the winter of 2013/2014. Slide 5 - Weaker Start to 2019 Please turn to slide 5. 2019 has started weaker than the last two years with a more pronounced Chinese New Year dip, compounded by the US-China trade conflict, Chinese restrictions on coal imports, and recent iron ore infrastructure disruptions in Brazil that undermined sentiment further. However, as the graphs for 2019 clearly show, the seasonal recovery is now firmly underway. Slide 6 – Minor Bulk Expected to Drive Demand in 2019 Slide 6. Despite disruptions to some US-China trade, minor bulk tonne-mile demand increased by 5.3% in 2018. In contrast, total dry bulk demand growth (including both the minor and major bulks) slowed to 2.9% in 2018 due to stagnant trade in grain and iron ore. In 2019, we expect continued solid growth in minor bulk demand and we expect grain to bounce back to positive growth again. A trade deal between the United States and China could provide the market with a further boost, but we must not ignore the possibility that a protracted trade conflict could further undermine global GDP growth and consequently overall trade and dry bulk demand. Slide 7 – Better Supply Fundamentals for Handysize/Supramax (I) Please turn to slide 7. As expected due to the declining orderbook, newbuilding deliveries in 2018 reduced to about 28 million deadweight tonnes – or 3.3% of existing dry bulk capacity, the lowest level since 1992. However, scrapping reduced to almost zero due to the much improved freight market conditions, meaning that the overall fleet growth of 2.9% was fairly stable compared to 2017. After accounting for estimated delivery shortfalls, Clarkson estimates actual deliveries of 3.8% in 2019 with scrapping remaining low at less than 1%, giving an expected net increase in dry bulk capacity of around 3%. It’s important to remember that s crapping cannot go any lower than today’s levels and there is potential for scrapping to increase due to the growing number of old vessels and the increasing burden of environmental regulation. The supply fundamentals in our Handysize and Supramax segments look more favourable and, as you can see, the line in the right graph shows the net fleet growth is on a steadily reducing trajectory from 5.7% in 2015 to an estimate of almost zero for 2020. 2
Slide 8 – Better Supply Fundamentals for Handysize/Supramax (Cont) On slide 8, we contrast in further detail both the orderbook and age profile of the smaller ships with the larger vessels. Handysize benefits from the smallest orderbook and the highest percentage of older ships, pointing to a better balance between new deliveries and scrapping going forward, while for Capesize and larger the situation is reversed. Slide 9 – New Regulations Benefit Stronger Companies Slide 9 provides a quick update on environmental regulatory changes. There are three new regulations that impact our industry. The first requires the installation of Ballast Water Treatment Systems. Fourteen of our owned vessels have already been fitted with Ballast Water Treatment Systems and we have arranged to retrofit the balance 97 of our ships with a system based on filtration and electrocatalysis by the end of 2022. The second is the IMO’s global 0.5% sulphur limit which takes effect on 1 January 2020. Ship owners will have to comply either by using more expensive low-sulphur fuel, or by continuing to burn heavy fuel oil in combination with installing exhaust gas cleaning systems or “scrubbers”. We expect the majority of the global dry bulk fleet, especially smaller vessels such as our Handysize ships, will comply by using low-sulphur fuel. This should have a positive effect on the supply demand balance as higher fuel costs encourage ship operators to slow down. However, some owners of larger vessels with higher fuel consumption, including some Supramaxes, are installing scrubbers to take advantage of expected lower cost of heavy fuel oil. As we cannot risk being competitively disadvantaged, we are well prepared and have arrangements in place with repair yards and scrubber makers to install scrubbers on our owned Supramax vessels. These arrangements include fitting and testing scrubbers on Supras to gain experience early and to evaluate the equipment both technically and operationally. Thirdly, in April 2018, the IMO announced an ambitious strategy to cut total greenhouse gas emissions from shipping by at least 50% by 2050 (compared to 2008) and improve average CO2 efficiency by at least 40% by 2030 and 70% by 2050. There is much uncertainty about how the market will eventually comply with these targets and the legislations that will in due course be implemented to achieve them. The easiest first step to decrease carbon emissions is to reduce speed, but our view is that these new IMO targets will also lead to the development of new fuels, engine technology and vessel designs that are not available or practical today. Continued…. We believe the IMO’s greenhouse gas reduction targets and eventual regulations will discourage new ship ordering in the short and medium term until new technologies and ship designs become available. We expect all these major new environmental regulations to be positive for the supply-demand balance and benefit larger, stronger companies with high quality fleets that are better positioned to adapt and cope both practically and financially with compliance. Slide 10 – Favourable Minor Bulk Supply and Demand Outlook In slide 10, we show Clarksons’ yearly demand and supply levels for the overall dry bulk market in the chart on the left. Tonne-mile demand growth of 2.9% was evenly matched by net supply growth in 2018 and, for 2019, demand is estimated to grow slightly slower than supply. Again, this is mainly due to weak iron ore demand. On the right are two graphs showing the same demand and supply data separated out for the minor bulk and major bulk segments. 3
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