Pacific Basin (2343.HK) has announced a net profit of $109 million and an underlying profit of $119 million for the year 2023, with an EBITDA of $347 million. The company experienced an increase in global demand for dry bulk, with significant growth from China.
Despite a decline in freight rates due to various economic factors, Pacific Basin has maintained a strong financial position, with $549 million in available liquidity.
The Board proposed a final basic dividend and an additional special dividend, reflecting the company's commitment to shareholder returns. Pacific Basin anticipates a more favorable market in 2024 and remains focused on expanding its fleet and improving earnings.
Key Takeaways
- Pacific Basin reported a net profit of $109 million and an underlying profit of $119 million for 2023.
- The company's EBITDA stood at $347 million, bolstered by increased global demand for dry bulk.
- A final basic dividend of 1.6 Hong Kong cents per share and an additional special dividend of 4.1 Hong Kong cents per share were recommended.
- Freight rates declined in 2023 but are expected to improve in 2024.
- Pacific Basin's owned and chartered fleet totals 266 vessels, with a focus on Handysize and Ultramax vessels.
- The company's financial performance was impacted by lower daily TCE earnings but offset by vessel disposals and reduced costs.
- Pacific Basin maintains a policy of distributing at least 50% of annual net profit as dividends and may consider share buybacks.
Company Outlook
- Positive outlook for the dry bulk market in 2024, with expected demand growth.
- Environmental regulations could contribute to earnings sustainability.
- The company is optimistic about the long-term potential of the industry.
Bearish Highlights
- Freight rates declined in 2023 due to economic factors.
- Daily TCE earnings were lower than previous years.
- The company experienced a one-off non-cash impairment.
Bullish Highlights
- Freight rates showed a seasonal increase in August.
- The company outperformed indices with Handysize and Supramax vessels.
- Successful expansion of the owned fleet and long-term charter agreements.
Misses
- Impairments on small Handysize ships, though no further impairments are anticipated.
Q&A highlights
- CEO Martin Fruergaard expressed confidence in market recovery post-Chinese New Year.
- The company's cash breakeven point is around $5500, with potential for cost reduction.
- CapEx for 2024 is set at $65 million, with investments aimed at improving ship performance.
Pacific Basin has demonstrated resilience in the face of market fluctuations and remains committed to strategic growth and efficiency improvements. With a solid financial foundation and a positive market outlook, the company is well-positioned to navigate the challenges and opportunities ahead.
Full transcript - None (PCFBF) Q4 2023:
Operator: Welcome to today's Pacific Basin 2023 Annual Results Announcement Conference Call. I'm pleased to present Chief Executive Officer, Mr. Martin Fruergaard, and Chief Financial Officer, Mr. Michael Jorgensen. For the first part of this call, all participants will be in listen-only mode and, afterwards, there will be a question-and-answer session. Mr. Fruergaard, please begin.
Martin Fruergaard: Thank you very much. Welcome ladies and gentlemen, and thank you for attending Pacific Basin’s 2023 annual result earnings call. As said, my name is Martin Fruergaard, CEO of Pacific Basin, and I am joined by our CFO, Michael Jorgensen. Assuming that you have already gone through the presentation, we will briefly highlight some of the key points discussed in it before we proceed with the Q&A session. Please turn to slide three. First of all, let me start by extending my appreciation to our dedicated seafarers and shore-based employees who have contributed to delivering a strong set of results in 2023. In 2023, we achieved a net profit of $109 million and an underlying profit of $119 million, with an EBITDA of $347 million. This resulted in a 6% return on equity and an earnings per share of 6.5 Hong Kong cent. Despite challenges such as slowing global growth, higher interest rates and increased vessel supply, we delivered a solid result. Our result was largely due to the increased global demand for dry bulk, particularly from China post COVID’s reopening. Our large coal business generated $167 million before overheads, despite the weaker freight market, while our operating activity, which includes vessels charted in for less than 12 months, contributed $26 million, having generated a margin of $1,090 net per day, over 23,480 operating days. Leveraging our high level of cash generation, we have reduced debt, expanded our owned fleet statewide carrying capacity and maintained a robust financial position with $549 million in available committed liquidity. In view of our solid financial results, strong cash generation and confidence in the long-term fundamentals of the dry bulk market, the Board recommends a final basic dividend of 1.6 Hong Kong cent per share and an additional final special dividend of 4.1 Hong Kong cent per share, which combined with the 6.5 Hong Kong cents per share interim dividend distributed in August 2023 amounts to $82 million, representing 75% of our net profit for the full year. This will be the third consecutive year that the Board has returned dividends above 50% of annual net profit, and we continue to be committed to distributing excess cash to shareholders through dividends. Please turn to slide four. Management aim to maintain a robust and flexible capital structure throughout the shipping cycle to meet our commitments, strategic objectives, and maximize shareholder returns. We aim to create shareholder value through optimizing our capital structure, investing in value adding and counter-cyclical growth, opportunities and distributing funds to our shareholders. Over the last six years, we have generated a profit of $1.55 billion and paid out in excess of $1 billion in dividends to shareholders representing 69 of our net profits, highlighting our ability to deliver attractive long-term returns over the shipping cycle. Our unwavering dedication is evident in our distribution policy, which committed to paying out at least 50% of annual net profit, excluding vessels disposal gains. We continue to retain our general mandate for the buyback of shares of up to 10% of the share capital of the company and we will continue to consider this as an additional way to return capital to shareholders. Please turn to slide five. In 2023, average market spot freight rates for the Baltic Exchange Handysize Index and the Baltic Exchange Supramax Index were 8990 and 10,680 net per day respectively. Despite increased dry bulk loadings overall in 2023 Handysize and Supramax market freight rates declined due to de-accelerating global economic growth, high interest rate and increased supply due to new building deliveries and limited congestion in China. In August 2023, freight rates experienced a significant seasonal increase due to various factors. These factors include increased seasonal demand, ongoing growth in internal demand resolving for the Russia-Ukraine conflict, restrictions on Panama Canal passage and later on disruptions in Red Sea transit. These combined circumstances contributed to an improved supply and demand balance with supported higher rates, particularly in the Atlantic Basin. Current Forward Freight Agreements, commonly referred to as FFA, for Q1 and Q2 are 11,730 and 13,930 per day, and US dollar 12,990 and 15,600 per day for Handysize and Supramax vessels respectively, indicating an improving market going forward. In 2024, freight rates began higher than in 2023 and we started the year with good cover for the first quarter. We recently observed an increase in seasonal dry bulk demand, a typical trend after the conclusion of the Lunar New Year festivities. Additionally, the limited transit of dry bulk vessels through the Suez and Panama Canal continues to benefit supply, which should also support freight rates. Please turn to slide six. Global dry bulk loading volumes grew approximately 2% year-on-year supported by China's reopening. Minor bulk loading increased 1% in 2023 due to increased loading of bauxite, steel and ores and concentrates. Oxides continue to be the main driver of increased minor bulk loadings, primarily from Kenya, and which are mainly carried in Capesize and Panamax vessels. Grain loadings decreased by 1% on year-on-year due to limited exports of grain from Argentina and United States due to drought, while the Ukraine Black Sea exports remained affected due to the conflict. Brazil achieved record grain loadings in 2023, benefiting from favorable weather conditions, improved agricultural practices, and increased demand for China. On the other hand, coal loadings increased 4% year-on-year largely because of record Chinese import, despite record domestic coal production. India also important record coal, as favorable economic growth, though drove increased electricity demand. Iron ore loadings increased 4% year-on-year due to increased production from Australia and Brazil. Additionally, there was a significant rise in export from India, which is predominantly carried on Supramax vessels. Please turn to slide seven. Our core business generated average Handysize and Supramax daily TCE earnings of 12,250 and 13,830 net per day respectively in 2023, which is a decrease of 48% and 51% compared to, of course, a much stronger 2022. Our TCE earnings in the fourth quarter 2023 for both our Handysize and Supramax vessels are positively impacted by prior periods freight tax adjustments, which relate to freight earnings completed our vessels in the past few years, and no changes in accounting treatments. For the first quarter 2024, we have covered 100% of our committed vessels days on both our Handysize and Supramax vessels at 11,170 and 13,480 net per day respectively. For 2024, we have covered 54% and 71% of our core vessels days for Handysize and Supramax at 10,160 and 12,610 net per day respectively. Please note our Supramax forward cover estimates -- exclude the scrubber benefit, which is currently about 1110 per day across our core Supramax fleet. We continue to be long vessels and we believe we hold sufficient backhaul cover to optimize our voyages, such as by combining front-haul and backhaul trades, and those enhance our vessel utilization and earnings. Our focus will be to maximize earnings with higher paying fronthaul cargoes. Please turn to slide eight. In 2023, our Handysize and our Supramax vessels outperformed the indices by 3260 per day and 3150 per day, respectively. A large coal fleet of Handysize and Supramax vessels contributed 97 million and $70 million, respectively. Our Handysize and Supramax vessels have now outperformed the index over the last nine and ten quarters respectively. Our Supramax vessels outperformance has benefited from scrubber installed across our core fleet with scrubber contributing $850 per day to our performance in 2023. Currently, our core vessels compromise a 57 Supramaxes of which 32 are fleet with scrubbers. Our operating activity generated a positive margin of 1090 net per day over 23,480 operating day. Our operating days increased 18% as compared to same period last year. We continue to target further growth in our operating business, which provide us with an ongoing opportunity to leverage our commercial and operational expertise, as well as our global proximity to our customers to generate additional income for the business. Our operating activity margin was compressed in the fourth quarter of 2023, as a result of the need to cover cargo position in a fast outwards moving freight market during the end of the period, Please turn to slide nine. Our Handysize owned vessels costs have decreased, mainly due to lower crew repatriation costs, as COVID-related controls have been relaxed. We continue to improve our cost competitiveness with our indicative owned fleet cash breakeven level reducing to 4,930 net per day, which is a 13% reduction year-on-year. Please turn to slide 10. Our Supramax and Handysize owned vessel depreciation costs increased mainly due to higher dry docking costs and investments in fuel efficiency technology, including silicone and antifouling paints. Our blended Supramax costs remain cost competitive, and we are scheduled to redeliver five higher cost long-term charter vessels during 2024. These vessels were chartered in during the higher rate environment of 2022. Our indicative owned fleet cash breakeven level reduced to 5090 net per day, which is a 2% reduction year-on-year. Please turn to slide 11. During the period we acquired eight high quality Japanese modern second-hand vessels. These included six Ultramax vessels, and one Supramax vessel, and one Handysize vessel. In 2023, we have sold eight vessels consisting of seven Handysize and one Supramax vessel, with an average age of 20 years. Additionally, we sold one Handysize vessel in 2024, which we expect to deliver to the buyer by May 2024. Given increasingly strict existing and incoming decarburization regulation, such older and less efficient vessels will become increasingly challenging to operate. We therefore consider it wise to gradually divest ourselves of our least efficient vessels. We remain committed to our long-term strategy to grow our owned fleet of Supramax vessels by acquiring high-quality modern second-hand vessels, and to renew our Handysize fleet by replacing our older and less efficient Handysize vessels with younger and larger Handysize vessels. Our core fleet consists of 132 Handysize and Supramax vessels, and including chartered vessels in our operating business, we have approximately 266 vessels on the water overall. Please turn to slide 12. To support the future growth and renewal of our core fleet, we have signed agreements for the long-term inwards charter of both Handysize and Ultramax vessels. During the period we took delivery of three Japanese built Handysize vessels on long-term time charter. These time charters all comes with options to extend the charter agreement period at a fixed rate and/or purchase the vessels at a fixed price. Additionally, we have signed long-term charter agreements for Japanese build Handysize new buildings, all with scrubbers, as well as long-term time charters for four Ultramax new buildings. Each of these time charters also come with an option to extend the charter agreement at a fixed rate, as well as having the option to purchase the vessel at a fixed price, which further expands our optionality. It is important to know that these Handysize and Supramax vessels are new and large and more efficient, with the ability to earn approximately 20% and 16% [Technical Difficulty] respectively. Our collaboration with MSI and Mitsui is progressing well in designing an efficient dual fuel vessel capable of running on fuel oil or sustainable methanol. However, we remain cautious in our approach to invest in new buildings due to current historically high new building prices. We expect to be ready to build such a vessel with delivery well ahead of our original 2030 target. However, we anticipate ordering activity within our sector for such a dual fuel, mid-size, dry bulk low emission vessels will be limited in 2024. I will now hand over to Michael who will present the financials, and I will be back afterwards with outlook and strategic summaries. Michael?
Michael Jorgensen: Thank you very much, Martin, and good evening, ladies and gentlemen. Please turn to slide 14 for an overview P&L statement and financial performance. As you can see, given our lower daily TCE earnings, both our underlying profit and EBITDA were lower, despite decreased owned vessel and charter costs. Our G&A has decreased mainly due to lower discretionary remuneration provisions, given the [Indiscernible] for the period. We took a one-off non-cash impairment of $16 million relating to eight of our smaller older Handysize vessels. It's important to note that their carrying values represent only 4% of our owned fleet. These eight vessels are below 30,000 tonnes deadweight carrying capacity with an average age of 15 years, which have less earnings capacity compared to our main fleet of standard Handysize and Supramax vessels. Below underlying profit, our net profit was further improved by gains on vessel disposals. Please turn to slide 15. Our operating cash inflow for the period was $286 million. And that is inclusive of all long and short-term charter hire payments. This compares with $874 million in the full year 2022. We had $92 million in proceeds from the sale of eight small Handysize vessels, one Supramax vessel and one Ultramax vessel, which were delivered in the period. In December 2023, we successfully concluded our first sustainability linked unsecured revolving credit facility of $150 million. This facility will give us improved financial flexibility and aligns with our commitment to sustainability with interest margin adjustments tied to carbon intensity and crew safety performance, which we prioritize among the most important ESG issues. CapEx spending remains well controlled and, for 2023, $252 million, of which we paid approximately $190 million for one secondhand Handysize vessel and eight secondhand Ultramax vessels and around $62 million for dry dockings and investments in fuel efficiency technology, which Martin discussed earlier. We expect CapEx for 2024 to be approximately $65 million, predominantly relating to dry dockings and investments in fuel efficiency technology and excluding any vessel purchases. We have paid out $218 million in dividends, which relates to the 2022 final basic and special dividend of 26 Hong Kong cents per share, which we paid in May 2023 and the interim dividend of 6.5 Hong Kong cents per share in August 2023. Our borrowings in the period decreased due to net repayments of $81 million following the normal amortization profile of our loans. Please turn to slide 16. Despite significant shareholder distribution, we continue to maintain a healthy financial position with $549 million of available committed liquidity, which includes $262 million of cash and deposits. This is why we reduced debt and expanded our deadweight carrying capacity by 4%. Our net borrowings are now just 2% of our owned vessels net book value, and we currently have 62 unmortgaged vessels. Our goal going forward is to ensure that we maintain a robust, safe and flexible capital structure. Our distribution policy is to pay out dividends of at least 50% of our annual net profit, excluding vessel disposal gains, and thereby any additional distributions can be in the form of either special dividends and/or share buybacks. I will now hand you over to Martin for his outlook and strategy summary.
Martin Fruergaard: Thank you, Michael. Please turn to slide 18. Minor bulk seaborne demand is forecasted to increase 3% in 2024, which is supported by improved global macro-economic conditions and increased demand for China. While iron ore and coal demand forecasts are down, we see further upside to estimates giving positive Chinese government policy support to reinvigorate growth, particularly through investments in infrastructure. Limited transit through the Panama Canal is expected throughout the first half of 2024, while development in the Red Sea and the Gulf of Aden continue to remain complex. The combination has resulted in an increase in tonne-mile demand, as vessels are being rerouted from these key transit routes, which we expect to continue to support tonne-mile demand. Please turn to slide 19. High new building prices, uncertainty around emissions regulations and long delivery times of about three years have continued to discourage any significant new ship ordering over the period. 2023 Handysize and Supramax new building ordering was down 22% compared to 2022 and the dry bulk order book is currently 8.5% of total feet. World shipyard capacity remains limited and well below peak capacity of 10 years ago, with the majority of incremental new shipyard capacity concentrated on higher margin non-dry bulk vessels. Please turn to slide 22. Our focuses on the gradual decarburization of our fleet regulation must lead, and IMO and EU rules have taken effect in 2023 and 2024 to start driving the transition. We continue to watch and prepare for further decarburization regulations, such as FuelEU Maritime, which is a directive to drive the gradual take-up of renewable and low-carbon fuels when trading in, to and from EU, which will be effective from 2025. We also note the proposal for a package of maritime fuel carbon intensity reduction rules known as the US Clean Shipping Act & International Marine Pollution Accountability Act. This proposal is to implement requirements for shore-power and a greenhouse gas levy, which is applicable to voyages in, to and from US, with the aim of zero emission by already 2040. Please turn to slide 25. In the medium term, we believe dry bulk demand will be supported by substantial global infrastructure investment with a focus on emerging markets such as India and ASEAN countries, as well as concern over food and energy security worldwide. Our view is that environmental regulations, both existing and upcoming, will detail excessive new vessel orders that will force progressively slower vessel speed, and eventually also accelerate scrapping supporting dry bulk rates. We have a positive outlook on the future of the dry bulk market and expect to generate more sustainable earnings in the long term due to underlying demand and supply fundamentals. Our business has a promising future, and I eagerly anticipated growth and progress of our company and industry. As we embark on a journey to tackle various opportunities and challenges, we have the chance to distinguish ourselves in the transition of dry bulk shipping to a low carbon economy and continue to be leading the way in dry bulk shipping. We are optimistic about the long term potential of dry-bulk shipping. We believe that the robust demand for dry-bulk shipping will continue and we look forward to playing our part in the growth of the industry. Ladies and gentlemen, that concludes our 2023 annual result presentation. I will now hand over to the operator for Q&A. Thank you.
Operator: [Operator Instructions] We currently have one question from Andrew Lee. Please go ahead and unmute yourself.
Andrew Lee: Hello, hi. Can you hear me?
Martin Fruergaard: We can hear you, Andrew.
Andrew Lee: Hey, hi. Hi, everyone. Thanks very much for the call, guys. It's very useful. I have a few questions, right. My first question is that in your previous results or so your previous calls, right, whether it's a quarterly or full year or interims, you always mentioned the word medium term on the overall outlook. Since this is not mentioned this time, would you say that you're more optimistic now on the near-term rebound, rather than the so-called say medium term, which I think you've mentioned before was on six months out. So [Indiscernible] says, are you expecting the recovery to be happening from today? Second question is on shareholders returns, right. I think in the presentation in the results, you mentioned the word share buyback quite a few times. Does that mean that that's going to be the target going forward rather than the special dividend? Because I think this was mentioned this time, not compared to previous. Third question I have is on the operating activities, right. In the fourth quarter itself, it was only 110 million margin. If I look at your third quarter 2022, right, it was also lower as well, if you look at it on slide eight. Is this a seasonality? Is this the trend? Can you give us a little guidance in terms of how we should be looking at going forward, right, because 110 million is actually quite small, right, in terms of the margin, right? Four question I have is, could you give us a little bit guidance on your total core operating days, right, for both the Supramax and the Handysize? The reason I say that is because we know how much long-term charter days you have, but during the last year, you had some changes in your own fleet when you sold some and then you also had some new, well, second-hand, which has been delivered. So I just want to get a sense of what's the total number of the operating days, right. And that's it for now.
Martin Fruergaard: Yeah, can you -- last question, Andrew, are you talking about the coal fleet or the operating fleet?
Andrew Lee: The operating -- the coal fleet, right. So how many days you're going to have this year for the Supramax and the Handysize?
Martin Fruergaard: Yeah. Okay. Well, maybe I could take the first about how optimistic we are and then Michael can talk maybe about the share buybacks, and then I can talk about the operating part, and then we can maybe figure out the days in the meantime. But if I start with the -- are we more optimistic? Yes, I think we are more optimistic than when we met last time. And you could just look at the rate levels that we have now. Actually, if you forget 2021 and 2022, the rate level in the market today, that's the best we have seen for since, I think, 2014 or 2015. So as a start to the year, the market is really strong. Of course it has a seasonality, so the market did come down -- it did come up quite a bit at the end of the year. I think that's important when we talk about the operating profit. At the end of last year, the market actually came up very high and it did come down early this year, as it normally does, but it has actually recovered very well after Chinese New Year. And then when you look at the FFA, which indicate the direction of the market, it looks very, very positive actually, at the moment. Of course, I think, as always limit back to normal, so I'm sure we'll have some seasonality during the year, we have a very good start to the year at a high level, so I think that's very positive. You want to take a shot, Mike?
Michael Jorgensen: Yeah. Then there was a question about share buyback and it's correctly -- we are mentioning in our presentation here that our policy is to pay out minimum 50% of dividends. And any additional payment can be in the form of dividends and share buyback. There's no decision at the moment. Of course, it's something that we'd looking at, and I think it's fair to say that since the share price has stabilized, maybe reduced a little bit. And since asset prices have come up, there is a discount right now in the market if you compare our share price with the underlying net asset value of the company. So it is definitely something that we'll look at and study more carefully during a 2024. But of course, this is a discussion and a decision to be made by the Board, and it's something that we will monitor on a concurrent basis.
Martin Fruergaard: Yes, and about the operating, well spotted, Andrew. Yes, it's clear that when you see fluctuations, quite heavy fluctuations, in the market, it does actually sort of hit a little bit on the operating margin. And what we saw end of last year was a fairly big increase in the rate levels. And on top of that we saw actually the market in the Atlantic, the spread between the Pacific and Atlantic last year and early this year is the highest we've seen for 12 years. So actually the market reacted a little bit unusual and, of course, that makes the operating part -- when you see these increases, it make the operating part a little bit tough in the short term. So you have to sort of transition into to a different market. So you can see the fluctuation in the last year and early this year, of course, hits a little bit on the margin of the operating business in it but I think we have that turnaround now and moving forward as normal. So every time you have these big fluctuations in the market, it will sort of have an impact on our -- both our performance of the index on the coal fleet, but reality also on our operating business. But all in all, it's good for us when the market goes up all in all. We are fundamentally long on ships, even though of course we have some short-term cover, that's quite normal. We have fixed the ships of one to two ahead in it. I hope that answered that question. In respect to the operating at the core business days -- how to say that?
Michael Jorgensen: The activity level.
Martin Fruergaard: Yeah, so it seems to level you can say, yes, we are selling out and you can say when you look at our deadweight capacity on the coal fleet and the owned fleet, it's going up. So you can say the earning capacity of the fleet is now higher than it was last year. Even though we sold ships, we have replaced them with bigger and newer ships. I think one of the things that we like to look at when you look at a Pacific Basin, you can say, coming into 2021, where we had a very good market in 2021 and 2022, I think we outperformed many of our peers in that market. But on top of that, we actually have more earning capacity on the fleet today than we had before we entered 2021. So we haven't sold out the earning capacity of the fleet is there. So if we continuously see improving markets, that we have the earning capacity retained in the business, for sure. And on top of that we have taken these long-term time charter deals partly as a replacement for the smaller and old Handysizes we sold. We have taken, I think, about 11 new buildings being delivered from Japan on a three to five year time charters with purchase options and options for extended periods in it. So that's where we are at the moment. I hope that answered it Andrew.
Andrew Lee: Yep, that's good. Okay, I'll get back into the queue, right. I have a few more questions, but I'll let other people ask first.
Martin Fruergaard: Thank you.
Operator: We have a question from Parash Jain. Please go ahead and unmute yourself.
Parash Jain: Yeah, hi. Yeah. Thanks for Michael and Martin and congratulation on good set of result. And especially, thank you, Michael, for running pretty prudent capital structure, probably something that your peers on the container shipping segment can learn. But my question is more on with respect to the industry, because of the Red Sea, lower Panama Canal water level, how the vessels spend their time in between Atlantic and Pacific, has it structurally changed therefore? And if that's the case, how shall we see and understand the volatility or rather the divergence in freight rates throughout the year? And secondly, 2023 is pretty much China growing like no tomorrow, in terms of the import of dry bulk volume, while rest of the world was sluggish. Do you see sort of China flattening out while rest of the world start to grow as your base assumptions when you talk about the growth number? Maybe if you can handle these two first.
Martin Fruergaard: Yeah, we'll try for it. Thank you for the questions, Parash. First of all, the Atlantic in respect to the Panama Canal and the bay idea day in the [Indiscernible] the Red Sea. Of course, it has an impact on our basin. I think it's important to say that no way as much as it has on the container business in it. Of course, there's less of our ships transiting the Panama Canal, but in the bigger picture, it's not like a huge amount of ships we are talking about. But, of course, all these things adds up, of course, to an improvement in the market. And I think there's a big difference you saw between the Atlantic and Pacific that we had in the last year and early this year, which is historically, 12 years ago, we had such a spread. I think that is partly due to those things as well. The improvements you see in the market now is actually driven by the Pacific region, so that's actually where we see the activity level, whereas the Atlantic is settling down a little bit from a very high level but coming down. I think the Atlantic is probably waiting a little bit for the harvest out of South America coming in April. The thing is, of course, when you position the ships, I think about 45% of the Handysize fleet is normally at the moment in the Atlantic, and I think a little bit less of the Supramax ships are in the Atlantic, so it becomes very much how do you position the ships in the different areas. And I think when we have these issues with the canals and the transit, maybe there was less and less ships being positioned back into the Atlantic, so of course that drives the market up further, but actually, end of last year, early this year, the Pacific market was not very good actually, but that has, of course, rebounded quite a lot at the moment. I think there's a good question as well on China and the world economy. I think first of all, I think the -- I said IMF has actually raised the growth expectation for the US quite a bit actually, and actually also for China. These two economies, of course, it's super important for our market. I think Europe is unfortunately a little bit down but probably as expected. I think the interest rates will probably not come down as quick as we had hoped for. I believe there might be a little bit later. But I would also say, in general, when you look at China, it's probably likely that the coal, I don’t know if it's going to grow. I think there has been a little bit more rain that has helped the south eastern parts of the hydro energy at the moment, but it also -- there's still lack of rain on that part. So I think there're many fundamentals that when we look at China, it actually looks very busy. And when I talk to the chartering team we have, they say China is very, very active in steel and also in our forest product that they started importing again. So very mixed signal for China, and so when we look at the volumes going in and out, it's a little bit hard for us to be very negative about it. And I think in general, we see -- we don't think the world is out of the issues and problems, but it has been ongoing for a while and maybe we are well through it. And therefore we are maybe a bit more optimistic about the future, which I was hoping IMF actually is as well as they increase the levels. Yes.
Operator: Thank you, Parash. We have another question from Nathan Gee. Please go ahead and unmute yourself.
Nathan Gee: Hi, Martin. Hi, Michael. Thanks for the call. Just a question on impairments. So this is the second impairment you've taken around this small Handysize ships, you took something a lot larger in 2020. Just help us understand this, given the optimistic market outlook and how it jives with the impairment. And also just, is there any further risk of impairments ahead, particularly with the small Handys? Thanks.
Michael Jorgensen: Okay, I can start with this question and I think it's a very good question you're raising here. I think there's a little bit of history to it because some years back, we took an impairment on these small Handysizes and then the year after it was reversed, because it was a big uptick in the market. And now we're sitting at two years later and we can see that, especially the smaller Handysizes, the older Handysizes have a little bit challenging in catching up with the bigger ships. So what we're talking about here is cash generating unit, that's what we call it, consisting now of eight ships, initially it was 20 ships, we have sold out, we have eight ships left. And the amount that we talk about 60 million, it looks as a big amount, but it should be seen in comparison to a fleet value of more than $1.8 billion, so it's not a big thing. And when we look at our main fleet, the standard Supramaxes, the standard Handysize, there's good value of them still.
Martin Fruergaard: And then the current asset market values, we see no risk of further impairments at the moment. And there's a little bit of a technicality why we have taken it.
Nathan Gee: Okay. Thank you.
Martin Fruergaard: Thank you.
Operator: We have another question from Parash Jain. Please go ahead and unmute yourself, Parash.
Parash Jain: Yeah, hi Michael. This one is more on the supply side. So we have been into the world of EEXI and CII, and now perhaps EU ETS. Have you seen a material impact in terms of reduction of effective supply thus far? And if not, do you expect this to materialize in 2025, if not in 2024? And secondly, given relatively profitable last few years and how fragmented the dry bulk ownership market is, do you see any reason why even a 15 year or 18 year old ship owner who would have paid off all its debt and can't care less about depreciation [Technical Difficulty] scrap yard even if Handysize is generating anything above cash operating costs? Thank you.
Martin Fruergaard: Yeah, so first of first question about the environmental regulation IMO and EU and so on, we probably haven't really seen it because reality is the fleet is still doing economic speeder. So even though the rates might look very good, we still -- the average speed of the fleet is still below 11 knots, so you don't really see it. And then of course, we have had some discussions why is that but reality is probably because the calculation on peak consumption versus the value of it, it still justifies that we have -- that the fleet is reduced speed. That might change now, as the market goes up. So I think the rules is so that there will be more requirements year-on-year-on-year. So basically what it does is that it will be hard at a certain time to keep racing the speeder if you go slower, so there'll be a ceiling on the speed. And then over time, you will see less and less speed, and therefore they will take supply out of the market. But I don't think at the moment, we really have seen the impact of it. I would imagine you probably have seen a little bit of a special more fuel efficient ships calling Europe because at the moment you have EU ETS, so you have to pay, if I remember, on the Co2, so that is probably a different way of operating and utilizing the ships. And I think more modern and more fuel efficient ships are probably calling Europe at the moment. So I think those rules, they will have an impact, but we haven't really seen it yet in it. And then I could talk about -- sorry. Sorry, Parash.
Parash Jain: Yeah, no, that's fine. Yeah, and the second part in terms of what would drive a smaller Handysize owners to hit the scrap yard at these levels.
Martin Fruergaard: You talk about scrapping, and you're absolutely right. Clearly, if the market continues to go up, you will -- everybody who has an old ship will of course do the calculation and will try to trade it as long as it's a positive cash flow contributor to the business. And that's also why we have seen -- every year we talk about the scrapping and every year we see -- we don't really see the scrapping accelerating and that's of course because the market is actually not so bad. So it still makes sense maybe to take you through it right or to try an additional period of time. And with the market outlook at the moment, I'm sure everybody will try to keep them trading as long as possible. But what it actually does for us is, of course, that what we are building up at the moment is a scrapping pool, because of course the ship will get [Multiple Speakers] and will not disappear. So I think fundamentally, even though when you look at the order book, which is around 9%, I think it is, the scrapping pool is also increasing quite a bit. And also if you go in and look at the fleet profile of Handys and Supramaxes, then please notice that the fleet that was built at the last off turn 29 [Phonetic] to 2013, that is actually one-third of the fleet. So the pool of scrapping candidate older ships in the smaller sizes is actually increasing quite a bit over the next five, six, seven years, which I think is you have to look at that when you look at the overall supply situation for the fleet.
Parash Jain: Yeah, no, that's absolutely clear. Just that -- in a near-term probably that lowers the risk of scrapping right?
Martin Fruergaard: It definitely will. Also as a positive market will mean that people will try to trade, keep the ships trading as long as possible, as long as you get a positive cash flow out. And as soon as you see a change in the market, they will probably send them for scrap.
Parash Jain: That is very, very clear. Thank you so much, and have a lovely day.
Martin Fruergaard: Thank you.
Peter Budd: Thank you. I'll take a few questions online. The first question being, you have been active in buying secondhand vessels for the past few years. How is the market currently developing and do you have a target number of vessels for 2024?
Martin Fruergaard: Yeah, so we still have the same strategy. So the strategy will still be to buy secondhand ships. But of course, in our businesses, it's all about being disciplined, and about being counter-cyclical in your decisions on it. And we have to say that the secondhand prices have actually gone up quite a bit actually. So at the moment, actually the availability of Japanese modern secondhand ships is very limited and the prices are very high. We did buy one ship three months ago, that we just got delivered. And we of course, look at all opportunities we see in the market. But we are probably a little bit more, shall I say, disciplined at the moment due to the rapidly increasing asset prices we see at the moment, which is good for ozone and all but of course, it makes us a little bit -- maybe a little more worried about being too aggressive in the second hand market.
Peter Budd: A follow up question; in terms of your Handysizes, and in particular, the smaller Handysizes, how many of these are on your list to sell going forward and how are you approaching investment in low emissions vessels?
Martin Fruergaard: Yeah, so the strategy is still unchanged that we want to renew our Handysize fleet and of course, the age profile of the ships is still that when they become around 20, we do the evaluation as the discussion was before with Parash as well about. Of course, we look at the cash flow opportunities or the ships compared to what sales price we can get for the ships, and do that calculation. So we do that evaluation all the time. But historically, we have been selling the chips where they become around 20 years old. Of course, if the market continues to go up, it might actually be worth to keep trading them. But -- then you can trade them for maybe an additional two, two and a half years, but then I think we will get to a point where we probably will sell them. And the second part of the question Peter was?
Peter Budd: And then your approach in terms of investing in low emissions vessels?
Martin Fruergaard: Yeah, so we have had the project ongoing for nearly two years, with our Japanese partners in respect to a low emission vessel. And you all know, we sort of decided to go for the investment part of it. We’re still in the design phase in it. I think we said all along that the project was so that we were ready to order where we thought the timing was right. I think we learned a lot in the last two years, still a lot of uncertainties in the world in respect to the future of decarburization and availability of fuels and these things. But we know we have to decarbonize. So for us, it's a question about the timing, and of course, also the price and the terms of doing that, but we are progressing with that project together with our partners, so let's see.
Peter Budd: Given your confidence in the outlook for 2024, how will you expect to grow your operating business throughout the year?
Martin Fruergaard: With respect to what the market is, our operating business is, of course, where we leverage the overall relationship we have with our customers around the world, and we have to local offices around the world. So I don't think our operating business actually has anything to do high or low markets. It's all about getting access to the cargo and combining ourselves out of it that I think we shown that we are good at that part. We have opened up an office in Dubai about a year ago, who's been very active also, because it's a growth area for us. And we just opened up an office in Singapore. So I think that's also the investment we do besides of course, investing in ships, we invest in the offices around the world, because that actually generates the activity, both in our coal fleet, but definitely also on our operating part. So our ambition is to grow that part of our business as well, because it's just linked to the business we do anyway.
Peter Budd: And then last question, how should we expect vessel costs going forward and is there room to reduce costs further?
Martin Fruergaard: Of the?
Peter Budd: Handysize and Supramax vessel costs, operating costs?
Martin Fruergaard: Well, I would say that our cash breakeven is about 5500, it is OpEx. I think we run our ships for -- we own ships for life, that's why we have ships as it's turning 20. I think we are quite competitive in our cost picture but we do also invest in our ships, because that's how we run a safe and efficient operation. I don't think there's a big role in respect the cost to do it. I think there's room for us to improve our efficiency and the optimization of our fleet, and that has probably more to do with bunkers, as a fuel cost of fuel consumption, and that's why we put silicone paint on it, on the ships. We use data to try to figure out how to position the ship, how fast to go, and so on. That's where the money is. And remember, the cost of fuel is just so much more than the OpEx in it so for us. Of course, the focus is on that part, because we think there's actually room to improve forever. And that doesn't mean that on OpEx we won't constantly look at how to do things better, but I think the room for real improvements are that part of it, I think that's more limited, actually. I think if we have to look at how we run the ships and how we get a better speed consumption on the ships and other things in that respect and utilize them. We have 90% utilization of the ships and 90% of the time we have cargo on board, it's all about the backhaul and fronthaul, the combination of the ships, that's where the value is. And I think that's actually where we would be really good at, but of course, that's something we need to strengthen all the time, and that's why we focus on digitalization as well because we think through that we can use that data to do better.
Operator: We have another question from Parash Jain. Please go ahead and unmute yourself.
Parash Jain: Yeah, hi, Martin. This will be my last question. Can you remind us the CapEx guidance for 2024 and 2025, both with respect to maintenance CapEx? Are there more scrubber fitting needs to be done? Are there purchases -- of all the purchases that you have already made, how much need to be paid? And one final question is when we think about your capital return, is it fair to say that you're comfortable with your balance sheet as at the end of 2023. So whatever free cash flow that you're likely to generate, minus CapEx minus 50% of payout would be something that will be available for a special dividend or share buyback. Thank you.
Martin Fruergaard: So our CapEx for next year is $65 million, and I think it is in line with what we had in 2023. So now for this year, $65 million, it is in line with what we had last year. We are spending a little bit more money in the dry docks because we now put silicone paint on, because that gives us up to 8% saving on the performance of the ships when they sail afterwards. So again, that's back to this, invest in something that actually gives you some operational saving afterwards. I think that's actually the CapEx we have committed to. Then as always, also, like last year, last year we spent $119 million on secondhand ships, we sold for $100 million in it. And of course, we hope also this year to spend some money on that part of it. And as for our balance sheet, I think Michael and I, we’re sort of very happy with where we are, we're very happy with our liquidity, we're very happy with the cash flow, operational cash flow we have at the moment. And of course, it gives us a lot of strength in the market to do different things in it. And of course, it gives us a lot of opportunities going forward. And of course, it also, if these opportunities -- we can't find enough opportunities and we keep generating a lot of cash yet, then it's going to be hard not to return some of it to the shareholders, which I think we actually have shown that we have done with actually $1 billion in dividends in the last three, four years. So, yeah, we know the pressure you will put on us, Parash, on that.
Parash Jain: I think it makes perfect sense. Thank you so much.
Michael Jorgensen: Thank you very much. Thank you.
Operator: [Operator Instructions] As there are no further questions, we will now begin the closing remarks. Please go ahead Mr. Martin Fruergaard .
Martin Fruergaard: I'd like to thank you again for joining us today and for your continued support of Pacific Basin. If you have any further questions, please contact Peter Budd from our Investor Relations Department. Thank you very much and good evening.
Operator: This concludes our conference call. Thank you all for attending.
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