Pacific Basin Shipping Limited

Welcome to today's Pacific Basin 2023 Annual Results Announcement Conference Call. I am pleased to present Chief Executive Officer, Mr. Martin Frueger, 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. Frueger, please begin.

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 Frohgård, CEO of Pacific Basin, and I'm 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 earning per share of 16.5 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 reopening. Our large core business generated $167 million before overheads, despite the weaker freight market, while our operating activity, which includes vessels chartered 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 and fleet's deadweight 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 ball 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 commit us 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 Anti-Size Index and the Baltic Exchange Supermax Index were 8,990 and 10,680 net per day, respectively. Despite increased dry bulk loadings overall in 2023, Anti-Size and Supermax market freight rates declined due to decelerating 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 ton-mile demand resulting from 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, which 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 handy size and supermax 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 ball demand, a typical trend after the conclusion of the Lunar New Year festivities Additionally, the limited transit of dryball vessels through the Suez and Panama Canal continues to benefit supply, which should also support freight rates. Please turn to slide six. Global dryball loading volumes grew approximately 2% year-on-year, supported by China's reopening. Miner bulk loading increased 1% in 2023 due to increased loading of bauxite, steel and ores and concentrates. Bauxites continue to be the main driver of increased miner bulk loadings, primarily from Guinea and which are mainly carried in Cape size and Panamax vessels. Grain loadings decreased by 1% on year year-on-year due to limited exports of grain from Argentina and the United States due to drought, while the Ukraine Black Sea exports remain affected due to the conflict. Brazil achieved record grain loadings in 2023, benefiting from favorable weather conditions, improved agricultural practices, and increased demand from 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 imported record coal as favorable economic growth, though 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 supermax vessels. Please turn to slide seven. Our core business generated average handy size and supermax 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, the much stronger 2022 earnings. Our TCE earnings in the fourth quarter 2023 for both our handy-sized and supermax vessels were positively impacted by prior period freight tax adjustments, which relate to freight earnings completed by our vessels in the past few years and are not changes in accounting treatments. For the first quarter 2024, we have covered 100% of our committed vessel stays on both our handy-sized and supermax vessels at 11,170 and 13,480 net per day, respectively. For 2024, we have covered 54% and 71% of our core business days for handy size and supermaxes at 10,160 and 12,610 net per day, respectively. Please note our supermax forward cover estimates exclude the scrubber benefit, which is currently about 1,110 per day across our core supermax 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 front haul cargoes. Please turn to slide eight. In 2023, our handy-sized and our supermax vessels outperformed the indices by 3,260 per day and 3,150 per day, respectively. Our large core fleet of handy-sized and supermax vessels contributed $97 million and $70 million, respectively. Our handy-sized and supermax vessels have now outperformed the index over the last nine and 10 quarters, respectively. Our Supermax vessels' outperformance has benefited from scrubber installed across our core fleet, with scrubber contributing $850 per day to our outperformance in 2023. Currently, our core vessel compromise of 57 Supermaxes, of which 32 are fitted with scrubbers. Our operating activity generated a positive margin of 1,090 net per day over 23,480 operating day. Our operating day 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 upwards moving freight market during the end of the period. Please turn to slide nine. Our hand-designed 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 break-even level reducing to 4,930 net per day, which is a 13% reduction year-on-year. Please turn to slide 10. Our Supermax and Hedgesize's old vessel depreciation costs increased mainly due to higher dry docking costs and investments in fuel efficiency technology, including silicone and anti-fouling paints. Our blended Supermax costs remain cost competitive, and we are scheduled to re-deliver five higher cost long-term chartered vessels during 2024. These vessels were chartered in during the higher rate environment of 2022. Indicative old fleet cash break-even level reduced to 5,090 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 Supermax vessel and one handy size vessel. In 2023, we have sold eight vessels consisting of seven handy size and one Supermax vessel with an average age of 20 years. Additionally, we sold one handy size vessel in 2024, which we expect to deliver to the buyer by May 2024. Given increasingly strict existing and incoming decarbonization regulation, such old 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 own fleet of supermax vessels by acquiring high-quality modern second-hand vessels and to renew our handy-sized fleet by replacing our older and less efficient handy-sized vessels with younger and larger handy-sized vessels. Our core fleet consists of 132 handy-sized and supermax vessels, and including chartered vessels in our operating business, we have approximately 266 vessels underwater 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 Hattie size and Ultramax vessels. During the period, we took delivery of three Japanese built Hattie size 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 four Japanese-built heavy-sized 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 note that these handy-sized and supermax vessels are newer, larger, and more efficient with the ability to earn approximately 20% and 16% above the speed, respectively. Our collaboration with NSY 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 regional 2030 target. However, we anticipate ordering activity within our sector for such 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?

Thank you very much, Martin. And good evening, ladies and gentlemen. Please turn to slide 14 for an overview of our 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 chartered costs. Our G&A has decreased, mainly due to lower discretionary remuneration provisions, given the low result for the period. we took a one-off non-cash impairment of $16 million relating to eight of our smaller, older handy-sized vessels. It's important to note that their carrying values represent only 4% of our own fleet. These eight vessels are below 30,000 tons deadweight carrying capacity with an average age of 15 years, which have less earnings capacity compared to our main fleet of standard handy-sized and supermax 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 handy-sized vessels, one Supermax vessel, and one Ultramax vessel, which we delivered in the period. In December, 2023, we successfully concluded our first sustainability link 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 our most important ESG issues. CAPEX spending remains well controlled and for 2023 total $252 million of which we paid approximately $119 million for one second-hand handy-sized vessel and eight second-hand 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 $280 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 committee 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 borings are now just 2% of our own vessel's 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, including missile 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. Thank you, Michael.

Please turn to slide 18. Minor bulk sea bond demand is forecasted to increase 3% in 2024, which is supported by improved global macroeconomic conditions and increased demand from China. While iron ore and coal demand forecasts are down, we see further upside to estimates, given 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 Medellin continue to remain complex. Combination has resulted in an increase in ton mile demand as vessels are being rerouted from these key transit routes, which we expect to continue to support ton mile demand. Please turn to slide 19. High new building prices, uncertainty around emissions regulation, and a long delivery time of about three years have continued to discourage any significant new ship ordering over the period. 2023 Hadley-sized and Supermax new building ordering was down 22% compared to 2022, but the dryball order book is currently 8.5% of total feed. 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 cargo, non-dry bulk vessels. Please turn to slide 22. Our focus is on the gradual decarbonization 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 decarbonization regulations, such as Fuel EU Maritime, which is a directive to drive the gradual takeoff of renewable and low carbon fuels when trading into and from EU, which will be efficient from 2025. We also note the proposal for a package of maritime fuel carbon intensity reduction rules known as the US Clean Shipping Act and International Marine Pollution Accountability Act, His proposal is to implement requirements for shore power and a greenhouse gas levy, which is applicable to voyage into and from the U.S. with the aim of zero emission by already 2040. Please turn to slide 25. In the medium term, we believe dry-boil 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 deter excessive new vessel orders It will force progressively slower vessel speed and eventually also accelerate scrapping, supporting dryball rates. We have a positive outlook on the future of the dryball 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 anticipate the growth and progress of our company and industry. As we embark on the 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 enthusiastic about the long-term potential of dry ball shipping. We believe that the robust demand for dry ball shipping will continue. 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.

We will now begin a question and answer session. If you have a question for today's speaker, please join the Zoom link via the blue ask a question button. Press the raise hand button and you will enter a queue. After you are announced, please unmute yourself, state your name and company and ask your question. If you find that your question has been answered before it is your turn to speak, please press the lower hand. and button to leave the queue. We currently have one question from Andrew Lee. Please go ahead and unmute yourself.

Hello. Hi. Can you hear me? We can hear you, Andrew. Hey, hi. Hi, everyone. Hey, thanks very much for the call. It's very useful. I have a few questions, right? My first question is that in your previous results, sorry, 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 basically I'm saying, are you expecting the recovery to be happening from today? Second question is on shareholders' returns. 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 22, 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? Fourth question I have is... Could you give us a little bit of guidance on your total core operating days, right? For both the supermax and the handy size. The reason I say that is because we know how much long-term charter days you have, but during the year last year, you had some changes in your own fleet when you sold some, and then you also had some new, well, secondhand shares being 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.

And the last question, Andrew, is you're talking about the core fleet or the operating fleet?

The operating, the core fleet, right? So how many days are you going to have this year for the supermax and the handy sizes?

Yeah. Okay. Well, maybe I could take the first about how optimistic we are. And then, Mike, you 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 can just look at the rate levels that we have now. Actually, if you forget 21 and 22, the rate level in the market today, that's the best we have seen since, I think, 2014 or 15. So it's a start to the year. The market is really strong. Of course, it has the 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 rate. 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 sort of indicate the direction of the market, it looks very, very positive actually at the moment. Of course, I think as always, A little bit back to normal, so I'm sure we'll have some seasonality during the year, but we have a very good start to the year at a high level. So I think that's very positive. You want to take the share back?

Yeah, then there was a question about share buyback. And it's correct. We are mentioning in our presentation here that our policy is to pay out a 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're 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 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.

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 market. And what we saw end of last year was 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, make the operating part a little bit tough in the short term. So you have to sort of transition into a different market. So you could say the fluctuation end of 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 turned around 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 both our outperformings of the index on the core 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 a month or two ahead in it. I hope that answered that question. In respect to the operating, the core missiles days, does it say that? The activity level. So the activity level, you can say, yes, we are selling out. You can say when you look at our deadweight capacity on the core fleet, on the own 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 Pacific Basin, you can say coming into 2021, where we had a very good market in 21 and 22, 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 continue to see improving markets, 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 older handy sizes we sold. We have taken, I think it's about 11 new buildings being delivered from Japan on 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.

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. Thank you.

We have a question from Parash Jan. Please go ahead and unmute yourself.

yeah hi uh thanks uh michael and martin and congratulations on good set of results and especially uh thank you michael for running a pretty prudent capitalist 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 are 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 rate throughout the year and secondly is 2023 is pretty much a China growing like no tomorrow in terms of the import of dry bulk volume while the rest of the world was sluggish. Do you see a sort of China flattening out while the rest of the world starts to grow as your base assumptions when you talk about the growth number? Maybe if you can handle these two first.

Thank you for the questions, Paresh. First of all, the Atlantic in respect to the Panama Canal and the the aden, straight up aden, the Red Sea, Of course, it has an impact on our business. 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 add up to, of course, to an improvement in the market. And I think this big difference you saw between the Atlantic and Pacific that we had in the last year and early this year, which is historically, you know, 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 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 in April. The The thing is, of course, when you position the ships, I think about 45% of the heavy-sized fleet is normally at the moment in the Atlantic, and I think a little bit less of the supermax 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 ships being transferred. positioned back into the Atlantic. So, of course, that drives the market up further. But actually, in the last year, the Pacific market was not very good, actually. But that has, of course, rebounded quite a lot at the moment. I think it's a good question as well on China and the world economy. I think, first of all, I think, as I said, IMF has actually raised the growth expectation for the U.S., 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 and believe that 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 market I don't know if it's going to grow. I think there has been a little bit more rain that has helped the southeastern parts of the hydro energy at the moment, but there's still a lack of rain on that part. So I think there's many fundamentals that when we look at China, it actually looks very busy. And when I talk to the chartering team, they say China is very, very active in steel and also now in forest products that they started importing again. So very mixed signal for China and 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 little bit more optimistic about the future, which I also think IMF actually is as well as they increased the levels. Yes.

Thank you, Parash. We have another question from Nathan G. Please go ahead and unmute yourself.

Hi, Martin. Hi, Michael. Thanks for the call. Just a question on impairment. So look, this is the second impairment you've taken around this small handy size ships. You took something a lot larger in 2020. Just help us understand this given the optimistic market outlook and how it jibes with the impairment. And also just is there any further risk of impairments ahead, particularly with the small handys? Thanks.

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 handy sizes. 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 handy sizes, the older handy sizes have a little bit challenging in catching up with the bigger ships. So what we're talking about here is a cash-generated 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, $16 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 supermaxes, the standard handset sizes, there's good value in them still.

And at the current asset market values, we see no risk of further impairments at the moment. It is a little bit of a technicality why we have taken it.

Thank you.

Thank you.

We have another question from Parash Sham. Please go ahead and unmute yourself, Parash.

Yeah, hi, Michael. This one is more on the supply side. So we have been into the world of EXI 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 to scrapyard, even if handy size is generating anything above cash operating costs? Thank you.

Yeah, so first a question about the environmental regulation, IMO and EU and so on. You know, we probably haven't really seen it because reality is the fleet is still doing economic speed. So even though the rates market looks very good, 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 speed consumption versus the value of it still justifies that the fleet is at 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 and year and year So basically what it does is that it will be hard at a certain time to keep raising the speed if you go slower. So there will 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 it. a little bit of special, more fuel-efficient ships calling Europe, because at the moment you have EU ETS, so you have to pay a fine on the CO2. So there's 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 to talk about, sorry, sorry, Prash.

Yeah, no, that's fine. Yeah. And the second part in terms of what would drive a smaller handy size owners to hit the scrap yards at these levels.

You talk about scrapping and you're absolutely right. Clearly, if the market continues to go up, 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 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 it through a dry dock to try an additional period 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, Pares, is of course that what we are building up at the moment is a scrapping pool. Because of course the ship will get older and not disappear. So I think fundamentally, even though when you look at the order book, which is around 9%, I think it is, You know, the scrapping pool is also increasing quite a bit. And also, if you go in and look at the fleet profile of Handys and Supermaxes, then please notice that the fleet that was built at the last upturn, 29 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.

Yeah, no, that's absolutely clear. It's just that in the near term, probably that lowers the risk of scrapping, right?

It definitely will. So as a positive market will mean that people will try to keep the shift trading as long as possible, as long as you get a positive cash flow. And as soon as you see a change in the market, they will probably send them for scrap.

It's very, very clear. Thank you so much and have a lovely day.

Thank you. I'll take a few questions from 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?

Yeah, so we still have the same strategy. So our strategy will still be to buy secondhand ships But of course, in our business, it's all about being disciplined and about being countercyclical 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, should I say, disciplined at the moment due to the rapidly increasing asset prices we see at the moment, which is good for us all in all. But of course, it makes us maybe a little more worried about being too aggressive in the second-hand market.

A follow-up question. In terms of your handy sizes, and in particular the smaller handy sizes, how many of these are on your list to sell going forward, and how are you approaching investment in the low-emissions vessels?

Yeah, so the strategy is still unchanged, that we want to renew our handy-sized 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 of 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 ships when they become around 20 years old. Of course, if the market continues to go up, it might actually be worth to keep trading them. And 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?

And then your approach in terms of investing in low emissions vessels.

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 methanol 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 when we thought the timing was right. I think we learned a lot the last two years. Still a lot of uncertainties in the world in respect to to the future of decarbonization 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.

Given your confidence in the outlook for 2024, how will you expect to grow your operating business throughout the year?

But irrespective of 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 the local offices around the world. So I don't think our operating business actually has anything to do with high and low markets. It's all about getting access to the cargo and combining ourselves out of it. And I think we've shown that we are good at that part. We have opened up an office in Dubai about a year ago. It's been very active also because it's 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 core fleet, but definitely also in 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.

And the last question, how should we expect vessel costs going forward? And is there room to reduce costs further? Handysized and supermax vessel costs. The operating costs.

Well, I would say that... Our cash break even is about 5,500. It's the OPEX. I think we run our ships for, we own ships for life. That's why we have ships that'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 you run a safe and efficient operation. And I don't think there's a big room in respect to the cost to do it. I think there is room for us to improve our efficiency and the optimization of our fleet. And that has probably more to do with Bunker's fuel costs, fuel consumption. 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 further in it. 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 on that part of it. I think that's more limited, actually. I think 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. We have 90% utilization of the ships. So 90% of the time we have cargo on board. It's all about the backhaul, the front haul, the combination of the ships. That's where the value is. And I think that's actually what we are 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 it better.

We have another question from Parash Jam. Please go ahead and unmute yourself.

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 after the purchases that you have already made? How much needs to be paid? And one final question. When we think about your capital return, is it fair to say that you are 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.

So our capex for next year is $65 million. And I think it's in line with what we had in 2023. So for this year, $65 million is in line with what we had last year. We are spending a little bit more money in the dry dogs 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 in it. I think that's actually the capex we have committed to. And then as always, also like last year, last year we spent $190 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 to our balance sheet, I think Michael and I, we sort of, very happy with where we are. We're very happy with our liquidity. We're very happy with the cashflow, operational cashflow 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, if we can't find enough opportunities and we keep generating a lot of cash, 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 dividend the last three, four years. So, yeah, we know the pressure you will put on us, Paresh, on that part.

I think it makes perfect sense. Thank you so much.

Thank you very much. Thank you.

At this point, I would like to remind the attendees, if you have a question for today's speakers, please join the Zoom link via the blue ask a question button. Press the raise hand button and you will enter a queue. After you are announced, please unmute yourself, state your name and company and ask your question. We'll just take a moment to pause to see if there are any more questions. As there are no further questions, we'll now begin the closing remarks. Please go ahead, Mr. Martin Furugard.

I'd like to thank you again for joining us today and for your continuous support of Pacific Basin. If you have any further questions, please contact Peter Bott from our Investor Relations Department. Thank you very much and good evening.

This concludes our conference call. Thank you all for attending.