Chief Executive’s Review
In very difficult market conditions, we can take some satisfaction from the way our dry bulk business model and our team’s hard work have enabled us to reduce our recurring cost base and achieve daily earnings that outperformed the market.
Basic EPS on continuing operations was a negative HK116 cents, and our EBITDA was positive US$82 million (2013: US$118 million) reflecting our continued positive cash generation.
4 Our results were influenced by:
- the impact on our revenues of very low dry bulk market rates since early 2009;
- US$130 million non-cash impairments and provisions reflecting significant changes in the dry bulk and bunker fuel markets; and
- US$91 million towage-related impairment and business disposal charges.
The dry bulk spot market fell more than 60% over the year, undermined by the supply overhang following the 2010- 2012 newbuilding boom and weaker growth in demand – especially from China. The supply-demand balance is further threatened by the 50% drop in bunker fuel prices towards the year end (reflecting the global oil price decline) which resulted in early signs of increased vessel operating speeds, potentially increasing global shipping supply.
Our fleet scale and our team’s ability to optimise ship and cargo combinations and maximise utilisation enabled our average Handysize daily earnings of US$9,340 per day net to outperform the market by 28%.
Our Handymax daily earnings of US$10,460 outperformed the market by a more modest 12% due mainly to low-paying positioning voyages during the first quarter.
During the year we secured several multi-year cargo contracts with customers on both Atlantic and Pacific routes that will facilitate the triangulation and efficient utilisation of our ships.
We maintained good control of our owned vessels’ operating costs which are competitive and averaged US$4,370 per day. Our first half performance was impacted by the higher cost of short-term (and now expired) inward-chartered Handymax vessels during the spike in the US Gulf market at the end of 2013. We also incurred losses on long-term chartered-in ships taken at higher rates primarily in 2010.
We made a number of announcements in 2014 relating to our towage business and these developments over the year are summarised in our PB Towage Business Review.
An important development was the agreement we reached in December to sell our harbour towage business to Smit Lamnalco. The transaction completed successfully in February 2015, resulting in a net book loss of US$9.9 million and a non-cash exchange loss of US$9.3 million. The disposal of the business as a going concern ensured that the staff and crew transferred as an integral part of the transaction and saves us the significant cost of vessel dockings scheduled for this year.
The completion of this transaction leaves Pacific Basin with a towage vessel net book value of approximately US$41.5 million. The majority of these assets are now in the Middle East and only a few remain in Australia and New Zealand where they are being marketed for sale. We have downsized our New Zealand and Australian offshore towage organisation accordingly.
Our exit from the RoRo sector continues on schedule with two of our RoRo vessels delivered into Grimaldi’s ownership in June and December. The remaining two are due to follow into Grimaldi’s ownership within 2015 generating proceeds of around US$60 million.
INVESTMENT AND BALANCE SHEET
We have taken delivery of all 33 secondhand ships that we committed to purchase between late 2012 and early 2014. They have slotted into our cargo systems, are performing well and have made a positive cash contribution despite the weak market.
We currently operate 218 dry bulk ships of which 80 are owned. A further 32 newbuildings (18 owned and 14 chartered) are due to join our core fleet over the next two years.
As at 31 December 2014, we had cash and deposits of US$363 million and net borrowings of US$636 million. Our vessel capital expenditure obligations amounted to US$385 million payable in 2015 to 2017 in respect of our 18 newbuildings ordered at historically attractive prices.
These will be largely financed by the US$350 million, 12-year Japanese export credit agency (“ECA”) loan we secured in April. In December, we drew down an additional US$122 million in conventional ship finance secured against 12 of our dry bulk ships on the water, which we will use to refinance existing loans that mature in the first half of 2015. We received towage sale proceeds of US$69 million in early 2015 relating to the sale of our harbour towage business and our interest in OMSA.
DRY BULK OUTLOOK
Current and medium-term global dry bulk net fleet growth has reduced to around 5% per year.
However, the market has yet to fully absorb the supply overhang. Furthermore, low fuel prices and, in turn, faster vessel operating speeds threaten to worsen oversupply.
Demand has recently been growing at around 4%, and sufficient growth continues to be threatened by the on-going Indonesian mineral exports ban, reduced Chinese coal imports, lower growth in Chinese economic and industrial development and the softer growth outlook for most developed economies (the U.S. being a notable exception). Consequently, we take a cautious view on the freight earnings outlook.
DRY BULK STRATEGY
We strive to manage our dry bulk business to deliver profitable contributions even in a weak market, and seek to safeguard the Company’s strong cash position and EBITDA generation.
Our core business remains firmly focused on the Handysize and Handymax segments and these will receive even more of our attention as our towage business scales down.
We are working hard on making our dry bulk platform even more robust. That includes initiatives to reduce our costs and grow our customer relationships which enhance our access to cargoes – in turn facilitating our continued outperformance of the market. Good control of our vesseloperating expenses, efficient workflows and minimising administrative costs are especially important in these difficult times. We are implementing new ship management and accounting software to facilitate these objectives.
In Handymax, we will concentrate our fleet and cargo focus on a tighter geographical range to provide a better quality service to our customers, enable better ship-cargo matching and to optimise our front and backhaul combinations to generate better vessel earnings.
While we are currently neither buying nor taking ships on long-term charters, we will continue to supplement our core fleet with low-rate short-term chartered ships, which contribute to our service and our results even in the depressed market.
However, this difficult market will present acquisition and chartering opportunities for companies able to access capital.
We remain satisfied with the 51 ships (33 secondhand and 18 newbuildings) we acquired from late 2012 to early 2014, more than doubling our owned fleet and enhancing our competitive cost base. All are well suited to our cargo systems, and will leverage the market recovery when it comes.
We thank our shareholders for their patience during these poor market conditions.