Our Chairman reports on our Group performance
and reflects on the outlook and strategy for Pacific Basin
WE HAVE CREATED A STRONG PLATFORM FOR PROFITABLE GROWTH…
2012 was an important year in Pacific Basin's evolution towards becoming a more focused company and towards achieving our vision for the future.
While the dry bulk market was very weak, we continued to significantly outperform the freight market indices, benefiting from the value of an effective business model and the right people and tools to realise economies of scale for the benefit of our customers and other stakeholders alike. We are committed to our proven strategy to build shareholder value over the long term by fleet optimisation through the market cycles, and by empowering our employees with the tools and processes to improve our levels of service and efficiency and to run our business professionally and responsibly.
I see that strategy in action and, while we benefit immensely from the diversity that comes from staff of 30 nationalities, it is comforting to observe across the Group a collective determination to improve what we do through a common set of sensible business values and a shared mission. For that, I am extremely grateful to all Pacific Basin staff at sea and ashore.
…WHICH HAS DELIVERED POSITIVE UNDERLYING RESULTS AND A HEALTHY CASH FLOW
The Group produced a net loss of US$158 million (2011: US$32 million profit) from an underlying profit of US$48 million (2011: US$58 million).
Basic EPS on continuing operations was a positive HK 21 cents while total EPS was a negative HK 64 cents, and the associated return on shareholders' equity was negative 11%. Our operating cash flow remained positive at US$149 million (2011: US$159 million).
Results for the year were impacted by:- a US$199 million write-off for our RoRo business which is discontinued;
- very weak Handysize and Handymax market spot rates which reduced our vessel operating margins; and
- continued growth of our towage business which delivered a strong contribution of US$38 million.
Positive underlying results and a healthy cash flow were partly attributable to the significant outperformance of our dry bulk business during the weakest dry bulk market since 1987.
Our average Handysize daily earnings fell 23% year on year to US$10,460 per day, still beating the market index earnings of US$7,245 by 44% in 2012 and continuing to demonstrate the value of our industrial and customer-focused business model and the cargo book this brings.
Our Handymax earnings outperformed the market by 31%, but our reliance on relatively expensive medium-term chartered ships in the depressed market resulted in a modest albeit positive Handymax contribution overall.
Group results also benefited from the robust performance of our PB Towage business centred in the active Australian market.
As we had expected, our RoRo business had another loss-making year due to the protracted weak RoRo charter market. In September, following the significant impairment of our RoRo investment at the interim and our decision to exit the sector over the medium term, we secured the forward sale of all six of our RoRo ships to the Grimaldi Group who are taking the ships on bareboat charter in the intervening period, thus eliminating our exposure to the RoRo spot charter market.
In line with our strategic objective of considered divestment of non-core businesses, we disposed of our minority interest in a cargo terminal in Nanjing, cancelled our undrawn commitment to a clean-tech fund and, as announced in March, sold our marine surveying company PacMarine Services, all of which allows us to concentrate more of our resources on our core activities.
DIVIDEND
In view of the Group's positive operating cash flow and, despite the loss-making result for 2012, the Board has recommended a final dividend of HK 5 cents per share (2011: HK 5 cents final, HK 10 cents full year).
THE MARKET REMAINS WEAK AND WE ANTICIPATE A SLOW RECOVERY
We expect the dry bulk market weakness of 2012 to continue through 2013 and that it will take some time before a sustained recovery becomes apparent. While supply-side fundamentals are improving, the market needs longer to absorb the over-supply of mainly larger ships generated by the newbuilding deliveries of recent years. More restrained ordering of Handysize newbuildings has resulted in a healthier balance in our market segment, and 2013 deliveries are expected to be substantially offset by scrapping which should limit further downside in the Handysize spot freight market.
Dry bulk demand in 2012 grew by 7% year on year and the Handysize segment should continue to be reasonably well supported, particularly by healthy growth in Chinese imports of raw materials. However, conditions overall are likely to remain challenging and to generate further vessel acquisition opportunities.
The outlook for the towage market and our PB Towage business in Australasia remains positive for 2013. Our harbour towage job numbers are still on the rise, the offshore construction market remains active, and currently contracted business indicates a continued high degree of utilisation of our tug fleet during the year.
OUR FURTHER INVESTMENT IN DRY BULK
The protracted dry bulk market weakness further impacted ship values over 2012 as we had anticipated. After a one-year pause, we returned to the ship acquisitions market in September, at which time vessel prices had softened to pre-boom levels. In the past six months we have acquired six secondhand Handysize vessels, one Handysize newbuilding resale and one secondhand Handymax vessel.
We believe the timing is right to acquire our preferred types of Handysize and Handymax ships and, as a priority, we are initially focused on secondhand ships which currently offer us better value than newbuildings at today's prices. Availability of the right ships remains tight, but we are well positioned to access both on-market and off-market opportunities as our acquisitions of the past few months have shown.
In October we raised US$124 million through a convertible bond issue on terms that represent an attractive cost of additional funding to further enhance our ability to grow our Handysize and Handymax fleet and to partly refinance our existing convertible bond.
As at 31 December 2012, we had total cash and deposits of US$753 million and net borrowings of US$178 million. Our vessel capital expenditure obligations currently amount to US$236 million payable in the next two years in respect of 16 ships, leaving substantial buying power on our balance sheet for further fleet expansion.
A CLEAR FOCUSED STRATEGY
We reached out for formal feedback from our customers and investors in 2012, the findings of which served to support and refine the direction we are heading while also providing comments on where we can improve and how we can advance our business to the next level. That valuable feedback has resulted in enhancements to the tools and processes with which we arm our staff, and is reflected in a number of new departmental objectives for this year.
On a Group level, our focus will be on five key strategic objectives for 2013, which are to:
1. continue to purchase Handysize and Handymax ships at attractive prices, thereby growing further our fleet of high-quality, owned bulk carriers, selectively capitalising on opportunities that have recently started to emerge;
2. expand our dry bulk customer and cargo portfolio in tandem with our core fleet expansion;
3. enhance the customer experience through decentralised operational support;
4. grow our towage businesses; and
5. consider opportunities for divestment of our remaining non-core activities.
Last year the Pacific Basin team rose to the business challenges and strategic objectives set by the Board and, with the recent purchase of eight dry bulk ships and significant long-term cargo volumes contracted for 2013 and beyond, I am confident that our staff will draw on this momentum and again make similar strides in meeting our objectives for this year.
WE TAKE OUR RESPONSIBILITIES SERIOUSLY
Our platform for creating long-term value is based on good corporate governance and sustainable business practices.
- Corporate governance brings structure and credibility to our decision-making and communications processes, and so we are committed to maintaining our sound internal controls, transparency and accountability to all stakeholders. We believe a solid corporate governance structure underpins all components of our business and enhances stakeholder confidence in Pacific Basin as a partner and a place to invest.
- Sustainable business practices involve good corporate social responsibility. Our CSR initiatives involve commitments to sound operating and business practices, minimising the impact our operations have on the environment at sea and on shore, engaging with the communities where our employees live and work and creating workplace conditions that allow our people to thrive.
We continue to improve our corporate governance and CSR structures not only because of the moral obligation we feel we have to do so, but also because we believe they make our business competitively stronger and positively impact long-term shareholder value.
Once again our standards of corporate governance, investor relations, and safety and CSR management were recognised through a number of awards in all these areas, including the International Bulk Journal's Environmental Protection Award, and The Asset's Gold Awards for Investor Relations and for Social And Environmental Responsibility.
STRENGTH IN OUR SENIOR MANAGEMENT TEAM
Mats Berglund has settled in well as CEO and is proving to be an excellent fit for Pacific Basin. Under Mats, the day-to-day running of the Company is in excellent hands. On page 14, you can read Mats' comments on some of the developments that have been of recent interest or concern to stakeholders.
OUTLOOK
Despite the disappointing RoRo outcome, we can be satisfied with the respectable underlying results that we achieved in 2012 through a lot of hard work in a very weak market. We can expect similarly tough conditions to characterise much of 2013, and I am confident that we have the business model, strategy, systems, reputation, financial strength and – most importantly – the people required to make the most of the continued market turmoil and to emerge from it larger and more competitive.
The Board joins me in thanking our conscientious staff and loyal customers and other stakeholders for their support of the Company over the past year and in the future.
