2020 Bulkers Ltd

OSE:2020

Earnings Call Transcript 2022-Q1

[Operator]

Good day and thank you for standing by. Welcome to the 2020 Bulkers Limited earnings call for Q1 2022. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Magnus Halvorsen. Please go ahead.

[Lars Halvorsen, executive]

Thank you, operator. Welcome, everyone, to the first quarter 2022 conference call for 2020 Bulkers. I’m joined here today, as usual, by our CFO, Vidar Hasund. Before we start the presentation, we’d like to remind you that we will be discussing matters that are forward-looking today. These forward-looking assumptions are based on the company’s current views with regards to future events, and hence subject to risk and assumptions that are subject to uncertainties. Actual results may differ materially. With that, I’ll move over to the highlights for the quarter.

We generated a net profit of $5.9 million in the first quarter. This is slightly above our net profit of $5.8 million for the first quarter last year. As we’d like to remind you, we maintain a track record, having been profitable every quarter since we got our first vessel in operation in Q3 2019. We again outperformed the Capesize index this quarter and achieved average time charter equivalent earnings of $24,000 per day. This compares to the Baltic Capesize index, which was approximately $14,750. For the months of January through March, we announced total 26 cents per share in cash distribution.

This is exactly equal to the cash distributions we made during the first quarter last year. During the quarter, we also converted some of our index-linked ships to fixed charters. We did so at $31,640 per day plus scrubber benefits. For those who’ve followed the company for some time, this corresponds to a level which is approximately 10% higher than the similar fixings we did for 2 vessels last year around the same time. During the quarter, Georgina Sousa retired as a director of the company and the secretary, while Mi Hong Yoon was appointed the company secretary and director of the company.

The board and the company would like to thank Georgina for her valuable contributions, and she’s been there since the company was founded and made great efforts for company success.

During April, the company transferred 8 Newcastlemax vessels that we own and operate from subsidiaries domiciled in Liberia to Norwegian limited liability subsidiaries. Lastly, so far in the quarter, we have earned approximately $23,000 per day gross on average across the fleet. And with that, I’ll leave it over to Vidar.

[Vidar Hasund, executive]

Thank you, Magnus. 2020 Bulkers reports a net profit of $5.9 million for the first quarter of 2022. Operating profit was $8.1 million, and EBITDA was $11 million for the quarter. Earnings per share was 27 cents. Revenues were $16.8 million for the first quarter, and the average time charter equivalent rate was approximately $24,000 per day gross. Vessel operating expenses were $4.5 million, and the average operating expenses per ship per was approximately $6,300 in the first quarter.

G&A for the first quarter was $0.9 million and include approximately $0.1 million in legal fees, including in connection with the transfer of vessels from Liberia subsidiaries to Norwegian subsidiaries. Interest expense was $2.2 million in the first quarter. Shareholders’ equity was $151.3 million at the end of the quarter. Interest-bearing debt decreased from $236.1 million at the end of the fourth quarter to $232.4 million at the end of the first quarter, reflecting scheduled repayments. The company reports cash flow from operations of $8.6 million for the first quarter. Cash and cash equivalents were $17.8 million at the end of the quarter. The company declared total cash distributions to shareholders of 26 cents per share for the months of January, February and March 2022. That completes the financial section, and now back to you, Magnus.

[Lars Halvorsen, executive]

Thank you, Vidar. As you know, 2020 Bulkers has a policy to pay out free cash flows to shareholders, and we do so on a monthly basis. At this time, we have returned our free cash flow for 21 consecutive months, which is every month since we had the full fleet delivered. To give you some summary numbers, our Q1 cash distribution was 26 cents per share, the same level as Q1 last year. Looking at today’s share price, that equates to an approximate annualized yield of around 8% during what is typically the low season of the year. I would also mention that, with a fleet that’s just a bit more than 2 years old on average, we have already to date returned 61% of the total paid-in equity in the company back to shareholders.

As you can see from this slide, we have over the last year outperformed the TCE results that are being announced by our public peers who report separate earnings for the Cape and Newcastlemax segments. We see this as a confirmation of the attractive performance of our very modern scrubber-fitted fleet of Newcastlemax, as well as a confirmation that our commercial strategy is working well.

The following slide looks at our cash generation available for distribution to shareholders under various rate scenarios. For the balance of 2022, we remain constructive on the market, having 2 ships fixed at healthy rates and 6 ships on index-linked charters, where all 8 ships also receive a scrubber benefit share. The current FFA curve from May through December sits at $32,000 per day, which, for illustrational purposes, could generate an annualized distributable cash flow of around 30 kroner per share or 2.5 kroner per month. This, again, with the equal and annualized yield of around 25% compared to today’s share price. I think it’s also worth noting that this slide illustrates our very resilient cash breakeven, where, thanks our overall low cash level -- cash cost levels, as well as 2 fixed ships at healthy rates, we’re generating free cash flow available for distribution as long as the Capesize market is above $5,000 per day for the 6 ships on index-linked charters. We believe this is very competitive and highlights the attractive risk/reward investing in our company.

Then, looking at Capesize spot rates year-to-date, they have been following the usual seasonal pattern of softer rates compared to the second half of the previous year. Rates year-to-date have averaged approximately $4,000 lower than last year for the same period. The somewhat softer market is, in our opinion, driven by mainly weaker Brazilian exports, which are down 7.5% year-over-year. This again is driven by particularly wet rainy season. If you look at global iron ore trades, it’s relatively flat, down a modest 0.5% year-to-date.

On the coal sides, where we saw a surge last year, volumes are down around 4.5%. However, the volume declines are being offset by, to a large extent, increased trading distances, where, for example, we’re seeing coal moving from Asia to Europe to replace Russian coal. Also, in spite of a slightly slower start of the year than last year, we wanted to highlight the expectations expressed through the FFA markets. The FFA curve for the balance of the year is meaningfully more positive than what we saw at the same time last year. The FFA contracts, as we mentioned earlier, from May through December are currently trading at around $32,000 per day, compared to $29,000 per day a year ago.

Then, having a look at some of the key market drivers. After a slow start to last year, we saw a strong uptick in the issuance of local special infrastructure bonds in China during the second half of 2021. This has continued in 2022, and we also saw some signals out of China yesterday indicating that they’re looking to step up infrastructure investments further, if not significantly. And as you can see on the right-hand side, we have been seeing a response to this increased issuance of infrastructure bonds, with infrastructure investment increasing recently. However, we still see that the real estate sector has continued to see a deceleration in investments.

Then moving on to look at the steel market. While the second half of last year showed a sharp drop in Chinese steel production, with production being down around 16% from the first half, we have seen a strong uptick in production in recent months. Daily production of steel in China in the first quarter was up 6% compared to the average for the second half of 2021, and this consensus seems to be that China will deliver flat steel production this year compared to last year. That would require a further 5% increase in the daily steel production.

We’re encouraged to see, on the left-hand side, this graph that shows the daily steel output from China measured on a rolling 10-day basis. The latest data point on this graph is 20th April, and that’s continuing to show improvements in spite of the continued lockdowns in China. In fact, the data point for the period ending 20th April showed the highest production since August of last year. Also, we think it’s interesting to see that, in spite of the correction in the Chinese economy, steel inventories have not built materially, here shown by Chinese rebar inventories, which are only 3% above where they were at the same time last year. As you can see on the right-hand side, steel prices were holding up firm as well.

Then looking at the global steel market, based on numbers from the World Steel Association. Steel demand is expected to grow by a modest 0.4% this year, down from 2.7% last year, the World Steel Association further expect growth in steel demand to rebound next year to 2.2%. Reading the reports, they’re citing, among others, the increased stimulus towards infrastructure in China. Looking at steel production outside of China, it was up around 7% in March compared to February. However, down 3% year-on-year. Year-to-date production is fairly flat, down 0.7%.

Then moving on to have a look at the iron ore markets, total iron ore trade globally is relatively flat year-to-date compared to last year, showing a drop of 0.5%, with Chinese iron ore imports down year-to-date by around 4%. For the first part of the year, we saw Chinese iron ore inventories growing both in nominal terms as well as days of consumption. However, we’ve seen a trend reversal in recent weeks, with 8 of 9 last weeks showing that there’s been a drop in iron ore inventories. And, if we look at the right hand of the slide, you will see that Chinese iron ore inventories, in terms of days of consumptions, are not really at very high levels compared to where we’ve been for the last few years, and they’re following the normal seasonal pattern as well.

As mentioned earlier, we believe that the weak iron ore production and exports in Brazil during Q1 is a key reason for the market starting out on a slightly softer note than last year. On the flip side, we do believe that the strong recovery in Brazilian production for Q2 to Q4 could drive a significant recovery in spot rates. Vale, which typically produces 90% of Brazil’s exports, produce 63.6 million tons of iron ore in Q1. This compares to the full year guidance of 320 to 335 million tons.

As an illustration, if Vale was to meet their full year guidance on the low end, the average production for Q2 to Q4 would be 85 million tons. These additional tons, by our calculations, would generate demand for 140 standard Capesize equivalent compared to what was needed to shift the Q1 volumes. We oftentimes hear from investors and market participants that, well, this guidance is not really to be trusted. We looked at their guidance one year forward, going back to 2013, and we actually find that historically they’ve been within 3% of their one-year prior guidance, except from the recent years, so 2019 and 2020.

It’s quite plausible that they missed out in these years because of the Brumadinho accident and the subsequent cultures and maintenance that took place in 2020.

Then moving on to have a look at the supply side, and, as on previous calls, we would like to stress that we believe we’re looking at the most attractive supply side dynamics seen in more than 30 years. The Capesize order book is currently at around 6.3%, which seems to be the lowest data on record according to the Clarkson Shipping Intelligence Network. Capesize ordering was relatively low last year and have remained virtually nonexistent this year. And, given the continued massive ordering in the container space, there’s very little yard capacity available for new orders before 2025. When we do our channel checks, we still see less than 5 Capesize and Newcastlemax slots actively being marketed within the end of 2024. And that’s obviously quite modest, given the fleet size of approximately 1,700 ships today in the Capesize segment. Looking at deliveries of Capesize, they will drop to approximately 10 million deadweight ton this year, which is down from 18 last year and 25 million in 2020.

Somewhat changed from what we saw in the fourth quarter is that scrapping year-to-date has picked up recently. 1.5 million deadweight ton of Capesize has been scrapped year-to-date, giving a run rate of 4.8 million deadweight ton. This compares to 3.4 million deadweight ton last year. We suspect that the uptick in scrapping is somewhat related to the upcoming environmental regulations. As we talked about before, there are new regulations coming in in January 2023. EEXI and CII will lead to a slowdown in average sailing speeds, although it’s hard to estimate exactly how much. It may also lead to some accelerated scrapping of older, less efficient units.

I think, lastly, we just wanted to give a quick summary -- the highlights of the equity story at 2020 Bulkers. We have a fleet of 8 Newcastlemax vessels. It’s the most modern fleet of any listed rival company with assets on the water today, with an average age of just over 2 years. The current status as we look into the end -- last 3 quarters of 2022 is 2 vessels fixed on fixed rates of $31,600 on average, plus scrubber benefits, and 6 ships on index-linked charters that can be converted to fixed rates on our options on the basis of the FFA curve. The FFA curve, for illustration, implies TCE equivalent for a scrubber-fitted Newcastlemax of around $45,000 per day for the period from May through December, if they were converted. This again compares to our cash breakeven budget of $14,900 per ship per day.

We have, and we will continue to, pay our free cash flow as monthly distributions, and so far we’ve paid back 61% of the paid-in equity to our investors. And lastly, we think we are looking at the most favorable supply side dynamics in more than 30 years, and we see very little if anything that could change that for the coming years. And I think, with that, I’ll leave it over to the operator for questions.

[Operator]

[Operator Instructions] We currently have one question, and the question comes from the line of Frode Morkedal from Clarkson Securities.

[Frode Morkedal, analyst]

When I look at the Capesize curve, it’s clearly elevated, I would say, right? As you’ve pointed out, $32,000 per day for the rest of the year.

[Lars Halvorsen, executive]

Yes.

[Frode Morkedal, analyst]

So that’s -- I mean, at least if you look at the macroeconomic backdrop, with lockdowns in China and potentially lower GDP growth, right, so, given those concerns, how do you explain the strength, really? What are the key factors driving [indiscernible] relative optimism?

[Lars Halvorsen, executive]

I think we touched on some of them, and I think one is -- I mean, first of all, that curve, probably, if you were to make it really simple, just reflects the normal seasonality. And I think, if you looked at any year in the Capesize market on average and were to construct the curve for next year on the basis of that, it would look very similar. So it’s essentially repeating a pattern that’s been seen before. And I think, as I mentioned, Brazil has had weather-related issues this year. Was it last week or the week before, they gave their production statement and they stuck to their guidance. Obviously, as I said, if we do the math, if they’re going to meet their guidance, it’s going to mean a surge in long-haul demand. One ton transported from Brazil requires 3 times the vessel capacity of one ton transported from Australia.

And that’s also what prompted us to go in and look at this statement, which we very often hear, that, well, [indiscernible] is always missing on their guidance. And again, we looked at the guidance they give in December on what they call Vale day and what they deliver the year after, and the 12 months after production has actually been very tight, except for ’19 to ’20, to what they guided. So I think there’s no reason to dismiss that as just wishful thinking. I will agree that, if you look at Vale’s longer-term -- kind of looking 2, 3, 4 years out -- guidance, the track record has been a lot more spotty.

And then, of course -- which frankly surprised us as we were reviewing the data, if you -- if you look at the lockdown situation in China, you would think that there’s a full slowdown in all industrial activity. However, if you look at the steel production data -- and this is -- this is not data that came out 3 weeks ago or a month ago. I mean, the last data point was 7 days ago, and it comes out every ten days. It shows the highest level since August. So of course we see, I agree -- I mean, how China handles this outbreak is definitely a risk factor. It would be foolish to say anything else. But for now I’m surprised how well production is keeping up. And I guess the flip side, as we saw after the initial COVID outbreaks, is, whenever there is a setback in the economy, you tend to see a response in terms of increased spending. And, as you may have read, there was a meeting yesterday of the central committee for financial and economic affairs in China, and there were some pretty bold and, I would say, aggressive statements made from Xi following that where increased infrastructure spending seems to be part of it.

And then I think other things that is giving some support to the market is, of course, although volumes are not necessarily up from last year, because last year was a strong year, but the [indiscernible] changes we’re seeing on the coal side in light of the Ukraine war and, I guess, the general energy crisis. So I don’t know if that answered your question, but I think, first of all, you can start off with saying that this curve is not reflecting a pattern that’s never been seen before. Rather to the contrary, it’s reflecting a pattern that you tend to see every year.

[Frode Morkedal, analyst]

Yes, sure. So the pattern is up -- seasonality -- but the absolute rate level above 30,000 is a fairly high level, right. So -- but, I guess, if -- whenever lockdowns are over, I mean, as you said, there should be an acceleration economic activity in China again, so that’s part of it, I would think. But are you tempted to switch some of your floating charters into fixed charters when you look at that FFA curve?

[Lars Halvorsen, executive]

Yes. I won’t comment on anything we’re doing until we do it, but I think -- I think I’ve said before it’s something that we do look at literally every day, and we calculate various scenarios on how doing one or more ships would impact, both on the up and downside, the balance of the year.

[Frode Morkedal, analyst]

Yes. Understand. So the current 2 charters, basically if the curves are low -- cash breakeven in the spot market of $5,000, right, so -- you know. But you have -- in terms of the mechanics, is it basically you would achieve the Capesize equivalent rate of $32,000 per day? And then the alternative would be to keep as closely and then perhaps achieve the premium of, as you’ve mentioned, 45,000 per day, if that’s…

[Lars Halvorsen, executive]

No, no. We -- I mean, if -- no, no. If we convert, we get the curve plus our premium. So we would lock in the 32,000 plus our premium, which I think, on average, if you look at our commercial reports, have been around 35%, plus the scrubber premium. So that is what we can lock in.

[Frode Morkedal, analyst]

Yes. Okay. So 45,000, right?

[Lars Halvorsen, executive]

Around that level doesn’t seem to be a bad estimate. But keep in mind, with the curve at the last time -- at the same time last year -- I think -- and I think I’ve said this before. I mean, the curve has a relevance, because it can be monetized. I think it’s more often than not right on the direction of the market. However, the actual levels tend to not come in where it’s priced at any point in time. So last year, for instance, at the same time, May through December was pricing $29,000, and we ended up with Q2 at 31, Q3 at 42 and Q4 at 42. And again, back to -- if you believe in Vale and what they’re saying, there’s going to be a very big push coming sometime now as the rainy season ends. And the recovery in the last few days, just to comment on that -- it’s not related to increased Brazilian volumes. It’s related to quite strong activity out of Australia.

[Operator]

Your next question comes from the line of [ Clement Mollins ] from [ Value Investors ].

[Unknown Analyst]

You provided very interesting commentary on China steel output continuing to strengthen, even after recent lockdowns. What are your expectations for the remainder of the year? And, regarding coal trade, could you provide some further commentary on the expected gains on [indiscernible] demand?

[Lars Halvorsen, executive]

Well, I think, if we were to pretend we have the crystal ball for China and could estimate exactly where steel production comes in, I would be lying. I think what we -- what we have seen is, as I said, stimulus efforts that started during the third, fourth quarter last year and have continued in Q1. Typically you see a few months’ lag with -- from infrastructure stimulus efforts are being made until actual steel production increases, and we’ve followed that pattern. Then it’s the question, is this COVID lockdown situation going to derail this pickup or not? And I say, if I didn’t have the data, I would probably be willing to make a bet that it would derail it, and let’s see in a few days when the next data point comes out. But, so far, we are not seeing a reduction in the steel production, so it seems that perhaps this is -- the problem for now is contained in the bigger ships, but it’s an evolving situation.

And I think -- I think directionally, as well, with the news that you probably saw coming out of China yesterday -- they will be pushing even harder on the infrastructure stimulus. So I think that’s back to what are the market expectations, which is for flat steel demand in China this year? I think we could flip it around and say that seems reasonable, barring any unforeseen COVID consequences. And then you could also say that flat steel demand this year doesn’t sound like a lot, but again, given the sharp downturn we had in the second half of last year, flat steel production this year would actually mean daily averages close to 10% higher for all of this year than what we saw second half of last year.

And I think, on the coal side, again, I’d like to speak about it more directionally, rather than -- rather than giving a number on the ton mile equation. But I think, if you look at some of the trades that are being done, they are definitely creating increased ton miles. We’ve seen coal go from even Australia or Indonesia to Europe, with what’s been ongoing, of course, which is not new. The theory is that China is not buying Australian coal, so they’re taking coal from as far away as the US. We’re also seeing India, where there seems to be a lot of demand these days, are sourcing from as far away as the US. And it’s tough to say, but now, with -- because this situation is evolving almost day by day, if Russia is not sending gas to Poland, I’m quite sure that some of the guys in Asia with import contracts are going to be diverting some cargos to Europe to sell at a bigger premium, which again would be supporting for coal demand. So things have been turned a little bit upside down, I think, on the coal side compared to what we’ve been used to seeing over the last few years.

[Unknown Analyst]

That’s helpful. And, turning to the supply side, new [indiscernible] has been very low year-to-date, and the order book is indeed sitting at very attractive levels. You mentioned your capacity to build Capesizes or Newcastlemax is very low, but has capacity also started to tighten going into 2025? And could you provide some additional commentary -- wait, sorry. Go on. Go on.

[Lars Halvorsen, executive]

No, sorry. I will -- yes. Continue your question, please.

[Unknown Analyst]

Okay. And could you provide some additional commentary on newbuild pricing [indiscernible] continue to increase?

[Lars Halvorsen, executive]

Yes. I think, to take those questions, first of all, just there’s no misunderstandings, we are not looking to order ships. We are focused on paying equity back to shareholders. Of course, we do continuously analyze the market, and part of that is asking ship brokers when you could get delivery of a new ship. And, literally speaking -- and we tend to use 2 or 3 sources for this -- there are probably 4 ships being actively marketed that could be built within 2024 in China.

And then, as a consequence of that, of course, the rest will have to come in 2025. Others -- hardly any order book for 2025. If I look at the Clarksons data, the order book for ’25 is only 400,000 deadweight tons. Some of this is end of March, so something may have happened. But I think, as a consequence of that, there must be slots available. But we still see a hesitance to order, and it could have to do with several things. One is of course the fact that prices are pushing up. I think, for a -- what I’ve seen for a standard Newcastlemax without the scrubber, and delivering typically in ’25, you’re probably looking at $66 million, and then you probably have to add 2.5, $3 million to get that ship with the scrubber. And if you’re looking at something running on LNG, you are -- or dual fuel capability, you probably have to add $15 million on top of that again, so you are in the kind of low eighties.

And I think this inflation is of course coming on the -- on the back of higher steel costs, higher energy prices and also labor costs, where there is meaningful inflation. So I’m happy to see, every time we open the broker report on a Monday and it says, Capesize or dry build sector, no new ships ordered. That’s good news, and there’s been a lot of that, and it’s just pushing out further. And I think we have to thank, I guess, all the ordering in the container space, to some extent.

[Operator]

[Operator Instructions] Your next question comes from the line of Magnus Fyhr from H.C. Wainwright.

[Magnus Fyhr, analyst]

Just -- most of my question was answered related to your chartering strategy going forward, but I don’t know if you have any data on what your scrubber profit share was for 4Q versus 1Q, if you have that data per vessel per day or however you want to quantify it.

[Lars Halvorsen, executive]

Well, I’ll admit I don’t. We of course have it. I don’t have it in front of me. Let me see. [ Vidar ], is there any way we can pull that up quickly?

[Vidar Hasund, executive]

Would you like an average number on the…

[Magnus Fyhr, analyst]

Yes, yes, no, just an average. I just want to get the magnitude of the change from 4Q to 1Q and, with oil prices at current levels, we could expect -- what kind of premium we could expect going forward.

[Vidar Hasund, executive]

Yes. We mainly…

[Lars Halvorsen, executive]

We -- I think -- can we get -- because we report it on a monthly basis. Can we consolidate numbers and get them back to Magnus? I think [indiscernible].

[Magnus Fyhr, analyst]

Yes, yes, yes. No worries.

[Lars Halvorsen, executive]

We don’t have that in front of us in the room we’re sitting.

[Magnus Fyhr, analyst]

I hear you. Okay. Looking forward to hearing back from you, and congrats on a good quarter.

[Lars Halvorsen, executive]

Well, thank you for dialing in.

[Operator]

Thank you. There are currently no further questions. I will hand the call back to you, sir.

[Lars Halvorsen, executive]

Okay. Thank you. I think we then conclude the conference all and thank you for everyone who dialed in and listened. And, if you have any questions, feel free always to contact us. And again, I will remind you that, if you’re looking to follow the Capesize market and how the index and FFA market is progressing, you can always follow our Twitter accounts, where we try to make it transparent for our investors to see what’s going on in the markets. Thank you, everyone, and we speak next time. Bye-bye.

[Operator]

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.