2020 Bulkers Ltd

OSE:2020

Earnings Call Transcript 2024-Q1

[Operator]

Hello, and welcome to the 2020 Bulkers Q1 Report for 2024. [Operator Instructions] This call is being recorded.

I'll now hand the call over to Magnus Halvorsen, Chairman of the Board. Please go ahead.

[Lars Halvorsen, executive]

Thank you, operator. Welcome, everyone, to the first quarter 2024 earnings conference call for 2020 Bulkers.

As usual, I'm also joined here today by our Chief Financial Officer, Vidar Hasund.

Before we start the presentation, we'd like to remind you that we will be discussing matters that are forward-looking in nature. These forward-looking assumptions are based on the company's current views with regards to future events and are subject to risks and assumptions subject to uncertainties. Actual results may differ materially.

And with that, I'll move it over to the highlights for the quarter.

It was an eventful quarter for us, and I'll start with some of the highlights. We reported a net profit of $28.5 million and EPS of $1.25 million. This includes $20.5 million gain for the sale of Bulk Shanghai, which was booked during the first quarter. Trading-wise, we achieved time charter equivalent earnings of approximately $30,000 per day gross. This compares to the Baltic 5TC index, which averaged 24,286. For the months of June through March, we declared total dividends of $1.99 per share. This includes a $1.68 special dividend from the sale of Bulk Seoul and Bulk Shanghai, which were sold for a total consideration of $127.5 million, resulting in a gain of approximately $40 million.

During the quarter, we also terminated interest rate swaps that were set to mature in August and September for $2.9 million in cash.

Lastly, we also took 2 of our vessels that are turning 5 years in August and September through a dry dock in March. We did this early in order to avoid off-hire at the time, which is usually the best season earnings-wise for Capesize and Newcastlemax. The total cost for the dry dock was $2.2 million for the 2 ships.

Then to some subsequent events. We delivered Bulk Seoul, which was sold, as mentioned, to the new owner on April 4th, and the company estimates it will recognize a book gain of $20.5 million in Q2 2024 for that vessel. Following the sale and delivery to new buyers of the 2 vessels, we repaid $27.5 million of debt, and we entered into a new $112.5 million non-amortizing bank facility at SOFR+195 basis points. The new facility matures in April 2029 and significantly reduces our cash breakeven, which is now lower to an estimated $11,800 per day.

For April, we achieved time charter equipment earnings of approximately $31,300 gross. This compares to the Baltic 5TC average, which was around $20,000. And we also declared the dividend based on the earnings for April of $0.14 per share.

And with that, I will leave it over to Vidar.

[Vidar Hasund, executive]

Thank you, Magnus.

2020 Bulkers reports a net profit of $28.5 million for the first quarter of 2024. Operating profit was $31.7 million, and EBITDA was $34.4 million for the quarter. Earnings per share was $1.25. Revenues were $40.5 million for the first quarter and include a gain of $20.5 million for the sale of Bulk Shanghai. The average time charter equivalent rate was approximately $30,000 per day gross. Vessel operating expenses were $4.8 million and the average operating expenses per ship per day was approximately $6,700 in the first quarter.

G&A for the first quarter was $1.1 million. 2020 Bulkers charged Himalaya Shipping $0.3 million in management fee for the first quarter, which is recognized as other operating income in the financial statements. Net financial expenses were $3 million, including interest expense of $2.8 million in the first quarter. During the quarter, the company terminated the interest rate swaps and received approximately $2.9 million in cash settlement.

Shareholders' equity was $178.9 million at the end of the quarter. Interest-bearing debt was $140 million at the end of the first quarter, down from $206.5 million at the end of the fourth quarter, reflecting scheduled debt repayments and the settlement of the sale leaseback financing for Bulk Shanghai.

In addition, the sale leaseback financing for Bulk Seoul have been classified as held for sale in the balance sheet at the end of the quarter and was settled early in April in connection with the delivery of Bulk Seoul to the new owner.

Cash flow from operations was $13 million for the first quarter. In March, the company completed the dry docking for Bulk Sandefjord and Bulk Santiago for a total cost of $2.2 million. Cash and cash equivalents were $55.5 million at the end of the quarter. The company declared total dividends to shareholders of $1.99 per share for the months of January, February and March 2024.

That completes the financial section. And now back to you, Magnus.

[Lars Halvorsen, executive]

Thank you, Vidar.

Having a quick look at the markets. As you can see here, the Capesize market has started the year on the firm footing with rates during Q1 at times hitting the highest seasonal levels in more than a decade. This is driven by overall strong trade volumes with Capesize toplines, up approximately 9% year-to-date. In particular, volumes during Q1 were driven by strong Brazilian exports on the back of drier than usual weather. Brazilian iron ore shipments are up around 11% year-to-date. We do have a positive outlook on the market, and we currently have all our vessels exposed to the spot market on floating index rates. Following the previously mentioned refinancing, our cash breakeven is lowered significantly. As this chart illustrates, our cash breakeven would have yielded free cash flow in most historic markets. The new and lower cash breakeven, we believe, gives a good basis for cash flow that can be paid as dividends, and it will enable us to run with a high degree of spot exposure if we decide that without being forced to take coverage in the event of temporary market setbacks. We believe this gives us very attractive exposure to the optionality inherent in the spot market.

Here, we take a look at our illustrative dividend capacity on an annualized basis with all vessels spots as we are today. The current FFA market for the balance of year sits around $30,000, which for illustrative purposes, would imply approximately [ NOK ] 2.5 per month in free cash flow generation if that market actually were to materialize.

Then taking a look at some of the main drivers in the Capesize market. As mentioned, overall ton-miles saved on Capesize vessels are up approximately 9% year-to-date, mainly driven by strong iron ore volumes, particularly out of Brazil. Congestion is currently sitting in the middle of the range, observed for the last few years.

Looking more specifically at China, they're in iron ore imports. You see that China is continuing their strong imports, which is up 6%, continuing the growth experienced in 2023. As a function of this iron ore inventories have built and are currently sitting at relatively high level seasonally.

Then over to take a look at the steel market. We see that global steel production for the period of January through March '24 was up 1.4% compared to the same period 2023. This is broken down with a decline in China of around 3.1%, while the rest of the world is up around 4.8%.

And then lastly, we'll go through and have a look at the supply side, which we think is key for the outlook in the Capesize market. The order book is close to the lowest we've seen in 30 years as a percentage of the existing fleet. It's also interesting to see that the nominal order book is at the same level as when the fleet was 1/4 of the size. If you add the fact that active yards building ships above 20,000 deadweight tons according to Clarksons is down approximately 50% since the peak. This creates a very tight situation, where it's hard to add new supply in the near future. The last factor is that yards are quite full and for sure, really not to bill Bulkers if they can take orders for other segments as they make higher margins. We've seen a significant uptick in new building prices. I think when we had this call 3 months ago, we talked about an estimated $70 million for Newcastlemax with scrubber, and currently, we believe deals are being done at $78 million to $80 million for newbuild orders that stretch all the way into 2029 for some deliveries. The deliveries we're seeing now are between '27 and '29.

And with that, I think we will conclude the presentation and leave it over to the operator for questions. Thank you.

[Operator]

[Operator Instructions] And the first question will be from Bendik from Clarksons Securities.

[Bendik Nyttingnes, analyst]

I have a question on the market. You mentioned the FFA contracts currently in -- pricing in around $30,000 throughout the year, but do you have any explanation for why the second half is priced lower than the second quarter? They seem somewhat counterintuitive given the historical seasonality. So if you have any color on -- if you think it's driven by demand uncertainty from China, or if it's just a [ reversion to the mean ] kind of dynamic? Any color would be appreciated.

[Lars Halvorsen, executive]

Yes. I think first of all, as we've said I think a number of times, the FFA market is historically not a very good predictor for where the market actually ends up. It's, of course, useful, and -- well, it's critical to follow because it's what dictates where we can take coverage. And I think it would be normal to put it that way, if the second half of the year was to be weaker than the second quarter, as you say. I think the only kind of arguments I've heard would be, we've had such strong shipments of iron ore in the first quarter, so maybe we won't have the same seasonal effect that may be to -- of course, you can't dismiss that. But on the other hand, if you look at the volumes that have been shipped so far this year, you see Brazil, we're going to have no growth for the full year, you still need 10% higher daily volumes for the balance of the year than what you've had year-to-date? And secondly, I think we all remember that bauxite has become a very important trade, where the season really starts in September. So we are certainly not thinking that it necessarily ends up with the second half being weaker than Q2, and that's why we have our ship spot and haven't taken any coverage for the back end of the year.

[Bendik Nyttingnes, analyst]

We should expect this year locking rates.

[Lars Halvorsen, executive]

Well, I can say, though, on the locking rates. So I think we -- as we mentioned before, we've now changed our cash breakeven level. And I think that's going to awards a lot more ability to ride optionality in the market in the future. I think one of the key attractiveness of Capesize or commodity shipping any segment for that sake is the unexpected disruptions that creates strong earnings. I think I wish to say that we were very clever, and we could predict every spike in the market. But unfortunately, I don't think we or any analysts are able to do that. So I think there's a value to have a high spot exposure over time. And we now have a cash breakeven, which means it will be very rare, if ever, that we have to take coverage to protect cash flow. So I think going forward, you will see us more taking coverage. We are quite happy with the numbers, and we want to lock them in, then taking coverage because the market is weak, and we need to make sure we don't lose money.

Any other questions, operator?

[Operator]

[Operator Instructions]

[Herman Billung, executive]

Okay. Well, if there are no further questions, I think we will thank everyone for dialing in. And if you have any questions after the call, feel free to reach out to any of us. Thanks a lot, everyone.