2020 Bulkers Ltd

OSE:2020

Earnings Call Transcript 2020-Q2

[Lars Marius Halvorsen, Chief Executive Officer]

Thank you, operator. Welcome, everyone, to the Second Quarter 2020 Earnings Conference Call for 2020 Bulkers. As usual, I'm also joined here today 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 in nature. These forward-looking assumptions are based on the company's current views with regards to future invent and they are subject to risks and assumptions that are subject to uncertainties. Actual results may differ materially. And with that, I will move over to the highlights for the quarter. 2020 Bulkers generated a net profit of $2.4 million in Q2. We're pleased to deliver our fourth consecutive profitable quarter in spite of the challenging market conditions. During the quarter, we also took delivery of our 2 last new buildings. These went straight on to their time charters with Glencore. During the quarter, due to the weak and uncertain market conditions that were still prevailing, we decided to convert Bulk Sandefjord and Bulk Sydney to fix charters to protect our cash flow generation in those weak markets. This subsequently led to commercial outperformance during the quarter. We continued to outperform the Capesize Index during Q2 and achieved average time charter equivalent earnings of $19,100 per day during Q2. This compares to the Baltic Capesize Index, which was approximately $9,900 per day in the quarter. We're pleased to resume our monthly dividends and today announced that we will pay $0.01 per share in dividends for July. This will be payable on or about September 5. The market has improved significantly during Q3. And so far this quarter, we have achieved time charter equivalent earnings of $23,100 per day gross. This compares to the Baltic Capesize average of $23,400 per day. And with that, I will leave it over to Vidar.

[Vidar Hasund, Chief Financial Officer]

Thank you, Magnus. 2020 Bulkers reports a profit of $2.4 million for the second quarter of 2020. Operating profit was $4.7 million and EBITDA was $6.9 million for the quarter. Earnings per share were $0.11. Revenues were $10.8 million for the second quarter, and the average time charter equivalent earnings was approximately $19,100 per day. Vessel operating expenses were $2.9 million, which give an average of approximately $4,900 per day per ship. 2020 Bulkers had 584 operational vessel days in the second quarter. Following delivery of the last 2 new buildings in June, operational vessel days will increase to approximately 730 days per quarter. G&A for the second quarter was $0.5 million and included a noncash share option expense of $0.1 million. Net financial expenses for the second quarter was $2.3 million and include interest expense of $2.1 million, net of capitalized interest. In April, the company entered into interest rate swaps agreements securing an all-in interest of 3% for the outstanding loan under the term loan facility. Shareholders' equity was $137.9 million as of June 30, which gives an equity ratio of approximately 35%. Interest-bearing debt was $257.6 million at the end of the quarter, and the increase from previous quarter reflects the drawdowns for the delivery financing of Bulk Sao Paulo and Bulk Santos. The company reports cash flow from operations of $6 million for the second quarter. Cash and cash equivalents were $16.3 million as of June 30. That completes the financial section. And now back to you, Magnus.

[Lars Marius Halvorsen, Chief Executive Officer]

Now over to our commercial update for the quarter. As you can see from this slide, we outperformed the Capesize spot market significantly during the second quarter with average earnings of $19,100 per day compared to the Baltic average of $9,900. This is both the result of us proactively taking on fixed charter coverage earlier in the year as well as the earnings premium and scrubber savings our ship generate compared to a standard Capesize vessel. Looking at our current chartering situation, all our vessels are on charter to strong counterparts, whereas 6 ships are on fixed charter until the end of the year. We expect to start adding some fixed charter coverage for next year at some point during the third and fourth quarter this year. We are very pleased to resume the monthly dividend payments in conjunction with this quarterly report. We have not included our CapEx program, and we will look to pay out the majority of our free cash flow as a monthly dividend as long as our cash balance is above 7.5% of outstanding debt. Our monthly debt repayments vary by around $1 million per month due to the stage delivery of our ships. And based on the current market rates, taking this into account, we expect to be in a position to regularly pay the majority of previous month's free cash flow as dividends starting in October based on the earnings generated in September. For the remainder of 2020, the 6 ships with fixed charter coverage covers 98% of budgeted OpEx, G&A and debt service for the full fleet. That really means that the revenues generated from 2 ships on index-linked charter is effectively equal to free cash flow to equity for the balance of the year. These 2 ships earned around $27,000 per day net based on today's index rate. And the forward curve for the balance of the year, which is in San Contango, implies earnings of around $30,000 per day for scrubber fitted Newcastlemax. For 2020, we have an estimated cash breakeven of $14,000 per day. We'll now move over to review some of the key drivers we're seeing affecting the Capesize market presently. China is the key demand driver in the iron ore market with around 70% of seaborne iron ore exports. After a short setback during the COVID-19 outbreak, Chinese steel production has recovered to record levels with year-to-date production levels of 2.25% year-on-year. The high levels of steel production has brought Chinese iron ore inventories down to the lowest level seen in a decade measured in days of consumption. The other 2 occasions when iron ore inventories were at the similarly low 24 to 25 days of consumption preceded periods of strong restocking activity. If the same was to materialize this time as well, that will have a positive effect on our market. We believe the weak market experienced in the first half of the year can largely be attributed to the weak exports out of Brazil, which was caused by a severe rainy season as well as maintenance and repairs on Vale's infrastructure. The Brazilian exports are very important as 1 ton exported from Brazil to China ties up 2.5 to 3x the vessel capacity compared to 1 ton exported from Australia. As you can see from the graph on the right-hand side, Brazilian volumes have increased significantly over the last weeks with last week's export being 7.7 million tons compared to the average year-to-date of 5.6 million tons. Moving on to the next slide, we want to show you how Vale's production guidance implies a sharp uptick in production exports in the second half of the year. As you can see, there's been a very strong correlation between Capesize rates and the production volumes of Vale historically. Vale accounts for most of Brazilian iron ore production exports. Q1 and Q2 this year for the reason mentioned earlier today represents Vale's weakest production quarter in more than a decade. Vale recently reiterated their full production guidance to 310 million to 330 million tons of iron ore for the year. If you take out the 127 million tons they produced in the first half of the year, that implies the average production levels in Q3 and Q4 would need to be almost 50% higher than the levels we saw in the first half of 2020 in order for Vale to meet our guidance. As you can see from the historical correlation, there's reason to believe that Capesize rates will recover significantly, if Vale is able to meet this guidance. Lastly, we wanted to have a look at the supply side, where the dry bulk order book is around the lowest level seen in the last 3 decades. Ordering activity year-to-date for Capesize and larger vessels has been virtually nonexistent. Even if scrapping stopped off due to the COVID-19 outbreak and related lockdowns for approximately 2 to 3 months, the run rate of scrapping year-to-date is significantly higher than what we've seen in the recent year. This concludes our market section, and we'll move over to the operator for questions. Operator?