2020 Bulkers Ltd

OSE:2020

Earnings Call Transcript 2022-Q2

[Operator]

Good day and thank you for standing by. Welcome to the 2020 Bulkers Limited Earnings Call for the Q2 2022. [Operator Instructions]

I would now like to hand over to your speaker Mr. Magnus Halvorsen. Please go ahead.

[Lars Halvorsen, executive]

Thank you, operator. Welcome everyone to the second quarter 2022 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 would 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 they're subject to risk and assumptions that are subject to uncertainties. Actual results may differ materially. And with that, I'll move over to the highlights for the quarter.

2020 Bulkers generated a net profit of $12 million in the second quarter which is up from $5.9 million earned during the first quarter. And with that we continue our track record having been profitable every quarter since we got our first vessel in operation during Q3, 2019.

We continue to outperform the Capesize index and achieved time charter equivalent earnings of $32,300 per day. This compares to the Baltic Capesize index, which was around $21,600 per day during the second quarter.

For the month of April through June, we announced a total of $0.52 per share in cash distributions. In April 2022, the company transferred 8 Newcastlemax dry bulk vessels that we own or operate from subsidiaries domiciled in Liberia to Norwegian limited liability subsidiaries.

Then I'll go over to some of the key subsequent events so far in the third quarter. We have achieved time charter equivalent earnings of around $30,300 per day gross. On August 09th, the company transferred its tax domicile from Bermuda to Norway. On August 10, Neil Glass and Mi Hong Yoon resigned as Directors of the company, while Viggo Bang-Hansen was appointed as a Director. The Board and the company would like to thank Neil and Mi Hong for their good contributions for the company and for the time they were Directors.

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

[Vidar Hasund, executive]

Thank you Magnus. 2020 Bulkers reports a net profit of $12 million for the second quarter of 2022. Operating profit was $14.5 million, and EBITDA was $17.4 million for the quarter. Earnings per share was $0.54. Revenues were $23.3 million for the second quarter, and average time charter equivalent rate was approximately $32,300 per day gross.

Vessel operating expenses were $4.3 million and the average operating expenses per ship per day was approximately $5,900 in the second quarter. G&A for the second quarter was $1.3 million and include approximately $0.3 million in fees incurred in connection with the transfer of vessels from Liberia subsidiaries to Norwegian subsidiaries. 2020 Bulkers is charging management fee to Himalaya Shipping on a quarterly basis.

Interest expense was $2.3 million in the second quarter. Shareholder's equity was $154.6 million at the end of the quarter. Interest bearing debt was $228.7 million at the end of the second quarter, down from $232.4 million at the end of the first quarter.

Cash flow from operations was $14.5 million for the second quarter. Cash and cash equivalents were $18.4 million at the end of the quarter. The company declared total cash distributions to shareholders of $0.52 per share for the month of April, May and June 2022. That completes the financial section.

And now back to you Magnus.

[Lars Halvorsen, executive]

As you know 2020 Bulkers has a policy to pay free cash flow back to shareholders on the monthly basis, and we have now returned free cash flow to our shareholders for 25 consecutive months which is every month since we have the full fleet delivered.

Our Q2 cash distribution was $0.56 per share equal to an annualized yield of around 20% based on yesterday's closing price. With a fleet that's a bit more than 2 years old on average, we have to-date return 72% of total paid-in equity back to our shareholders.

As you can see from this slide, we have overtime shown a strong commercial performance relative to the time charter current earnings results announced by our public peers, report separate earnings for Cape and Newcastlemax. In fact we have outperformed all peers during each quarter except on the first quarter this year. This confirms the attractive performance or scrubber fitted Newcastlemax.

The following slide looks at our test generation available for distribution on the various rate scenarios. For the balance of 2022, we have 2 ships fixed at healthy rates and 6 ships on index-link charters. The current FFA curve for September through December sits around $16,000 per day, which for illustration purposes could generate an annualized distributable cash flow of around NOK 14 per share, which would equal an annualized yield of around 12%.

It's also worth noting that this slide illustrates our resilient cash breakeven. Thanks to our overall low cash breakeven combined with 2 ships fixed at healthy rates. We generate 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 find this to be very competitive and also highlight's the attracting risk awards in our company structure.

Looking at Capesize spot rates year-to-date, after a decent start to the year. We have seen a correction during the third quarter, a correction that's somewhat unusual from a normal seasonal perspective. The correction rate is mainly driven by a significant unwinding of congestion and fleet inefficiencies where the percentage of Capesize vessels import have fallen from historical high at the beginning of the second quarter, down to current levels which are back to the normal range seen prior to the COVID disruptions. Although, overall trade volumes have been healthy, ton miles have been negatively impacted by the weak Brazilian exports which are down 3.6% year-over-year.

Now taking a look at the steel markets, global crude steel production was 1,003 million tons for the period ended January through June 2022, this is down around 5% compared to the same period in 2021. Chinese steel production for the same period fell by 6% year-over-year, with June production showing a somewhat better trends only down 3% year-over-year. This is compared to earlier in the year when production was running at rates around 10% lower than the similar level seen in 2021.

In spite of the slowdown in the Chinese economy and implicit steel demand, Chinese steel rebar inventories are currently 20% below the level seen at the same time last year. We have however seen a correction in prices with Chinese steel rebar prices down around 10% year-to-date.

Following the continued weakness in the Chinese economy, China continues to increase infrastructure stimulus, by increasing and bringing forward quotas for issuance of local government special infrastructure bonds. The issuance of such bonds for more than 3x high during the first half of 2022 compared to the first half of 2021.

As you can see, Chinese infrastructure and manufacturing fixed asset investments have increased on the year-on-year basis so far in 2022, while real estate fixed asset investments is still lagging. As a response, Chinese regulators have recently announced that they will provide liquidity to support selected private developers through the underwriting of new local bonds.

Taking look at the iron ore market. Total iron ore trade is relatively flat year-to-date compared to last year globally. Our coal mines have been negatively impacted on the year-on-year basis given the decline in Brazilian long-haul volumes.

Chinese iron ore imports were down 3% for the period from January to July 2022. But they've shown a more positive trend recently with imports in July of 5% from year-over-year. For the first part of the year, we saw Chinese inventories growing in normal terms, as well as, in days of consumption. However, inventories drew down sharply during the second quarter before building back somewhat over the last few weeks. They currently sit at levels around the average seen since 2017.

As we have discussed in the past the Capesize market has historically shown a strong correlation with Vale's production and Brazilian exports, which are typically higher in the second half of the year. So far this year, Brazilian exports are down 3.5% compared to the same period last year. And Vale has recently lowered their production guidance to 310 million to 320 million tons for the year, down from your prior guidance of 320 million to 335 million tons.

Vale's updated guidance still implies a significant uptick in production volumes for the third and fourth quarter this year compared to the first and second quarter. We expect this will give some support to the market if it materializes. As you very often hear that Vale's guidance is not to be trusted, we have here included an overview of their track records in meeting their one year prior guidance.

As you can see Vale production has historically come in fairly close to their guidance given one year earlier except from the years 2019 and 2020, where they saw a negative impact on Brumadinho accidents and the following repair and maintenance.

Now looking at the supply side, the order book keeps shrinking and it's now down to 5% of the existing fleet on order. This in combination with Chinese yards essentially having very little capacity for new orders between now and the end of 2025 gives us great visibility that we're facing 3 years with the historically low feed growth.

Delivers of Capesize will drop to approximately 10 million dwt on this year down from 18 million last year and 25 million in 2020. The order book for 2024 and 2025 is very light at 5.7 million deadweight tonnes and 0.4 million deadweight tons respectively.

Scrapping year-to-date has been relatively modest with 10 vessels totaling 1.67 million deadweight tons scrapped. This is down from 3.1 million tons during the same period last year. If the somewhat weaker spot market persists we could expect to see an uptick in scrapping particularly given the upcoming environmental regulations.

We have talked about this upcoming regulations in the past on previous calls and to make it short, EEXI and CII comes into effect on January 2023. And they will give modern fuel efficient tonnage such as 2020 Bulkers fleet benefit over older legacy tonnage.

Lastly, we'll conclude by giving a quick summary of the highlights in our investment case. We have a modern fleet of 8 Newcastlemax mix vessels all scrubber fitted with an average age of around 2.5 years. 2 of the vessels are fixed -- on fixed rates until the end of the year at $31,640 per day plus scrubber profit shares.

We have 6 ships on the index-linked charters that we converted to fixed rates on the basis of the FFA curve. The FFA curve implies TCE for a scrubber fitted Newcastlemax of around $24,000 per day for September through December 2022. This compares to our cash breakeven budget of around $15,300 per ship per day, and we pay everything we earn back to shareholders as monthly distributions where we so far has paid back 72% of the paid-in equity in the company.

Lastly, we are looking at the most favorable supply side dynamics in more than 30 years. And with Chinese yards filling up even further, we feel that like that runway is becoming more secure and longer as we go on quarter-by-quarter.

And with that, I will leave open for questions.

[Operator]

[Operator Instructions] The first question come from the line of Frode Morkedal from Clarksons.

[Frode Morkedal, analyst]

I know you've touched upon it already. But maybe you could just summarize your thoughts on the recent spot rate decline, and what's going to move it higher in the near term?

[Lars Halvorsen, executive]

Well, I think if we were going to give one main reason for the decline, which, frankly I think has caught us and many others by surprise, is the fact that largely all fleet inefficiencies that I guess it could attribute to COVID disruptions seem to have been dissolved over quite short periods. And I think one part of it probably relates to the fact that Australia in their 14 day quarantine which had created some additional waiting time on that side. I think the others maybe more surprising part is, in spite of China's zero COVID policy. We're seeing very efficient turnaround times.

At Chinese ports where, Cape or Newcastlemax typically can arrive and discharge turnaround in 4 days these days. So I think that's obviously hurt the market. And I think now we are at least back to as you see from that graph here in the presentation. The sort of mid to slightly below mid range or where we were pre-COVID. So this, I don't see as a particular risk at least going forward, and now I guess it's a more normal picture where and the disruptions create risk to the upside.

I think when it comes to volumes, there's -- that is not the main culprit in our view. I think we have some negative impact from the lack of export performance from Brazil. I think we don't know that if you're going to trust Vale's, we should expect a pickup which would be in line with normal seasonality, and all history shows that, that has an impact on rates. So that could be one of the things driving the markets going forward.

I think other things that's worth noting is, because of the weather season and maintenance bauxite exports out of West Africa, which is a growing trade for Cape and Newcastlemax, has been a bit lower, but expected to pick up again in Q4. So we'll see -- we feel at least the -- I don't know if that's -- this is the right method, we certainly didn't see the unwinding of congestion coming out given the zero COVID policy still in China, but at least now it's happened and that's our of the market. So I think those are kind of the shorter term considerations.

Longer term, I think we do have this very supportive supply side picture, where the yards are just getting -- continue to be filled up largely with container orders. And there is actually very, very little capacity marketed from the yards before 2026, I mean, there is probably a few stops left in 2025, but not many. So I think we're -- in the longer term, we're going into a few years now with increased environmental regulations and particularly from 2024 onwards, very, very low fleet growth.

So I think that gives us some comfort. Of course, another thing that could support the market, we're seeing this -- I mean, China -- the Chinese economies is definitely struggling, as we know, but we also know China's historical response has been with stimulus. We are seeing that stimulus increasing. And we think that will have an effect on infrastructure spending. There were some news out yesterday, which I mentioned on the call as well, the property sector is what struggling the most, and it seems like government entities are trying to step in with some credit support. So whether that will be a game change overnight, I don't think so, but it seems that they're actually there to support it and that we could see some marginal improvement.

[Frode Morkedal, analyst]

Second question I had is, well, you have a great dividend policy each month. But if you look at the current share prices versus the NAV, would you also consider share buybacks? Or is dividend just wholly specific?

[Lars Halvorsen, executive]

No, I think our main way of returning capital is definitely these free cash distributions that we are making. Of course, we are out there to look at what makes the most sense in terms of creating shareholder value. So that's a Board decision that will have to be taken at some point. But if the discount gets too wide between underlying values and the share price, it will be natural for the Board to discuss buybacks. So I don't think I can give any more color than that, but we are committed to our share -- our capital return policy, mostly through cash distributions. But, of course, I mean, if we come to a point where the Board thinks it's a better use to maybe use some funds. I mean, in theory, yes, that's not something I wouldn't rule out.

[Frode Morkedal, analyst]

Final question is maybe you can just talk about the decision to remove tax domicile in Norway, pros and cons, if there are any cons?

[Lars Halvorsen, executive]

No, I think I can tell you it's been a very extensive process where the Board has used for a longer period of time, what we think are better advisers locally and internationally. I don't think I'm going to go into kind of pro and con analysis. But I think the conclusion is clearly that we think this is for the long-term benefit of the company. And as part of that, we've also done an analysis of our shareholder base, and we believe that it should be neutral or for the benefit of the majority of the shareholders. But we believe that the Norwegian tonnage tax regime offers a very transparent and efficient structure for shipping companies such as ours, and we believe that's a good structure to be in.

[Frode Morkedal, analyst]

At least Norwegian investors avoid double taxation. So that's good.

[Operator]

[Operator Instructions] We have no further questions at this time. I hand back the conference to you for any closing remarks.

[Lars Halvorsen, executive]

Okay. Thank you. Then I want to thank everyone that dialed in. And if someone has any questions, always feel free to reach out. Thank you, everyone. We'll conclude the conference call.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect your lines. Speakers, please stand by.