2020 Bulkers Ltd

OSE:2020

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, welcome to the 2020 Bulkers Q3 Conference Call. [Operator Instructions]

I will now hand it over to the speakers. Please begin.

[Lars Halvorsen, executive]

Thank you, operator. Welcome, everyone, to the third quarter 2022 earnings call for 2020 Bulkers. As usual, I'm also joined here today by our CFO, Vidar Hasund.

Before we start the presentation, I'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 they are subject to risks and assumptions, 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 $7.3 million in the third quarter. We still have an unbroken track record of profitability every quarter since we got our first vessel in operation in Q3 2019. We again outperformed the Capesize Index during the quarter and we achieved average time charter equivalent earnings of $25,800 per day compared to the Baltic Capesize Index, which was approximately $13,700 per day during the quarter. This comes from a combination of some fixed charter coverage as well as our vessels' general higher performance than the standard Capesize vessel. For the months of July through September, we announced a total of $0.30 per share in cash distributions.

During the quarter, we extended the index-linked time charter with haul from Bulk Sandefjord from August 2022 to August 2023. We also converted the index-linked charter from Bulk Sao Paulo into fixed rate charter at $16,146 per day gross plus scrubber benefits. From October 1 until March 31, 2023. On August 9, the company transferred tax domicile from Bermuda to Norway.

Then over to some key subsequent events. So far in the quarter, we've achieved time charter equivalent earnings of approximately $26,700 per day. Today, we declared a cash distribution of $0.10 per share for the month of October. Lastly, during October, we converted the index-linked charter from Bulk Sandefjord into fixed rate charter at $14,392 per day gross plus $4,500 net for the scrubber for the period from October 19 until March 31, 2023.

And with that, I'll leave it over to Vidar.

[Vidar Hasund, executive]

Thank you, Magnus. 2020 Bulkers reports a net profit of $7.3 million for the third quarter of 2022. Operating profit was $9.7 million and EBITDA was $12.7 million for the quarter. Earnings per share was $0.33. Revenues were $18.7 million for the third quarter and the average time charter equivalent rate was approximately $25,800 per day gross.

Vessel operating expenses in the third quarter were $4.8 million. And the average operating expenses per ship per day was approximately $6,600, which includes $300 per ship per day in COVID-19-related expenses.

G&A for the third quarter was $1 million. 2020 Bulkers charged $0.3 million in management fee to Himalaya Shipping for the third quarter recorded as operating income in the income statement. Interest expense was $2.3 million in the third quarter. Shareholders' equity was $154.8 million at the end of the quarter. Interest-bearing debt was $225 million at the end of the third quarter, down from $228.7 million at the end of the second quarter, reflecting scheduled repayments.

Cash flow from operations was $9.2 million for the third quarter. Cash and cash equivalents were $14.6 million at the end of the quarter. The company declared total cash distributions to shareholders of $0.30 per share for the months of July, August and September 2022.

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

[Lars Halvorsen, executive]

As you know, 2020 Bulkers are supposed to pay free cash flow to shareholders on a monthly basis. We've now returned free cash flow for 28 consecutive months. That is every month since we have the full fleet delivered. Both our Q3 2022 distribution of $0.30 per share and our year-to-date distribution of $1.18 equals approximately 15% annualized yield on the current share price. Since inception, we've returned 75% of total paid in equity back to shareholders.

As you can see from this slide, we have, over time, shown strong commercial performance relative to the TCE results announced by our public peers to report separate earnings for Cape and Newcastlemax. Relative to the Capesize Index, we also outperformed earnings-wise 35 out of 39 months.

Over to have a look at the market. After a decent start to the year, we have seen unseasonal weakness in the market during Q3 and Q4. We believe this is largely due to the unwinding of fleet inefficiencies and congestions that have been the factors since the beginning of COVID-19. Additionally, there's been a year-over-year contraction in Brazilian export volumes of iron ore, which has had a negative ton-mile effect due to the long traveling distances. Overall, though, Capesize ton miles is up by 1.3% this year in spite of the slowdown in the world economy.

Then we'll have a look at some earnings scenarios and what that would generate in terms of free cash flow. As you can see from this sensitivity table, which covers November and December this year, taking into account that we have 4 ships at fixed rates, unfortunately at index-linked rates for the rest of the year, we're well positioned to generate free cash flow in the coming months.

Moving on to the illustration for next year. We have taken cover of 2 ships for the first quarter, which is typically a seasonally weak period. With the current chartering book and prevailing fuel spreads, we should be in a position to generate free cash flow as long as the standard Capesize market is above high $7,000 per day. Our goal is to keep monitoring the market and keep it downside protected while giving away as little optionality as possible for the majority of 2023.

Then taking a look at the overall market. For the overall Capesize trade, we actually see that traded volumes are up this year compared to last year while trading businesses are down. Comparing these factors shows that overall ton mile for Capesize is up around 1.3% compared to the same period last year. This is mainly driven by a 32% increase in ton miles for bauxite. For iron ore, ton miles are down 1.6%, negatively impacted by the Brazilian exports and Australian exports are up 1.4%. For the coal trade, ton miles are down 1.9% year-to-date.

As we showed you on the previous slide, the downturn in the market since Q2 is probably not caused by the lack of volumes. We believe the main explanation for the softness is the unwinding of inefficiencies and congestions that occurred following the outbreak of COVID.

As you can see from this slide, the shareholder Capesize fleet import has dropped from an all-time high of 34% in April down to the pre-COVID levels around 26% that we see today. On a more positive note, we think this unwinding is now largely behind us and we don't see increased sufficiently as a significant risk to the market from here on.

Now taking a deeper look at the steel markets. Global steel production ex China was down 6.9% for the period of January through September. Following 4 months of sharp year-over-year declines earlier in the year, September actually showed a 4% increase in production compared to September 2021.

Chinese steel production for January through September fell 3% year-over-year. Following 7 months of year-over-year declines, Chinese steel production increased in August and September by 1% and 18%, respectively.

As a consequence of the continued weakness in the Chinese economy, China has continued to increase infrastructure stimulus by increasing and bringing forward quotas for issuance of local special infrastructure bonds. As you can see, infrastructure and manufacturing fixed asset investments have increased on a year-over-year basis so far in '22 while real estate fixed asset investments are still lagging.

Then over to a closer look at the iron ore market. Chinese iron ore imports were down 1.2% for the period of January through October 2022 compared to the previous year. Imports have, however, picked up during the last months with September and October imports up 4% and 5% year-over-year, respectively. Chinese iron ore port inventories currently stand at 121 million tons compared to 135 million tons a year ago, also down from a peak of 160 million tons in February.

Lastly, we'll have a look at the supply side again, where the order books keep shrinking. It is now down to 5.8% of existing fleet order for the Capesize segment. 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 and that we're facing 3 years with low and declining fleet growth.

Deliveries of Capesize will drop to approximately 10 million tons this year, deadweight tons, from 18 million last year and 25 million in 2020. The order book for 2023, '24 and '25 is very light at 12.5 million, 6.5 million and 1.6 million deadweight tons, respectively.

Scrapping year-to-date accelerated during September as the market weakened and is so far at 2.7 million deadweight tons scrapped, which is down from 3.1 million during the same period last year. If the somewhat weaker spot market continues, we would expect to see an uptick in scrapping particularly given the upcoming environmental regulations we've summarized on the next slide.

And with that, I'll end the presentation and I'll open up for questions. Over to you, operator.

[Operator]

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

[Frode Morkedal, analyst]

Yes. This is Frode of Clarksons. I guess we're just a few weeks away from the new regulations coming in here. I think you have a slide on it. But maybe you can just summarize how you think this will play out on the market balance? I guess it's very little relevance for your modern fleet but yes, I'm curious on the wider implication there.

[Lars Halvorsen, executive]

Yes. I think -- I mean, of course, we're talking about 2 different regulations, EEXI and CII. EEXI, which is a one-off certification that you have to do, I think will certainly lead to some ships having to effectively reduce their trading speed through energy performance limitators, which essentially caps the RPM.

I think it's fair to say that right now, when the market is in a softer spot, although profitable, the speeds are generally lower. So I'm not necessarily sure if you will see any reduction compared to the speeds we currently have. But I think as the market tightens up, you will see ships, older, less fuel-efficient vintages not being able to increase the speed, which, of course, takes away some of the slack that is typically there in the market.

Then when it comes to CII, that's assessed annually and a function of both the emissions but also the trading patterns. And I think, as you know, that regulation tightens year-by-year. But I think that will probably not have a major effect in '23. But it will lead in coming years combined with the order book to, I think, a gradual either speed reduction or in some cases, earlier phaseout of older tonnage.

So it's -- I think it's still tough to quantify but the effect over the coming years will certainly be positive on the margin. And I think it may also be a factor in people's decision on whether to scrap their units or not. I mean we've seen this year in September when the market was weak. I think we saw vessels as young as 2004 built that was scrapped, which could, of course, have something to do with people looking into these regulations and how they will be faring.

[Frode Morkedal, analyst]

Yes. FFA for the future are very low. But do you see any -- so what do you see in the time charter market for Newcastlemax these days?

[Lars Halvorsen, executive]

I mean it's a very liquid market chartering-wise. I think -- I would say the last done premiums are a little bit depending on their design, 135 to 138 range above Capesize Index plus the scrubber benefit. I think what's interesting is you've seen -- I can't name any for Newcastlemax simply because I haven't seen any done recently.

But you've seen some fixed charters for Capesize done over the last weeks, which have been at a premium to the curve. Not just because the ship is performing better than the curve but I think that's telling you that this market, which typically -- is pretty mechanically priced off the curve. There's been probably a case where charters are looking to take on tonnage and owners are not willing to price based on the curve. So I think if anything, I think we've seen some benchmarks that are reflecting slightly more optimistic view than the current FFA curve.

[Frode Morkedal, analyst]

Yes. Makes sense to me. I guess it's -- when I look at calendar '23, I mean it's just like $12,000 per day or something. So to me at least, overly conservative. Anyway, so how would you summarize your dry bulk view now? What are the positives? What are the negatives? What's your overall view?

[Lars Halvorsen, executive]

No. I think the one key message I want to get across is that as I mentioned, the disappointing market that we've had in Q3 and Q4 relative to the start of the year, it's not based on collapse in volumes. I mean volumes are actually up this year. It's not driven by iron ore and coal. It's driven by bauxite. But iron ore and coal are down 1.5% to 1.9% if you look on a ton-mile basis.

What really killed the market compared to where we thought it was going to go was that all these inefficiencies and port congestion that built up during COVID, which frankly, we -- and I think most other players I talked to in the business know that they would go away some time. But we didn't expect it to happen as long as China had the zero COVID policy.

But if you think about it, going from 32% to 34% of the fleet -- Capesize fleet in port in April down to the levels of 26% now, that's adding a lot of capacity to the market. That's worth it. Of course, on the other hand, that's now in the past and we are at levels which are kind of low to mid-range of what we used to see before COVID.

So I think -- I'm not going to make a call on China reopening. But I think it will eventually but not on the timing of it. I think once that happens and we get a bit more volumes going and probably also leading to a bit more congestion, I think we're coming from a firmer base.

Of course, the order book, at the risk of sounding like a broken record, but it's never looked better in the history of Capesize. That's not something that's necessarily going to make you money tomorrow. But I think once we come out of this, we're looking at a period with very low and shrinking fleet growth in combination with those environmental regulations you were talking about.

And then we'll see. I mean it's -- whether it's just blip or a trend. But the fact is as I showed in the presentation, I think we wrote in the report, there's actually been a year-on-year pickup now in steel production both in China and the rest of the world. So I think maybe the sort of worst pain is behind us.

I think regardless for our company, we're focused on one thing. Remember, we have never lost money for a single quarter since we got our first asset on the water. We cannot guarantee anyone that we'll never do it. But I think we have the tools. We have some coverage now for Q1. We're trying to keep as much optionality as long as possible. But of course, even at the levels where the FFA curve is now, we can cover 1 or 2 ships to take the cash breakeven even further down.

It's also generating a pretty decent yield. So I think at least -- we're not in as happy a place market-wise as we thought. But the counterpart of that is people are not ordering ships. And that's going to make eventual recovery stronger and longer when it comes. And in the meantime, we're just going to focus on at least creating some free cash flow to reward our shareholders a little bit.

[Operator]

As there are no further questions at this moment, I will now hand it back to the speakers for any closing remarks.

[Lars Halvorsen, executive]

Okay. Well, I'll just say thank you for dialing in, those who did. And if you find out you have any questions after this call, feel free to reach out. And we'll speak to you next quarter. Thank you. Bye-bye.