2020 Bulkers Ltd

OSE:2020

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the 2020 Bulkers Q3 Report for 2023. For the first part of this call, all participants are in a listen-only mode. Afterwards, there will be a question-and-answer session. [Operator Instructions] This call is being recorded.

I'll now turn the call over to your speakers. Please begin.

[Lars Halvorsen, executive]

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

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

And with that, I will start with some of the highlights for the quarter. In the third quarter, we generated a net profit of $5.2 million. This figure includes $1.9 million, which is the estimated final insurance settlement for the Bulk Shenzhen collision we had back in August 2021.

And with these results, we safely maintain our unbroken track record of being profitable every quarter since we got our first vessel in operation. We, again, continued to outperform the Capesize Index. We achieved time charter equivalent earnings of $21,000 per day gross. This compares to the Baltic Capesize Index, which was around $13,400 per day during the quarter.

For the month of July through September, we did make total cash distributions of $0.12 per share. And today, we have announced another one for the month of October of $0.20 per share, which interestingly represents 2.25% of the current market cap for 1 month's earnings.

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

[Vidar Hasund, executive]

Thank you, Magnus. 2020 Bulkers reports a net profit of $5.2 million for the third quarter of 2023. Operating profit was $8.2 million, and EBITDA was $11.1 million for the quarter. Earnings per share was $0.23. Revenues were $17 million for the third quarter, and the average time charter equivalent rate was approximately $21,000 per day gross.

The company recognized $1.9 million in insurance settlement as other operating income in Q3. Vessel operating expenses were $4.9 million, and the average operating expenses per ship per day was approximately $6,700 in the third quarter.

G&A for the third quarter was $0.8 million. 2020 Bulkers charged Himalaya Shipping $0.2 million in management fee for the third quarter, which is recognized as other operating income in the financial statements.

Net financial expenses was $2.8 million, including interest expense of $2.9 million in the third quarter. Shareholders' equity was $157.3 million at the end of the quarter. Interest-bearing debt was $210.2 million at the end of the third quarter, down from $213.9 million at the end of the second quarter, reflecting scheduled debt repayments.

Cash flow from operations was $7.1 million for the third quarter. Cash and cash equivalents were $16.5 million at the end of the quarter. The company declared total cash distributions to shareholders of $0.12 per share for the months of July, August, and September 2023.

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

[Lars Halvorsen, executive]

As mentioned, we continued to show strong commercial performance, not only relative to the market and Capesize Index itself, but also relative to the results we're seeing announced by other public peers who do report and break out their earnings for the Cape and Newcastlemax segment. Of course, this, to a large extent, reflects the additional earnings power that our scrubber-fitted Newcastlemax have relative to standard Capesize.

Moving on and looking at the market. The market started out, as we talked about before, pretty normally this year with seasonal weakness in Q1 before improving somewhat into Q2. We've had a year overall with quite good volumes and demand. Capesize ton-miles were up 3.7% year-to-date.

However, during Q3, in particular, and we'll look closer at this later on, this was, to a large extent, offset by a significant unwinding of congestion. We've seen the market pick up again in Q4 and rates are, so far this quarter, around $24,000 a day, up from $13,400 on average during Q3.

Then, looking at our dividend or cash distribution capabilities, as mentioned, we showed some of our operational leverage through the $0.20 dividend or cash distribution that was announced today based on the month of October.

We currently have all our vessels open on index-linked charters, i.e., no fixed charter contract coverage. And I think if you look at it, it gives you an idea of the exposure we have to what we believe is an improving Capesize market. And, of course, the reason why we have chosen not to have any fixed exposure for the time being.

Although a poor predictor rates actually end up historically, as a reference, we can say that November to December. FFA curve of this year is around $15,500 a day. And the curve for next year is around $13,900. Taking a closer look at what's been driving the trade growth this year.

As mentioned, we've seen Capesize ton miles grow by around 3.7% year-to-date. The main contributor is the increased bauxite trade, which is largely long-haul volumes from Guinea into China. That trade itself grew by 30% in ton-mile terms.

We've also seen the iron ore trade grow by around 3.2%. This growth both in Australia and Brazil. I guess, Australia has grown at around 1.5% this year, whereas Brazil is at a higher run rate. So with this good demand growth, why hasn't the market been better? By all means it's okay, but I think it's fair to say that Q3 was a bit disappointing.

And I think you see that on the graph here on the right-hand side. We had a massive unwinding of congestion. Here, we measure it by the percentage of the Capesize fleet, which is in port at a 7-day moving average. Of course, everyone knows that there was a buildup of congestion during COVID. We had the first round of unwinding of that during the period after May 2022. And then, we've seen a significant unwinding now again during Q3 largely.

I think what we can take away from this chart, which goes back to 2027 (sic) [ 2017 ] is that we are now at levels that would be low pre-COVID, pre any of these disruptions we were witnessing for a while. Of course, everyone who follows shipping knows that time to time we do get disruptions, and it's very rarely that machinery runs smoothly all the time. And I think now at least this represents an upside risk to us going forward.

Then, looking at, of course, China, I would say, almost contrary to the narrative in the press. Of course, China is struggling with its property sector. Perhaps surprising to some, iron ore imports in China are up 6% year-to-date. And I think it's even more interesting to see that in the context of how they are drawing inventories.

Inventories are now significantly, as you can see here on the right-hand side, below the 5-year averages. And I think we have to assume that, that does mean there will be a restocking taking place at some point, which obviously would be supportive to the Capesize markets and our market.

Looking at the steel market, world ex-China steel output came in around 4% high year-over-year for the month of September. I see this graph has been cut a bit too early. So we'll make sure we post an update of that one. China monthly steel output is still up year-over-year on an annual basis. So though September, as an isolated month, was down 6% after growing in August.

I think, lastly, we are still very much encouraged by the outlook of the supply side going forward. According to Clarksons, the Capesize order book is now down to 5%, which should be the lowest level in the history of their time series. And we know, thanks to the significant ordering interest for containers and LNG, also to some extent smaller tankers that we have seen over the last years, that yards have very really limited capacity, number one.

And number two, I guess, Capesize and Newcastlemax are a lower-margin product for them. So there are, of course, a slot here and there that can be dug out, but the significant capacity available for building new Capesize or new Newcastlemax vessels really comes from 2027 onwards.

And that, of course, means that we have a pretty good idea of what will come out on the supply side, and it's not really much that can change that. We expect 6.8 million deadweight tons to be delivered next year, down from around 11 this year and around 7 next year. So next 2 years, we'll see muted fleet growth compared to what we've seen in the previous years.

We are not looking to order any new builds. But of course, we follow the market. And I think based on the input we are getting from yards and brokers, the pricing for Newcastlemax with the scrubber today is very close to $70 million. And the yards are also tightening their payment terms.

So given how cheap assets are in the secondhand market and also the valuation of publicly-listed dry bulk companies, it does not really make much sense to -- for any financial investor at least to look at ordering new builds today.

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

[Operator]

[Operator Instructions] The first question will be from the line of Bendik Nyttingnes from Clarksons Securities.

[Bendik Folden Nyttingnes, analyst]

I'm just curious on your market expectations, especially going into the fourth quarter and the first quarter of next year. Are you seeing any sort of factors or deviation that could alter the usual seasonality in winter breaks?

[Lars Halvorsen, executive]

Yes. I mean, first of all, for those who follow us, we never kind of predict rates or guide on rates. So what's our job as a company is, of course, a big part of this job when we set up and when we made sure we had assets that generate a good premium to the benchmark vessel, and we have a financing and operating structure with a pretty low cash breakeven.

I think in terms of the dynamics of the market, the bauxite trade, as we touched upon, have become an important factor. I mean, it's now around 10% of the Capesize market in ton-mile terms, up from 5% a few years ago. That is also quite seasonal market where the main season for shipment volume starts late September, early October, but it actually runs into Q1.

So it remains to be seen, but I think there's a decent chance that the increased bauxite volumes will have a positive impact on Q1. I mean, I think definitely, Q1, as always, will be the weakest quarter. But with these bauxite volumes, it might help it a bit.

And then, I guess, if your question kind of is why don't you take some cover now into Q1. And I think it's really about the risk-reward. Remember that if we take coverage, we do that on the basis of the FFA market. The FFA market, as mentioned many times before, is a horrible predictor of where it actually end up, but it's relevant because that's where we can fix at any given time if we want to go fixed.

Right now, the FFA market for Q1 is around 8,500 a day. And I think if you just go back and make a simple analysis, just look historically, I mean, what had Q1 rates been? They have, I would say, mostly been above that level. They have very really in the recent years been below. I can give you some numbers. This year, it was $9,150. Last year, it was $14,700. The year before, it was $17,001.

Of course, COVID was bad. It was $4,005. In 2019, it was $87. In 2018, it was $13. I'm not going to go through the whole list, but it basically shows you that if you're locking in now, you're basically locking in the levels that are obviously we've seen for a few years.

And with the prospects with good trade flows with increasing bauxite trade and with few ships to be delivered, that doesn't seem like a good idea. You will be giving up a lot of optionality. So I think we have a constructive underlying view on the market. So I don't find the FFAs that we could kind of lock in for Q1 attractive on a risk-reward basis whatsoever.

That being said, of course, keep in mind that we have always safeguarded cash flow in this company. And if the market turns really bad, and we need to take some coverage to protect profitability, we have at least always done that in the past. I mean, we've never lost money for a single quarter, but we have certainly had quarters where we have been positive on the market, like the COVID quarter, if you will, Q1 2020, we had most of our ships open and then rates went to $2,000.

Of course, then we had the ability with the small fleet like we have of 8 ships to turn around very quickly and take over. Of course, then you have a contango in the FFA curve. So for now, we're happy to play it open. And I think the good thing is the market right now is quite good. October, you saw we were able to generate $0.20 per share in the month. And so far, this month or this quarter, the rates have averaged $24 to around $20 today. So I think we're quite happy with the positioning.

[Bendik Folden Nyttingnes, analyst]

Perfect. That's great color. And congratulations on the strong October performance.

[Operator]

The next question will be from the line of Jørgen Lian from DNB.

[Jørgen Lian, analyst]

Just wanted to ask about your thoughts on the outlook in Q1. You discussed a bit with the FFA it's around $8,500 a day. And then the potential CapEx commitments coming up with regard to dry dock. Is there any debt capacity to cover that? Or how do you think about the cash balance against those commitments and the timelines?

[Lars Halvorsen, executive]

I think what we are likely to do now is probably -- I guess we haven't guided on that yet, but I don't think it hurts to say it. It's not unlikely that we will dry dock 2 ships during low season this year.

And if you look at our cash balance, it is -- there's quite a lot of buffer there. And I guess we were in -- we were unlucky when it happened. But on top of the cash balance you're seeing and what we are generating in this market in the coming months, we will be receiving an insurance settlement quite shortly. So we are well prepared to take those 2 dry dockings.

And then I think you shouldn't expect that we do anything until we get into 2025, and we have a plan for that. So I wouldn't think about kind of any change to the debt level or anything to handle that. We have a comfortable cash position.

[Operator]

[Operator Instructions] As there are no more questions, I will hand it back to the speakers for any closing remarks.

[Vidar Hasund, executive]

Yes, I think we have covered what we wanted to cover. If you forgot to ask a question, don't hesitate to reach out. And thank you, everyone, who joined for joining.