2020 Bulkers Ltd

OSE:2020

Earnings Call Transcript 2024-Q3

[Operator]

At this time, I would like to welcome everyone to this 2020 Bulkers Earnings Call for Q3 2024. Today's call is being recorded. If you have any objections, please disconnect at this time. [Operator Instructions]. And afterwards, there will be a question-and-answer session.

I'll now turn the call over to the Chairman, Magnus Halvorsen. You may now begin.

[Lars Halvorsen, executive]

Thank you, operator. Welcome to the Q3 2024 Conference Call for 2020 Bulkers. I'm joined here today by our Chief Financial Officer, Vidar Hasund; as well as our Chief Commercial Officer, Lars-Christian Svensen.

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 regard to future events and thereby subject to risk and assumptions that are subject to uncertainties.

Actual results may differ materially. And with that, I'll start with the highlights for the quarter. We reported net profit of $11.6 million and an EPS of $0.50. Trading-wise, we achieved time charter equivalent earnings of approximately $36,000 per day gross. This compares to the Baltic 5 TC index average of 24,900. During the quarter, we declared total dividends of $0.57 per share for the months of July through September. This represents an annualized yield of approximately 16% compared to our current share price. For October, we have achieved time charter equipment earnings of $31,400 per day gross. And today, we declared a dividend of $0.15 per share based on the earnings for October. And with that, I will hand over to Vidar.

[Vidar Hasund, executive]

Thank you, Magnus. 2020 Bulkers reports a net profit of $11.6 million for the third quarter of 2024. Operating profit was $12.5 million and EBITDA was $14.7 million for the quarter. Earnings per share was $0.50. Revenues were $19.9 million for the third quarter. The average time charter equivalent rate was approximately $36,600 per day gross. Vessel operating expenses were $3.9 million, and the average operating expenses per ship per day was approximately $7,000 in the third quarter.

G&A for the third quarter was $1 million. 2020 Bulkers charged Himalaya shipping $0.4 million in management fee for the third quarter, which is recognized as other operating income in the financial statements. Net financial expenses were $0.7 million, including interest expense of $1.1 million. The interest expense is impacted by $1.2 million transit from other comprehensive income relating to amortization of realized gain on interest rate swaps. As of September 30, the realized gain on interest rate swaps have been fully amortized through interest expense. Shareholder's equity was $157.9 million at the end of the quarter. Interest-bearing debt was $112.5 million at the end of the third quarter and is nonamortizing until maturity in April 2029.

Cash flow from operations was $14.8 million for the third quarter. Cash and cash equivalents were $21.2 million at the end of the quarter. The company declared total dividends to shareholders of $0.57 per share for the months of July, August and September 2024. That completes the financial section. And now back to you, Magnus.

[Lars Halvorsen, executive]

Thank you, Vidar. Just to summarize our financial robustness, we'd like to show you this graph illustrating our very low cash breakeven. As you can see, we have a cash breakeven of around $11,700 per day, which we should be able to achieve with standard Capesize rates of 6,900 given our vessels earning premium and the scrubber benefits. This is a great foundation for our ability to distribute dividends back to our shareholders.

Now looking at our dividend potential. This graph shows the theoretical free cash flow with all vessels trading spot as they are today. The current FFA curve for the balance of the year would indicate a dividend potential in the high teens on a run rate basis.

And the FFA curve for next year, around 21,000 would indicate dividend potential of around 15%. Of course, as we know, the FFAs are volatile, so it should be taken just as an indication of where we could lock in rates today, should we wish to do so. However, as Lars-Christian will go through now, we have a fairly constructive view on the market for 2025.

And with that, I will leave it over to our Chief Commercial Officer, Lars-Christian .

[Lars-Christian Svensen, executive]

Thank you, Magnus. So far in 2024, we had a solid year with rates 66% above 2023 levels. We can thank much of this rate jump to the Capesize ton-mile impact, which has grown throughout the year. Iron ore and bauxite from Brazil and Guinea are the large drivers of this trend and the ton-mile forecast for these two particular trades are anticipated to continue its positive trajectory as we're moving closer to 2025. The coal ton-mile impact so far in 2024, however, has been negative for the Cape and Newcastlemax sentiment. Even though we see healthy coal volumes transported, the Panamax sentiment, which is struggling to find its own feet, have been eating into the Capesize volumes and has been responsible for multiple Capesize cargo splits during the period.

The Cape and Newcastlemax congestion has moved from low range to midrange over the last month, which we identify as a bullish signal as less ships will be available to transport fresh cargo volumes. As we mentioned, the iron ore ton-mile has been good in 2024, which is also reflected in the volumes imported to China, the largest iron ore importer in the world. A 5% increase compared to the previous year and a year-over-year increase of 5.1% from Brazil and 1.5% increase from Australia. Inventories are up about 25% year-over-year.

However, if you take into account the inventories related to days of consumption, we are about on the historical average. The Chinese also require an increased working stock of iron ore for their physical forward traded contracts and more stock for their iron ore blending facilities for export. Reputable bank estimates this total working capital stockpile figure to be between 20 million and 40 million tonnes.

The global steel production market has been fairly flat during 2023 and 2024. However, we know good excitement that the Chinese steel output has returned after months of contraction. In October alone, the country exported 11.2 million tonnes of steel products. This is up 10% month-on-month and marks a 42% increase year-on-year, the highest amount exported in 9 years.

As discussed, bauxite has also been a significant contributor to ton-mile in the Cape and Newcastlemax segment, with a large 15% increase compared to the previous year. We are soon entering another Q1, which is the historical high season for bauxite exports due to the dry weather, which optimized the onshore logistics. This commodity, we believe, will continue to grow in terms of volumes, thus also ton-miles in the coming years.

The Capesize and Newcastlemax segments continue to thrive on new fundamental long-haul trades. The commencement of the new Simandou iron ore mine in Guinea will be yet another solid leg for this segment to stand on. Simandou is a joint venture between Rio Tinto, the Chinese and Guinean government and will provide an additional 120 million fresh tonnes of iron ore to the market commencing in 2025.

Combined these volumes with the additional iron ore mines grade from Vale in Brazil, the added cargoes alone will consume an equivalent of 150% of the current Capesize order book. Speaking of the order book, we find ourselves in the grateful position of having visibility in terms of Capesize and Newcastlemax vessel supply for several years ahead.

The order book for these vessels currently stands at around 7%, the lowest of any shipping segment of this size. The active shipyards are down 50% from the peak of 2009. And because of the large container tanker and gas carrier market search prior to the dry cargo rebound arrive around 5 years ago. It's close to impossible to find yard capacity able to construct a meaningful amount of Newcastlemax and Capesize vessels for delivery prior to 2028. The dry bulk vessel is also a relatively low-margin business for the shipyards and preference to build container, tanker or gas carriers continue to prevail.

Mandatory dry docks every fifth year for the merchant fleet has historically been a nonevent for the broader market impact. However, with a fleet that has not been modernized in scale for a long time, we now find ourselves in a scenario where the 2010 generation of vessels over 10% of the fleet will be forced to enter dry dock. If you combine the 5, 10, 15 and 20-year dock schedule for 2025, we have a 52% increase in dry dock compared to 2024.

We expect this to have a significant impact on vessel availability and can restrict the total fleet with as much as 3% over the next 3 years. We would also like to add that yard congestion and potential scrapping for all the tonnage has not been taken into account leaving further upside to this scenario.

To summarize, with new volumes from Guinea and Brazil, the dry dock impact on the total merchant fleet and new vessel deliveries, the net effect will be a reduction of 6.5% available vessel days in 2028 compared to 2025. We have also forecasted 0 scrapping into this case, which indicates these numbers to be on the conservative side.

And with that, I will pass the word back to the operator. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from Bendik Nyttingnes from Clarkson Securities.

[Bendik Nyttingnes, analyst]

As I look towards the first quarter, the FFA is pricing in around $15,000, $16,000 per day. Is there any level where we should expect to see you take some coverage? Or do you expect to remain spot sort of no matter what, given your new capital structure?

[Lars Halvorsen, executive]

I think it's something that we monitor day-to-day and it's a function of, of course, what the FFA levels we can fix that is. But also look at it in the context of the spot [ market ] FFA even if it's supposed to be future rates tend to move quite a lot with the spot market. So I said now, usually, you should have a stronger period driven by Brazilian volumes and the bauxite, which has been a more important trade in recent years, at least for the next couple of weeks. But there's a natural inclination to always look at whether we take some coverage for Q1.

But I don't think we're there yet. I mean, we haven't done it yet. And the 16 or so that the Q1 is trading at is, of course, it's been weaker years, but then there's usually been something abnormal that happened. Now we have bauxite trade with season is quite strong in Q1. So there's no urgency to lock in as you very correctly pointed out, we have a capital structure now where is really not going to be a case where we have to do it out of necessity because we are going to be cash flow positive regardless.

So I guess stay tuned, don't rule it out, but -- we haven't done anything just yet. And usually, we would expect to have a couple of weeks of offering rates, which hopefully could give us a better position to do that.

[Bendik Nyttingnes, analyst]

That's good color. And just looking at the iron ore inventories building in China, and then you see all this new capacity that you mentioned coming in on the iron ore side from the Atlantic producers? I believe the Pacific producers are guiding more or less flat production. But -- you have an inflow of additional tonnes here. Have you made any thoughts on what will happen if demand is not there to take off the additional tons from Vale and Simandou?

[Lars Halvorsen, executive]

Yes, I think it's obviously a good question. But I think 1 thing that we find quite interesting is how domestic iron ore in China has been depleting both in terms of volume and grade. If you look at the last 10 years, we are probably down from around 1.4 million to 1 billion tonnes in production. The grade has fallen from 40% to 20%. And this is unfortunately hard to verify, but our understanding is it's quite a lot of low-grade inventory system there in China.

Another point is that if you look at Chinese interests have been financing a lot of this mining expansion. And I think it's reasonable to assume that given its high-grade -- it is going to be shipped to China, which will have a positive effect on ton-miles. And I think Lars-Christian found some research on the day suggesting China has increased the trade with BRICS countries, I think, 11%, 12% year-on-year, which mirrors quite well what we're seeing in the current year trading patterns where Brazil is up, as we touched upon some more flattish development in Australia.

So I think, of course, I think people, to be honest, get a little bit too hung up on is the GDP in China, 4%, 4.5% -- is it plus minus 1% or 2% on steel demand. You have to take into account that there is a balance between what you produce domestically and what we import. And there's been a very clear and steady decline in both volume and grade declined and been flat around 20%, suggesting that even in a relatively modest end-user demand scenario, you're going to require these volumes imported from West Africa, which is probably why they've been financed by Chinese interests. So we -- I think we view that as a quite be positive. And I think there's definitely a positive ton-mile story in Capesize for the next 2 or 3 years just based on the [indiscernible] guiding. Yes.

[Operator]

[Operator Instructions] As no one else is lined up for questions in this call. I will now hand it back to the presenters for any closing remarks.

[Lars Halvorsen, executive]

Okay. Thank you, operator. I think I'll just say thank you for everyone who dialed into the call. And if you realize you have any questions you didn't ask today. Feel free to reach out any time and we'll speak on the next quarter. Thank you.