2020 Bulkers Ltd

OSE:2020

Earnings Call Transcript 2022-Q4

[Operator]

Welcome to the 2020 Bulkers Q4 Conference Call. [Operator Instructions] I'll now hand it over to the speakers. Please begin.

[Lars Halvorsen, executive]

Thank you, operator. Welcome, everyone, to the Fourth Quarter 2022 Earnings Conference Call for 2020 Bulkers. As usual, I'm also joined here today by Vidar Hasund, our CFO.

Before we start the presentation, we would like to remind you that we will be discussing forward-looking matters. These forward-looking are based on the company's current views with regards to future events and 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 $6.7 million in the fourth quarter. By this, we maintain our unbroken track record of profitability every quarter since we got our first vessel in operation in Q3 2019.

We continue to outperform the Capesize Index and achieved time charter equivalent earnings of 25,500 per day. This compares to the Baltic Capesize Index, which was approximately 14,900 during the quarter. For the months of October through December, we announced a total of $0.27 per share in cash distributions.

During the quarter, we also extended index-linked time charters for Bulk Santiago and Bulk Shenzhen for 8 to 13 months each. Further, we increased our charter coverage for Q1 this year to 50% of available days at an estimated average of $17,000 per day. During the first quarter, we further increased this charter coverage from 19th of February, taking our Q1 coverage to 62.5% at an estimated average of 17,400 gross.

During January, we achieved time charter equivalent earnings of $16,500 per day, and we declared a cash distribution of $0.01 for the month of January. During January, we also entered into two new index-linked time charters for Bulk Santos and Bulk Sao Paulo, which will run until Q2 2025. These will start in direct continuation of our current time charters that are rolling off in Q2 and Q3 for these vessels.

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

[Vidar Hasund, executive]

Thank you, Magnus. 2020 Bulkers reports a net profit of $6.7 million for the fourth quarter of 2022. Operating profit was $9.2 million and EBITDA was $12.1 million for the quarter. Earnings per share was $0.30. Revenues were $18.5 million for the fourth quarter, and the average time charter equivalent rate was approximately $25,500 per day gross.

Vessel operating expenses were $5 million, and the average operating expenses per ship per day was approximately $6,700 in the fourth quarter. G&A for the fourth quarter was $1.2 million and include approximately $0.3 million in share option costs. 2020 Bulkers charged Himalaya Shipping $0.3 million in management fee for the fourth quarter.

Interest expense was $2.6 million in the fourth quarter. Shareholders' equity was $155.9 million at the end of the quarter. Interest-bearing debt was $221.3 million at the end of the fourth quarter down from $225 million at the end of the third quarter, reflecting scheduled repayments.

Cash flow from operations was $10 million for the fourth quarter. Cash and cash equivalents were $15.5 million at the end of the quarter. The company declared total cash distributions to shareholders of $0.27 per share for the months of October, November and December 2022. That completes the financial section. And now back to you, Magnus.

[Lars Halvorsen, executive]

Thank you, Vidar. Now an update on our cash distributions and dividends. We now have a track record of monthly dividend consecutive months. And so far, we've returned 78% of the paid capital to shareholders. Our 2022 full year cash distributions ended up at $1.35 per share which equates to approximately a 14% yield on today's share price.

We continue to show strong commercial performance relative to the results announced by public peers who report separate earnings for Cape and Newcastlemax. This reflects additional earnings power of a scrubber-fitted Newcastlemax relative to a standard Capesize vessel.

Now over to have a look at the markets. The second half of the year last year was unseasonably weak relative to previous years. This was mainly driven by an unwinding of congestion, which we will get back to later on. So far this year, rates have started seasonally soft as normal, perhaps a bit more than usual as there's been particularly low Brazilian exports due to wet conditions in Brazil.

However, last week, we started to see some uptick in those volumes. As you can see from this graph, the Capesize market has a historic pattern of bottoming out during Q1 or early Q2. As mentioned many times before, 2020 Bulkers' main mission is to give shareholders a good return through monthly dividends for cash distributions. As you can see from the sensitivity table, which takes into account that we have four ships at fixed rates, introducing to five ships from the 19th of February.

Our positioning reflects a desire to have a good coverage in the seasonally weak period in Q1, while we maintain full exposure to the later part of the year. We will, as usual, not give any guidance on rate expectations, but as a reference to current FFA curve for Q2 through Q4 right now sits around $17,000 per day, which would imply annualized dividend capacity of around 30 for that period.

Taking a look back at the full year 2022 and some of the main drivers in the Capesize market. Overall, sale on Capesize vessels were up approximately 2% relative to the prior year. This was mainly driven by a 30% increase in ton miles for bauxite. For iron ore ton miles were down 1.6%, negatively impacted by a 2.8% drop in Brazil in export volume, while Australian export volumes were up 1.8% year-over-year.

For the coal train, ton miles were up 2% compared to the previous year. The main reason for the disappointing second half relative to the start of the year, we believe, was the unwinding of congestion seen since COVID down to levels in line with pre-COVID levels. We believe as a rough estimate that the peak to trough unwinding of congestions represented the equal of 7% to 8% fleet growth over a few months, which the market then had to absorb.

Now we find ourselves at relatively lower levels in terms of congestion, which means that any disruptions would reflect an upside in utilization for the Capesize fleets. For the year of 2022, global crude steel production ex China was down 7%, while Chinese steel production fell 2%. Steel production in China saw some improvements on a year-on-year basis during the second half of the year.

Chinese iron ore imports were down 2% in 2022. Imports did, however, pick up towards the end of the year with imports in the second half increasing 1.3% compared to the second half of the prior year. Chinese iron ore port inventories currently stand at 125 million tons compared to 140 million tons a year ago. As you can see on the right-hand side, the guidance from major iron ore producers indicate increased production volumes this year relative to 2022.

Following the continued weakness in the Chinese economy, China continues to increase infrastructure stimulus by bringing forward quarters for issuance of local government special infrastructure bonds. The issuance of such bonds were more than 2x the level in 2021 during 2022. As you can see, Chinese infrastructure and manufacturing fixed asset investments have increased recently, while real estate fixed asset investments are still lagging.

As a response to this, Chinese regulators have responded by implementing stimulus measures, such as significantly boosting PBOC pledge segmental lending and lowering first-time buyer mortgage rates. The order book for the Capesize market keeps shrinking. It's now down to 5.96% of the existing fleet on order. This, in combination with Chinese yards having very little capacity for new orders before 2026 gives us good visibility that we are likely to face 3 years with historically low fleet growth.

Clarksons expect Capesize deliveries of 12.4 million deadweight tons in 2023, dropping further to 6.5 million in 2024 and 3.1 million in 2025. As I said, the yards are very fully booked, so there's very little that can change those numbers.

Scrapping in 2022 came in at 19 Capesize vessels, in line with the levels seen in 2021. Five of these vessels were scrapped in December, which could imply an uptick in scrapping as new tighter environmental regulations get implemented. We touched on this before, and although it's hard to quantify exactly, we believe the coming years of implementing CII and EEXI will be tough for all the less fuel-efficient ships. Data from Clarksons suggests that 67% of the large bulker fleet may face noncompliance by 2023 -- sorry, by 2030.

And with that, I 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 Frode Morkedal from Clarksons.

[Frode Morkedal, analyst]

Yes. Can you summarize your dry bulk market outlook for 2023? Yes, you made some coverage for Q1. Curious to know how you envision your chartering policy for the rest of the year?

[Lars Halvorsen, executive]

Sure. I mean, as always, I mean, we'll be very careful in terms of giving specific guidance on numbers. This is market, as you know, with very many variables. But I think on a higher level, I think we've had some artificial tightness in the market over the last 2 years, which came to a halt in April in 2022. That congestion now, I think, is down to a pretty normal level.

So I think we're back in a market where more conventional supply-demand forces is what's going to dictate. And I think we do believe that the China reopening will boost demand out of China. I think we're actually quite encouraged that the Capesize market saw 2% top mile growth last year even with China being as weak as it was. So I think with China coming back, that's probably going to help.

I mean our indications is that the workers in China have taken the proper Chinese New Year and full activity isn't expected to resume in the steel mills until the 15th of February. But as you said, we've taken some coverage for Q1. That's -- Q1 is always the weakest quarter in our markets. As of now, we'll have five ships on fixed charter from the 19th of February. And it's really more about protecting the downside during that part of the market.

I think where we're looking to make our money this year, so to speak, is from Q2 onwards. So there is I guess still a chance that we may do a little bit more hedging for the latter part of Q1 and maybe that will take us a little bit further into the year. But the idea is to be as open as possible for the back end of the year.

So we're able to enjoy what's hopefully a more buoyant spot market then. And I guess, although FFAs are usually pretty poor predicator in terms of where rates eventually end up. That's very clearly what's being reflected in the curve as well that you -- and I think the numbers in our presentation already look a bit all because the market has been shifting up a little bit over the last 24 hours or so, in line with spot rates stopping to fall at least for now.

[Frode Morkedal, analyst]

Yes. That makes sense. Maybe you could comment on the average premiums you've achieved on the two newest charters above the Baltic Cape Index? Do you see any trend there, so to speak, recently?

[Lars Halvorsen, executive]

I don't think we're going to give out any of them specifically, but I think it's possible to work out backwards if you look at our historical numbers, I think, generally speaking, they've been fairly stable, although the ones we do in the lower market tend to be on the higher end, whereas when we have refixed some ships back in the fall of 2021 when spot rates were $50,000 plus a day, then we got a little bit less premium, but it's not a huge variation.

So I think -- if you look at our historicals, you'll have a pretty good idea of where we are but they have not been going down over time. At least if you look -- all else equal, the ones that are done around now should be higher than what was done 18 months ago in premium simply because the market is lower.

[Frode Morkedal, analyst]

Yes. Final question on the market. You provided some interesting slides there constructive apparently on iron ore. But how dependent do you think the Cape market is on, let's say, the real estate industry in China, that seems to be one of the major pushbacks from investors these days. Curious on your thoughts there.

[Lars Halvorsen, executive]

It's obviously a big variable in the market. I guess China takes 70% of the iron ore imports globally. And I guess the total property market is around close to 30% of demand. That being said, if you look at last year, China headlines were pretty horrible and the country was locked down for the second half of the year, still iron ore imports only dropped by 2%.

So it's important, but I'm encouraged that the market and the volumes actually held up as well as they did with China being as low as it was. And the inventories, as I pointed out earlier, are lower now than at the same time last year. I saw a presentation from competitors today, which had aggregated both the inventories of the steel mills and the ones in port, which actually showed a even lower inventory situation relative to last year.

I think another thing which wasn't a big part of the Capesize trade or Newcastlemax trade in the past, which is growing is the bauxite trade out of West Africa. That's really contributed with positive ton-miles last year. There are more mines being built in the coming years in West Africa. It's obviously long-haul distances to China.

China is structurally short bauxite. And it's quite inefficient shipping logistics. So those are very welcome tons. So yes, if we're going to really fire up this market, I think we need China to return, but I think that's not the most outrageous expectation one could have given the country's coming out of lockdown, there's a lot of pent-up stimulus that we think will be put into action.

[Operator]

As there are no further questions at this moment, I will hand the word back to the speakers.

[Lars Halvorsen, executive]

Okay. Well, I think we'll just say thank you for the ones who dialed in. And if you had the question that you forgot to ask, feel free to reach out. We're always there to answer investor questions. Have a nice day. Thank you.