Earnings Transcript for 2020.OL - Q2 Fiscal Year 2023

Operator: Welcome to the 2020 Bulkers Q2 conference call. [Operator Instructions]

I'll now hand it over to the Chairman, Magnus Halvorsen. Please begin. :

Lars Halvorsen: Thank you, operator. Welcome, everyone, to the second quarter 2023 Earnings Conference Call for 2020 Bulkers. As usual, I'm also joined here today by our CFO, 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 regard to future events and therefore, 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 $4.8 million in the second quarter, continuing our unbroken track record of profitability since we took delivery of our first vessel. We, again, outperformed the Capesize Index and achieved average time charter equivalent earnings of $23,800 per day compared to the Baltic Capesize Index, which averaged out at approximately $15,600.:

For the months of April through June, we made total cash distributions of $0.19 per share. This represents an annualized yield of around 8% based on the current stock price. Last week, we also announced a cash distribution of $0.04 per share for the month of July. So far in the quarter, we started off July with average time charter equivalent earnings of $21,200 per day, gross. And during August, we also amended and extended our time charter with coke for Bulk Sandefjord.:

And with that, I will leave it over to Vidar for the financial highlights. :

Vidar Hasund: Thank you, Magnus. 2020 Bulkers reports a net profit of $4.8 million for the second quarter of 2023. Operating profit was $8.1 million and EBITDA was $11.1 million for the quarter. Earnings per share was $0.21. Revenues were $17.1 million for the second quarter and average time charter equivalent rate was approximately $23,800 per day, gross. Vessel operating expenses were $5 million, and average operating expenses per ship per day was approximately $6,900 in the second quarter.

G&A for the second quarter was $0.8 million. 2020 Bulkers charged Himalaya Shipping $0.3 million in management fees for the second quarter, which is recognized as other operating income in the financial statements. Net financial expenses was $2.6 million, including interest expense of $2.8 million in the second quarter. Shareholders' equity was $155.5 million at the end of the quarter. Interest-bearing debt was $213.9 million at the end of the second quarter, down from $217.6 million at the end of the first quarter, reflecting scheduled debt repayments.:

Cash flow from operations was $6.8 million for the second quarter. Cash and cash equivalents were $15.1 million at the end of the quarter. The company declared total cash distributions to shareholders of $0.21 per share for the months of April, May and June 2023.:

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

Lars Halvorsen: Thank you, Vidar. As you can see from this slide, we continue to show strong commercial performance. Not only are we outperforming the Capesize Index, but we're also performing very well compared to our listed peers who report separate earnings for their Cape and Newcastlemax fleets.

Having a look at the markets and the year so far. We started off with the usual seasonal weakness during January and February before the market firmed towards the end of Q1 and during Q2. During Q3, the market has so far not shown its usual seasonal strength in spite of very strong ton-mile growth at 5% up compared to last year for the same period. We think the main reason for the market not being stronger yet is that we've seen a significant unwinding of congestion, which is now down to historically very low levels that we'll get back to a little bit later.:

Now looking at our dividend potential. This slide shows our illustrative dividend capacity as well as our current charter coverage. As you can see, the fixed rate coverage we had earlier in the year is rolling off, and will be completely spot towards the end of September. The FFA curve for the balance of the year currently sits at just under 18,000 per day, which would imply a monthly yield of just under DKK 1 per share per month for the balance of the year if a curve was locked in today. This, of course, is not guidance that the market may move, but should give you at least an indication of where the current expectations in the FFA market sits.:

Now taking a look at some of the main drivers in the market. Overall, ton-miles, as mentioned, was up around 5% year-to-date relative to the same period last year. This is mainly driven by a recovery in iron ore shipments but also a continued increase in bauxite volumes. Bauxite now represents 10% of the Capesize trade measured in ton-miles, up from 4% 5 years ago.:

Interestingly, congestion here measured as the percentage of Capesize fleet to import at a given point in time is now down to around 22%. This is the lowest level seen in years, including the pre-COVID period. Needless to say, the unwinding of these congestions had a negative impact on rates and any normalization would tighten the effective utilization in the market.:

Now looking at some of the key metrics for the steel market. The global crude steel production for the period of January through June was down 0.9% compared to the same period last year. The world ex China was down 4.8%, while Chinese steel production increased around 2.3%.:

Moving on to the iron ore market. We've seen strong iron ore imports to China this year with 660 million tons imported, up around 7% year-over-year. In spite of the increased imports, as you can see, the iron ore inventories have been dropping, are currently at levels below the last year level and below the 5-year averages. This could suggest some need for restocking going forward. Also based on the collective guidance from the largest iron ore producers, we expect to see an increase in output this year compared to last year, which should continue to support the shipping volumes.:

Then having a review of the order book. It keeps on shrinking, and we're now down to 4.7% of the existing fleet on order. This, in combination with Chinese yards having very little capacity for new orders before the end of 2026, gives us great visibility for the coming years. Growth in vessel supply will be moderate.:

And looking at Clarksons' data, it's expected that around 10.9 million deadweight tons will be delivered in 2023, dropping further to 7.3 million in '24, and 5.5 million deadweight tons in '25. As a consequence of the high ordering of container vessels, the Chinese yards, as mentioned, have very little capacity for new orders until the end of 2026. Scrapping this year sits at 0.85 million deadweight tons compared to 1.67 million deadweight tons during the same period last year.:

Lastly, although it's still hard to quantify the exact effects, we are great believers that the implementation of CII and EEXI, will have an impact on all the less fuel-efficient ships going forward. As data from Clarksons suggest that 67% of the large bulker fleet may be noncompliant by 2030. Looking at this in context of the low order book just mentioned, we believe we're facing a very attractive supply side in the coming years.:

And with that, I'll 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 Securities.

Frode Morkedal: Magnus. Yes, thanks for the good detail on the slide deck there. I guess, sentiment in dry bulk is fairly weak recently, and not helped by the ongoing problem in China. But it's interesting that the FFA market has been moving quite significantly higher recently in the past few days, right? So about $18,000 per day now for Q4. So just curious, what do you think is driving that strength?

Lars Halvorsen: Well, right now, in the short term, I think it's Brazilian volumes, which, as you know, are long haul that are the strongest point. There's actually a bit more tightness in that basin than in the Pacific. Also, as you know, we're kind of heading into -- or we should be in the period where there is more seasonal strength, typically Q3 and Q4 are the seasonally stronger months.

So I think if you look at the market, and I think if you look at the slides, we -- yes, the narrative in China is very negative, and there's no doubt that the Chinese property industry, in particular, is having its issues in spite of the government's attempt to revive it. But I think what's quite encouraging is to see that trade is actually up this year.:

And I think if you look at that graph we provided, showing how you've had a very sharp move down in congestion, I think that's probably the explanation why rates aren't stronger right now, but I think you also see that we're now at levels where the market very really have sustained in terms of efficiency in the past. So I think it -- as long as the volumes are flowing at the rate they are now, if the operating patterns with a bit more idle time were more normal, I think we would see a stronger market. And that's probably what's led the recent move in FFAs. And I think today was probably the first day the physical Baltic Index actually followed up with a reasonable move as well.:

So I guess it remains to be seen, but I think there's some interesting data points out there. And I think another thing as well, which is worth mentioning or highlighting on the market is in spite of a strong recovery in iron ore imports into China, their inventories keep on dropping. There's quite a lot of negative analysis out these days with regards to iron ore prices. And I think seems to be consensus forming that we're heading into a more supply-driven market for iron ore.:

That could be an interesting thing for our market. As we know, the Chinese are typically, in the past, used moments of weakness in any commodity price to accumulate. And seeing that in context of the low inventories we're having now, I think it could be interesting. But the short answer to your question is, right now, it's a pickup in Brazilian activity that's driving the expectations. :

Frode Morkedal: Yes. Great. And I guess that the Brazilians typically tend to build inventories during the fall in anticipation of the Q1 seasonal maintenance, right, where there's typically difficulties in initiating volumes, so that should help.

Lars Halvorsen: Yes. But what we saw earlier in the year was that, I think, to a larger extent, the normal -- Vale was producing more than they had -- than they shipped. So I think there's a bit of a catch-up to be done there. I think what will be interesting to see this year, which happened last year, bauxite volumes were very good in Q4 last year out to West Africa.

And I think as we pointed out, bauxite has become quite meaningful trade. I mean, in terms of volumes, we're talking 10%, but it's also a trade that absorbs a lot of shipping capacity due to the transshipment that's taking place in the West Africa ports or COMSAR. So we'll -- yes, we'll see what happens. But for the market to be stronger in Q3 and Q4 would be quite normal. :

Frode Morkedal: Again, the Q1 is coming up and as the sales are weaker there, as always. But I guess you won -- on the one side, you had that El Nino effect, which probably will make it dryer, right? So less export hiccups, if that's the right word. I'm just curious how do you think about the Q1? You usually try to bridge Q1 weakness by taking some coverage, right? But -- so what if -- when you look at the FFA curve now at $18,000-plus, is that interesting levels to think about Q1 weakness?

Lars Halvorsen: Yes, I think as you're right, I think you should expect that we, at some point, do some blending where we use the Q4 and Q1 curve, average it out to get some coverage and cash flow coverage for the seasonally weak periods. I think just the way we're looking at the market right now, with volumes being good with hopefully, efficiencies or lack of congestion being unsustained below and the prospects of an active season out of Brazil and for bauxite.

I think we'll probably have a better chance to do that a few weeks out from now, to start doing it. So expect us to do the same, but we haven't done anything yet. And I think it seems to have some legs to this market now. So hopefully, that can give us an opportunity to get some higher coverage than what we're seeing presently. :

Frode Morkedal: Yes, makes sense. My final question is more on the long-term vision for the company. Maybe you could remind us what's your strategy here? I understand like you want to focus on distributing dividends rather than acquiring new business, at least. But could you consider maybe acquiring say, land ships now that prices have come up a bit and you have this very optimistic view on the future, I guess? How flexible are your said ships?

Lars Halvorsen: I think, I mean it's not in our strategy to look at new builds, that we want to keep on being able to earn free cash flow and distribute that to shareholders. And as you know, new builds, you have to start putting down money now for something you get late '26, '27. I think we would definitely look at modern similar vessels to what we have, but that would require 2 things. We would need to have currency that's strong, and we would need to be able to buy something cheaper than where we're trading.

And with where things are now, I think the stock currently values our average ship around $51 million or so. Anything we bought, I think, would be more expensive than where we're trading. So it's not out of the question, but the stock is not too cheap or priced well enough to give an attractive opportunity.:

And then, of course, if we were to do anything along those lines, it would have to be something that's really meaningful in terms of being accretive on the dividends or cash flow distribution. So I think if you priced that $55 million and you buy something at $54 million, it's a very thin margin and you have to pay some fees to bankers, et cetera. So it needs to be a more meaningful premium where the transaction actually makes a difference and thus, increase the distribution capacity per share. So that's where we are now. :

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

Lars Halvorsen: Okay. I think no further comments from our side. Feel free to reach out if you have questions you forgot to ask, and thanks for those calling in to our conference call. Thank you.