Earnings Transcript for 2020.OL - Q2 Fiscal Year 2024

Operator: Welcome to 2020 Bulkers 2024 Q2 Report. 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. And I will now hand it over to CEO, Magnus Halvorsen. Please begin.

Magnus Halvorsen: Thank you, operator and welcome everyone to the second quarter 2024 earnings conference call for 2020 Bulkers. As usual, I'm also joined here 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 assumptions are based on the company's current views with regard to future events, and they are subject to risks and assumptions subject to uncertainties. Following the actual results may differ materially.

Baltic: We did declare total dividends of $0.52 per share for the months of April through June. Then over to the subsequent events for July, we announced we achieved time charter equivalent earnings of approximately $37,600 per day gross. This compares to the Baltic 5TC average, which was $25,542. We've also declared a dividend of $0.20 per share for the month of July 2024 and with that I would leave it over to Vidar.

Vidar Hasund: Thank you. Magnus. 2020 Bulkers reports a net profit of $31.1 million for the second quarter of 2024. Operating profit was $32.1 million and EBITDA was $34.4 million for the quarter. Earnings per share was $1.36. Revenues were $38.9 million for the second quarter and include a gain of $20.4 million for the sale of Bulk Seoul. The average time charter equivalent rate was approximately $34,300 per day gross. Vessel operating expenses were $3.4 million and the average operating expenses per ship per day was approximately $6,200 in the second quarter. G&A for the second quarter was $0.9 million. 2020 Bulkers charged Himalaya Shipping $0.4 million in management fee for the second quarter, which is recognized as other operating income in the financial statements. Net financial expenses were $0.9 million, including interest expense of $0.8 million, net of $1.6 million, transfer from other comprehensive income relating to amortization of realized gain of interest rate swaps. Shareholders' equity was $160.2 million at the end of the quarter. Interest bearing debt was $112.5 million at the end of the second quarter, down from $140 million at the end of the first quarter, reflecting the $27.5 million debt repayment in connection with the refinancing of the term loan in April. The sale leaseback financing for Bulk Shanghai and Bulk Seoul were both settled during the first half of 2024. Cash flow from operations was $10.5 million for the second quarter. Cash and cash equivalents were $19.2 million at the end of the quarter. The company declared total dividends to shareholders of $0.52 per share for the months of April, May and June 2024. That completes the financial section and now back to you, Magnus.

Magnus Halvorsen: Thank you, Vidar. Then we'll have a quick look at the market. As you can see here and as discussed on our last call, the Capesize market had a very firm start to the year with rates during Q1 hitting the highest seasonal levels in a decade. The second quarter has also been relatively firm, with rates well above last year's levels for the majority of the period. This is driven by overall straight trade volumes. In particular, we've seen Brazilian iron ore shipments up around 8% year-to-date and we've continued to see strong bauxite volumes with bauxite ton miles 14% above 2023 levels. Just to recap our operating leverage, following our asset sales and subsequent refinancing earlier this year, we have an industry-leading cash breakeven which this chart illustrates. We have yielded free cash flow in almost every market in the last 35 years. The low cash breakeven we believe gives a good basis for free cash flow that can be paid out as monthly dividends and it does enable us to run with a high degree of spot exposure if we wish to do so. And here we look at the illustrative dividend capacity based on all ships being spot, which is actually the case today given our positive market view. As you see here, the FFA curve for the remainder of the year is currently around $27,000 per day, which would suggest a potential free cash flow generation on an annualized basis of close to 20% compared to today's share price. Then taking a look again at some of the key drivers in the Capesize market so far this year. Overall, ton miles are up 6.3% year-to-date compared to 2023. Year-to-date compared to 2023 and as mentioned, this is mainly driven by a strong increase in ton miles for iron ore, particularly out of Brazil. Bauxite volumes are up 14% following more than 30% growth in 2023. For the coal trade, however, volumes are down around 4% year-over-year. Congestion, which has been a major impact on the market in the last few years, is now down to slightly below average levels. I think it's fair to say it thereby represents an upside risk should we see an increase in efficiencies. The key commodity traded in the Newcastlemax market is iron ore. Iron ore imports into China, the biggest market is up 6% in 2023 year-to-date, with July growing 12%. On a slightly more negative note, we see that China has been building inventories which are currently at the high end of the last five years, both normally and seasonally. Then taking a look at the second most important driver in the market this year, which has been the bauxite trades, and as you can see, most of the year has tracked meaningfully above last year's volumes and bauxite today represents more than 10% of the ton miles we see in the Capesize in new gas markets. What we find encouraging for the coming months is that there is a strong seasonal pattern where typically Q4 sees the biggest exports out of Guinea and these are bookings we would expect to be done over the coming weeks for the initial part of that high season. And we think we might see a pattern similar to last year where Q4 is seasonally the strongest one driven by both the Brazilian volumes on iron ore, but also of the bauxite out of Guinea. Then having a look at the steel market, I think there's no secret that there are macro headwinds in China and we see that Chinese steel production is down around 2.2% year-over-year. On a more positive note, we see that the global steel production ex-China is up 4.3, which actually leads to a marginal growth for the steel production overall globally. Then of course we keep repeating it, but it's important we are in a very favorable supply side environment. The order book is around the closest we've seen in 30 years. If we look at yard capacity, which is down, the number active shipyard is probably 50% in terms of building capacity, probably 30%. The nominal order book is at the same level as when the fleet was one fourth of the size. So we think we have very good visibility in the coming years. Just looking at what the yards are offering in terms of potential newbuild slots, we see that it's around $80 million for a standard new Newcastlemax with a scrubber. And I would really say you have to look into 2028 if you want to order a new vessel today. And we think as long as there is demand for containers and tankers, the yards will continue to favor building those, which should mean that we're unlikely to see the number of available slots increase or the prices decrease meaningfully for Newcastlemax and newbuild orders. And I think with that, we will end presentation part and leave it over to the operator for questions. Operator?

Operator: Thank you. [Operator Instructions] The first question is from the line of Bendik Nyttingnes from Clarksons Securities. Please go ahead. Your line will now be unmuted.

Bendik Nyttingnes: Hey, guys.

Magnus Halvorsen: Hello, Bendik.

Bendik Nyttingnes: I think looking back to sort of last earnings presentations, you talked about how bringing this cash rate even down to such a low level would allow you to go spots more or less entirely throughout the season. However, when you look at the FFAs for the first quarter, seasonally weakest quarter for first quarter 2025 $17,000-ish per day, do you start getting tempted to take some coverage? I mean, you'd generate about 10% in annualized dividend yield at those rates.

Magnus Halvorsen: Well, I think, as you said before, we always monitor this quite closely, but I think the dynamic in the market has probably changed a bit given the now very solid trade flows you're seeing in bauxite in Q4 and Q1 and I think if you look at Q1 this year, we averaged $24,000. That was in part due to the bauxite volumes and also, of course, a little bit drier in Brazil. So I'm not sure that $17,000 is a level. I'm not saying they're bad levels, but they're not necessarily levels where we don't think there could be significantly more upside. So for the time being though, we're not particularly interested in locking in that. And of course, as you alluded to, should the market be lower, we have a cash breakeven. It means we should have no problem servicing that whatsoever. So it's not really tempting to give away that optionality, given the volumes we're expecting to see on the bauxite front in Q1 for the time being. Of course, if the curve moves to a different level, we may change our mind, but that's the view today.

Bendik Nyttingnes: Brilliant. And just, I guess I know the answer to this already, but the future of 2020, you now have six assets, you have a low cash breakeven, sort of looks like just a steady cash cow type of company. You're being rewarded for that with your share price as well compared to peers. I mean, is there anything you did if you were able to sort of change the setup, is there anything you'd do differently?

Magnus Halvorsen: No, I think we are quite happy with the structure the way it is today. And I think the company is financially structured along with what we have been communicated, and we run the company along with what I think our shareholders expect. I think what we will, of course, always, if we were to get into a position where we could do deals with similar assets that would enhance our dividend capacity per share without increasing the risk of the company, of course that's something we'd consider, but it's not something I think we're in a position to do right now. So for now, I think you should assume it's status quo in terms of running the fleet as well as possible paying out the cash. But at the end of the day, we are always out there to make the best risk adjusted return for the investors. So if asset values and/or share price moves in a way where we could do accretive deals, of course we would look at that. But we're also happy to stay the size we are, if that's what we think makes more sense.

Bendik Nyttingnes: Yes, that's probably what I thought as well. Thank you, guys.

Magnus Halvorsen: Thank you.

Operator: [Operator Instructions] And the next question is from the line of Damon Mullens [ph]. Please go ahead. Your line will now be unmuted.

Unidentified Analyst: Good afternoon. Thank you for taking my questions. I wanted to start by asking about the Simandou mine, we did expect it to come online in late 2025. Could you provide some commentary on your expectations for the mine and the market impact it should have? And I'm especially interested on who you expect to import most of the volumes maintained in Guinea?

Magnus Halvorsen: Sorry, I missed the last part of your question. You said you are particularly interested in…?

Unidentified Analyst: To know who you expect to be the main importer of those volumes.

Magnus Halvorsen: Yes. No, I think if you look at this project is being funded in part by Chinese interest and I think we do expect that China will be the biggest buyer of these volumes. And that, of course, should have a positive impact on ton miles and our markets, because these are, I think, except from seven islands in Canada, which is more of a trade in the summer, it's probably the longest ton miles in the market going to China. And I think when it comes to our view on the progress of the project, we will defer to what the stakeholders in the project are saying. And I think on the most recent call, it was alluded that it's on track and it will start gradually ramping up from 2025. So I can't give an impact in terms of rates, et cetera, but it's no doubt that assuming these volumes are going to Asia, it will have a positive effect on the market.

Unidentified Analyst: That's very helpful. Thank you. And Brazilian iron ore exports have been very solid year-to-date, but what are your expectations for the remainder of the year? Do you expect the high inventors in China to potentially lead to lower ports?

Magnus Halvorsen: I think what we have seen over the last few years at least, is that the volumes that Brazil have been able to ship have been going to China. And I think even if we had a pretty strong start to the beginning of the year, just assuming Brazil were to end up flat on last year, we should still see an increase in the shipment rates for the balance of the year. So I think we do still believe that seasonal effect will take place. And as we talked about combined with bauxite volumes, we would expect to see the strongest trade volumes for the area in our markets during the second half and with an emphasis on the fourth quarter.

Unidentified Analyst: Thanks for the call. Sorry. Yes.

Magnus Halvorsen: And then of course, depending on how far out you look, but by 2026, Vol [ph] has expressed that they are looking to increase their capacity by 50 million tons. So it's not only the Simandou project with 60 million tons in Phase 1 and 50 million in Phase 2, it's also Vol on the other side of the Atlantic. And I guess what they have in common is that they have the furthest shipping distance going to Brazil. And of course, ton Miles is the important thing. I think rule of thumb one ton from either West Africa or Brazil requires at least three, maybe three and a half times the shipping capacity of one ton from Australia. So I think that's going to be a support for the ton miles in, let's say, the next two years all else equal.

Unidentified Analyst: That's very helpful. Thanks for the call. That's all from me. Thank you for taking my questions.

Magnus Halvorsen: You're welcome.

Operator: [Operator Instructions] It does not seem like we have any more questions, so I'll hand it back to you again, Magnus.

Magnus Halvorsen: Okay. I think if there are no further questions, we'll thank everyone who dialed in and if you forgot to ask a question, please reach out afterwards. Thanks so much.