2020 Bulkers Ltd

Welcome everyone to the second quarter 2021 earnings conference call for 2020 Bulkers. As usual, I'm also joined here today by our CFO, Vidar Halson. Before we start the presentation, we'd like to remind you that we'll be discussing matters that are forward-looking in nature. These forward-looking assumptions are based on the company's current views with regards to future events, and they're subject to risk and assumptions that are subject to uncertainties. Actual results may vary materially. And with that, I'll move over to the highlights for the quarter. 2020 Bokers generated a record net profit of $17.1 million in the second quarter. We maintain a track record of having been profitable every quarter following the delivery of our first vessel in the third quarter of 2019. We continued to outperform the Cape size index during the second quarter and we achieved average time chart equivalent earnings of 39,500 per day compared to the Baltic Cape size index, which was approximately 31,000 per day in the quarter. For the months of April through June, we announced a total of 75 cents per share in cash distributions and dividends. This equals an annualized yield of just under 25% based on today's share price. Then over to some of the key events so far in the third quarter. So far this quarter, we've earned approximately 40,100 per day across the fleet. This compares to the Baltic Cape size index average of 31,500 per day. Today, we also announced another cash distribution for the month of July of 26 cents, which is up two cents from the previous month. Last week, our vessel, the bulk Shenzhen was involved in an accident on the Yangtze river in China. Following procedural investigations and formalities, the vessel went back on hire after approximately two days and proceeded to discharge the cargo on board. The vessel is currently in a repair yard in China, and we expect that the total yard stay will take approximately 15 days. We estimate that the total cost of the accident, including loss of revenue, will amount to approximately $1 million. With that, I will leave it over to Vidar.

Thank you, Magnus. 2020 Bulkers reports a profit of $17.1 million for the second quarter of 2021. Operating profit was $19.6 million and EBITDA was $22.5 million for the quarter. Earnings per share was 77 cents. Revenues were $28.4 million in the second quarter and the average time charter equivalent rate was approximately 39,500 per day gross. Vessel operating expenses were $4.3 million in the second quarter, which is an average of approximately $5,900 per day per vessel. Vessel operating expenses includes approximately $200 per day per vessel in COVID-19 related expenses. 2020 bulkers had a total of 728 operational vessel days in the second quarter. G&A for the second quarter was $0.8 million. Interest expense was $2.4 million in the second quarter. The company paid approximately 3.4% in average interest rate on the company's long-term debt. Shareholder's equity was $148.1 million at the end of the quarter. Interest-bearing debt decreased from $246.4 million at the end of the first quarter to $242.7 million at the end of the second quarter, reflecting scheduled repayments. The company reports cash flow for operations of $20 million for the second quarter. Cash and cash equivalents were $22.2 million at the end of the quarter. The company declared total dividends in cash distributions to shareholders of 75 cents per share for the months of April, May and June 2021. That completes the financial section. And now back to you, Magnus.

Thank you, Vidarik. As you know, 2020 Bulkers has a policy to pay free cash flow to shareholders on a monthly basis. 2020 Bulkers has returned free cash flow for 13 consecutive months now. Our Q2 dividend and cash distribution of 75 cents per share equals approximately 25% annualized yield based on today's share price. To date, 2020 Bulkers has returned 27% of the total paid equity to shareholders. The Cape Saks market has had a very strong development. In fact, the strongest development in the last 10 years. Yet today, rates are close to two and a half times higher than what we saw last year. At current rates, taking into account the premium we're getting on our Newcastle Maxwood scrubbers, our index vessels are earning around $50,000 per day. So what is driving this strength? First and foremost, strong iron ore volumes out of Brazil, which are up approximately 11% year to date. We believe, based on the company's guidance, that Vale will continue to increase their production volumes in the second half of the year, which will continue to lend support to the market. We're also seeing increased coal volumes being exported, with around 6% export growth globally year over year. Trade patterns are beneficial and supported with China taking more coal from the Atlantic and Australian coal having to target market further away than China. Lastly, we will continue to see modest fleet growth this year with an order book of 18 million deadweight tonne compared to 25 million deadweight tonne delivered in 2020. Over to the next slide. Even if cave-sized spot rates are the strongest we've seen in a long time, they're actually quite modest compared to the value of the freight we're carrying. Historically, freight rates from Brazil to China has been approximately 16% of the value of the iron ore. If you revert to that average, current iron ore prices would support rates for a standard cave size of around $42,000 per day, which would translate into earnings of approximately $57,000 per day for our scrubber-fitted Newcastle Macs. As mentioned many times, 2020 Bolker's main mission is to give shareholders a good return through monthly dividends. As you can see from this sensitivity table, which takes into account the fact that we have two ships at fixed rates and six ships at index-linked rates for the remainder of the year, our dividend potential is significant. We will not give any guidance on rate expectations, but as a reference, the FFA curve for the remainder of the year currently sits around $37,000 per day. The current spot rate sits just shy of that, but taking as an illustration the FFA curve, that could potentially translate into a run rate dividend of 36 kroner, or 3 kroner per month, which based on today's share price is a run rate yield of approximately 30%. We'll now review some of the key market drivers. Chinese steel production for January through June 2021 was up 11% compared to the same period in 2020. The Chinese government has during recent months imposed restrictions of steel production in certain areas in order to limit pollution. June showed a sequential 6% decline in Chinese steel production compared to May. However, production was still 2.5% higher than June 2020. Steel production in the rest of the world has already recovered beyond the levels we saw prior to the outbreak of COVID-19. And it's expected to recover further once vaccines against the pandemic are widely distributed. Steel production outside of China increased by 16% for the period of January through June 2021, compared to the same period last year. And the month of June showed an increase of 27% year over year. As various infrastructure spending initiatives are implemented, it's expected that the growth in steel demand in the rest of the world will overtake China as the growth engine. The World Steel Association estimates that the global steel demand will glow by 5.8% this year, with China growing only 3%. This suggests that the rest of the world will see a growth in steel demand of close to 10%. Then over to look at the iron ore market in some more detail. Total exports of iron ore globally is up 2.5% year-to-date compared to the same period in 2020. Taking a more detailed look, we see that Chinese iron ore imports have cooled off in recent months and are currently down 1.5% year-to-date compared to last year. While iron ore imports ex-China are up 7% compared to the same period last year. We suspect the recent pullback in Chinese iron ore imports may be linked to the desire to cool down commodity prices. We think it's likely that Chinese imports will stabilize or accelerate at some point, as Chinese steel demand continues to grow, and Chinese iron-oriented tourists do not really have a lot of cushion given the current standard of only one month of forward consumption. Over to take a look at Brazilian production, and Vale specifically. The correlation between quarterly Vale R&R production and Brazilian R&R exports has been 96% over the last 12 months. This suggests to us that each incremental ton Vale produces finds its way to the export market. Vale produced 75.5 million tons of R&R in the second quarter, and they're guiding for a daily production capacity of 1 million tons per day in the second half. Assuming this production is going to the export market and Conservatively assuming demand for iron ore is flat and Brazilian iron ore merely displaces Australian iron ore as exports to China, the potential incremental volumes in the second half would require 49 incremental cave-sized vessels. This stands against the current order book of cave-sized and larger vessels between now and the end of 2021 of only 32 vessels, which does suggest that there is a potential for further tightening in the market in the second half of the year. We continue to believe the supply side dynamics in our market are the most attractive seen in more than 30 years. The Cape size order book is around the lowest levels in the last few decades and currently stands at around 6%. Cape size ordering last year was the lowest in 20 years. And in light of the recent massive ordering in the container space, there's very little yard capacity available for new orders before 2024. In fact, our channel checks suggest that Chinese yards are currently marketing only around 15 Cape size or Newcastle max new building birth between now and 2024, which is very modest given we're looking at the total fleet of 1700 ships today. So far this year, we've still seen 22 Cape size scrapped in spite of healthy markets. We expect to see more scrapping in light of the new upcoming environmental regulations in 2023. Again, we'll give a quick update on where the industry stands with regards to upcoming regulations. This all goes back to 2018 when the IMO adopted the target to reduce CO2 intensity from international shipping with 40% by 2030, measuring from a 2008 baseline. As a consequence, EEXI and CII will be introduced by January 2023. Non-compliant ships may comply by... applying various performance-enhancing measures, which will require significant investment. More likely, they will have to go for a reduction in the engine's power output, which again will lead to a large part of the fleet having to slow down its effective trading speed. Following the IMO meeting in June, ABS, the classing agency, estimated that more than 80% of bulk carriers will require some kind of improvement to comply with EEXI and CII. Lastly, before we go to the Q&A, I'll just summarize what we believe is the 2020 Bokers investment case. We have the most modern fleet on the water of any listed company with eight Newcastle Macs, average age just over one year. Today's market, our index vessels, earn around $50,000 per day at the current cave-sized spot rates, which stands very strong against a 2021 cash break-even budget of $14,500 per ship per day. The FFA curve for the remainder of the year implies the time charter equivalent earnings for a scrubber-fitted Newcastle Max of around $50,000 per day, and we pay all our free cash flows as monthly dividends. We see some visibility in the markets as we're looking at the most favourable supply-side dynamics in more than 30 years, and we believe that will last at least through 2024. On the demand side, which has been stable over time with growth 28 of the last 30 years for the key commodities traded in our segments, we do expect a continued recovery as the world restarts post-COVID. And with that, I'll leave it over for questions. Operator?

Thank you very much, sir. Ladies and gentlemen, if you wish to ask a question, please press star 1 on your telephone keypad and vote for your name to be announced. Our first question is from the line of Freud Morgendahl from Clarkson Securities. Please go ahead.

Yeah, thank you. Hi, guys. You mentioned 15K new build slots in 2024, which is very low. And I'm just curious if you know what type of, price level that would be? I know that you don't consider ordering ships, but I'm curious to know what type of price level that reflects.

Yeah, I think based on... On the most recent inquiries we've done, simply for benchmarking purposes, Frodo, we are somewhere, I would say, $63 million plus for ship delivering in 2024. That's for Newcastle Max or Cape? That is for Newcastle Max.

Okay. Including Scrubber?

Yeah, I think all in, if you're looking at the new project with the scrubber, with, you know, final makers list and new building supervision, I'd be surprised if you could do something below 65 million at the end of the day, 64, 65 million.

Yeah, interesting. Yeah, so it seems like the supply side is very compelling, right? Particularly if you assume some type of slow steaming. due to the IMO regulations. So I'm curious to know if you look a bit closer into next year, how concerned you are about, for example, the normally seasonally weaker Q1 coming up. And in that respect, would you consider swapping some of your floating rate time charters into fixed rate?

Yeah, I think that's something we, of course, look at literally every day. And you are right. I mean, in our market, typically you have Q1 as the weakest quarter by far. And what you've seen in previous year is that we have taken some coverage through Q1. I think this year we chose to cover two ships going into Q1. we will most likely be doing something similar, whether it's two or more. I guess what we'll have to see really depends on what the curve looks like at any point in time. But I think although we are bullish on the market, we will always seek to have a sensible balance by taking some cover, particularly through the weaker periods, which effectively then, of course, lowers the cash break even for the remainder of the fleet. I think if you look at the curve, the FFA curve, which essentially sets where you can cover for any given period, tends to move quite a lot with the spot market. If you remember this year, as recently as in December, the FFA market was trading, sorry, last year in Q4, the FFA market for Q1 was trading around 9,000. We ended up pricing out at 17,000. and just given the outlook that we have for the next couple of months, in particular with the most recent guidance from Vale suggesting they'll hit the capacity of 1 million tons per day, I think we see a good likelihood that the spot market could move, and we would expect that to move the curves a bit, and maybe that's the time to to take some coverage for next year. But I think the bottom line is we do manage risk and we'll continue to do that both in good and bad markets. But our bias is clearly that we believe we have some decent years ahead of us.

Yeah, makes sense. Just out of curiosity, when do you have to decide? I mean, if you want to have a fixed cover for Q1 and maybe Q2, when do you have to decide? And can you decide the duration of that fixed part of the contract? I mean, some of these charters last well into 2022.

Yeah, generally speaking, we have conversion clauses where we can convert to a fixed period from anything from three months and onwards. And that's done on the basis of the FFA market, which, as you know, is a quite liquid market. So effectively, that's a decision we can do any day subject to liquid in the market, but the liquidity is there. So I guess any time between now and the first quarter is when we could do some cover. And then I guess it's a question of whether when you do take some fixed cover, do you do just for Q1 or do you do Q4 and Q1 to get the blended average that's a bit higher for the first quarter. That type of thing we're looking at and very actively monitoring the curve from day to day. Okay, so it's actually you that do the hedging? No, we don't do the actual hedging. I mean, we have a conversion clause in our index link time charters, but the pricing mechanism is based on the FFA curve. And I can't speak for our clients, but I think it's fair to assume that they are hedging out when we are converting. So we are not tying anything up in margins or taking any kind of mark-to-market risk in that sense. We're converting to a fixed rate, which is based on the forward curve. Yeah, okay.

Yeah, okay. So finally, I mean, what do you think about the impact of port congestion in the dry bulk market and What do you think about that when you look ahead into next year? How bullish or concerned are you based on that?

Apologies. Please hold whilst we reconnect, Magnus. We won't be long.

Did you get my final question? Port congestion seems to be an important part of the strength this year. Increasing port congestion, that is. I'm curious if you have any insights to that and whether you're concerned about that normalizing or even worsening next year. And the general outlook for 2022, really.

Yeah, I think, of course, there is some meaningful congestion in the market right now, but it's actually buried. I mean, it came down quite a lot in June, and now it's gone back up again a little bit. I think the logistical issues that we are seeing due to COVID are, although vaccinations are being spread out, they're not showing any signs of easing for the time being. Of course, I won't really make a call on whether it's going to get worse or flatten or not, but let's assume it normalizes over the next couple of years and the world tackles COVID, for lack of a better word. That on an isolated basis will have a negative impact on the market, but then on the other hand, just the baseline supply-demand equation we think looks so good. You know, you had, as I alluded to on the call, if you look at the typical commodities we trade, which is iron ore, we also compete with ships that trade a lot of coal. Those two commodities combined have grown in seaborne transport in 28 of the last 30 years, and they've grown by around 4 plus percent. And we're now looking at an order book of 6% gross which is delivering over a number of years then you will have scrapping on top of that and you're likely to have some parts of the fleet having to slow down with new environmental regulations so I think if the only variable was congestion the other variables that we see suggest a tightening market so we're still positive on the outlook, even if you were to see a normalization of some of the congestions. And again, that's what we saw in June, and still we have average rates of about 30,000 for CAPE in June, which is not typically the high season of the year. But there's no sign of kind of imminent improvement, at least in that situation.

Yeah, I agree. Thank you very much.

Thank you, everyone.

Thank you. As a reminder, if you do have a question, please press star 1 on your telephone keypad. There are no further questions that are coming through. I'll now hand back to the speakers for any closing comments.

Okay, well, if there are no further questions, I think that concludes the call for today. Thank you, everyone who dialed in, and we'll speak again next quarter.