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?