2020 Bulkers Ltd

Good day and thank you for standing by. Welcome to the 2020 Bulkers Limited earnings call for Q3 2021. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press style zero. I would now like to hand the conference over to your speaker today, Magnus Hovels. Please go ahead.

Thank you, operator.

Welcome, everyone, to the third quarter 2021 earnings conference call for 2020 bulkers. As usual, I'm also joined here today by our CFO, Vidar Hasun. Before we start the presentation, we'd 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 regards to future events and are subject to risk and assumptions that are subject to uncertainty. Actual results may differ materially. And with that, I'll leave it over to the highlights for the quarter. 2020 Bulkers generated a record net profit of 21.6 million in the third quarter. We maintain a track record of having been profitable every quarter since the delivery of our first vessel in Q3 2019. We continue to outperform the Cape Size Index during Q1 and achieved average time-tracked equivalent earnings of $46,000 per day. This compares to the Baltic Cape Size Index, which was approximately 42,000 per day during the quarter. For the months of July through September, we announced monthly dividends of a total of 97 cents per share. This is equal to an annualized yield of around 27% based on yesterday's closing price. During the quarter, we increased our fixed time charter coverage for Q4, with 490 days fixed at 45,680 per day on average. In addition, we get the scrubber benefit from these vessels. From November 1st until the end of the year, we will have six of eight ships fixed at an average of 47,400 gross, plus scrubber benefits. Then over to some of the key events so far in the fourth quarter. So far, we've earned around 65,100 per day on average across the fleet. Earlier in the month, we also announced a dividend of 39 cents per share, which equals the run rate dividend yield of more than 30% based on today's share price. Further, on October 9th, we also got the bulk Shenzhen back on charter. This is following the repairs after the collision on the Yangtze River, which we informed you about in August. And with that, I'll leave it over to Vidar.

Thank you, Magnus. 2020 Bulkers reports a net profit of $21.6 million for the third quarter of 2021. Operating profit was $24.1 million, and EBITDA was $27.1 million for the quarter. Earnings per share was 98 cents. Revenues were $32.8 million in the third quarter, and the average time charter equivalent rate was approximately $46,000 per day gross. Vessel operating expenses were $4.5 million in the third quarter, which includes $0.3 million in the repair costs and approximately $0.2 million in COVID-19 related costs. Average operating expenses per ship per day was approximately $6,100. G&A for the third quarter was $0.8 million. Interest expense was $2.4 million in the third quarter. Shareholders' equity was $152.2 million at the end of the quarter. Interest-bearing debt decreased from $242.7 million at the end of the second quarter to $239 million at the end of the third quarter, reflecting scheduled repayments. The company reports cash flow from operations of $27.7 million for the third quarter. Cash and cash equivalents were $28.4 million at the end of the quarter. The company declared total cash distributions to shareholders of $0.97 per share for the months of July, August, and September 2021. That completes the financial section, and now back to you, Magnus.

Thank you, Vidar. 2020 Bolkers has a policy to pay free cash flow to shareholders on a monthly basis. We have been doing so for 15 consecutive months now, which is every month since we had the full fleet delivered. As mentioned, the Q3 dividends and cash distributions of 97 cents per share equals around 27% annualized yield on today's share price. 2020 Bolkers, since we started the company, returned 38% of the total paid inequity to shareholders. As mentioned many times before, 2020 Bolker's main mission is to give shareholders a good return through monthly dividends. And as you can see from this sensitivity table, which takes into account that we have four chips fixed on fixed charter for the month of August and six chips fixed on fixed charter for the month of November and December, our dividend potential is significant. As usual, we'll not give any guidance on rate expectations, but as a reference, the FFA market is currently pricing that October will end up around $63,000 per day, which would give a distribution capacity of around 4 kroner for the month. The FFA curve for December and November implies a potential annual run rate of 36 kroner per share or 3 kroner per month on average for those two months. The latter would mean a yield on a run rate basis of around 30% compared to our current share price. Then looking at our dividend sensitivity or distribution capacity for 2022. We remain constructive on the market and we're so far fully spot exposed. The current FFA curve implies a free cash flow of around 18 kroner per share that could be paid out. It's also worth noting on this slide illustrating how we generate free cash flow available for distribution to the shareholders as long as the Cape size market is about $10,000 per day. This is assuming all our ships are trading on indexing charters. We believe this is very competitive and it also highlights the attractive risk reward in our company setup. The Cape size market so far this year is the strongest we've seen in 10 years. And in spite of a strong correction the last few days, we are seeing current rates that are two and a half times the level seen at the same time last year. If you take into account the premium that our Newcastle Macs get, in addition to the scrubber premium, at current rates we're earning around $60,000 per day. So what's driving this strength? Number one, we're seeing decent iron ore volumes, with year-to-date exports up 2.5%. Tonne miles are also being positively impacted, with the fact that Brazil is showing relatively higher exports, up 8% year-on-year, while Australia is flat. As we've talked about before, one ton of iron ore exported out of Brazil requires approximately three times the vessel capacity relative to one ton exported out of Australia. With Vale guiding for increased production in 2022, we expect this positive pattern to continue to lend support to the market. Secondly, we're seeing very strong volumes for global coal exports, with exports being up around 8% year-on-year. Also here, we're seeing a positive effect from trading patterns, as China is not buying Australia coal, and China are having to source coal from the Atlantic Basin, including the US East Coast. We're also in a period with relatively modest fleet growth compared to what we've seen in past years. This year we'll probably see additions of around 18 million deadweight tons in the segment of cave size and larger vessels, down from 25 million tons last year. We're also seeing lower fleet growth in the years ahead. Then over to take a look at the Chinese steel market. We've recently seen a sharp correction in Chinese steel production, with September production down 20% year-on-year. However, looking at the fact that steel inventories are drawing and are currently 19% below the levels one year ago for rebar inventories, while prices are remaining firm and are currently 50% above the level we saw a year ago, we believe demand is stronger than the production data may imply. There could be several reasons for this, but we believe that the drop in steel production is partially caused by the energy shortage in China, which has led to curtailment of steel production. We also see a desire to reduce pollution, which is believed to be particularly ahead of the Olympics. It's interesting to note that the ongoing production curbs in 28 cities end on March 15, two days after the end of the Paralympics. We have also been noticing recently that Q3 special infrastructure bonds issuance was up 30% compared to the first half of 2021. We also hear that local governments are told to use all their remaining quotas by the end of November. Typically, we've seen a six-month lag on infrastructure spending following an uptick in special bond issuance, which means we are somewhat positive that we can see a recovery in Chinese steel production. Taking a look at the global steel market, we see that Chinese steel demand expectations have recently been revised down by the World Steel Association, while the implied demand from the rest of the world has been revised up. We believe that the significant amount of infrastructure stimulus announced in the world ex-China following COVID-19 will support steel demand in the years ahead. We also see that global steel demand ex-China has increased, as you can see, and are showing pretty strong recovery this year. Taking a closer look at the R&R market, we see that total exports of R&R globally is up 2.5% year-to-date compared to the same period in 2020. in spite of a slowdown in Chinese iron ore imports. Looking more in detail, we see that Chinese iron ore imports cooled off sharply in the summer following the surge in iron ore prices. However, we see that the last couple of data points have been higher than the low seen this summer, which could imply that China is paying close attention to iron ore prices and their buying activity has been increasing as iron ore prices corrected. We also see that Chinese iron ore inventories have had a bit of an uptick measured in days of consumption and currently sit around 37 days, which is still not particularly high levels in historical context. Of course, the steel demand recovers, as we alluded on the previous slide. Those numbers would drop correspondingly. The biggest surprise this year has perhaps been the coal market. Although Newcastle Macs typically don't transport coal, and we, since we started, have had around 7% coal cargoes in total, we do compete with standard cave sites who are much more active in the coal trade. What we see is that global coal exports, before we take into account any change in trade patterns, is up around 8% year-to-date. Further, being emphasising the growth in tron mile demand, we see that China are not buying Australian coal, meaning they're having to source from the Atlantic bases, including US East Coast. We're entering the winter season, and markets are extremely tight among some of the bigger consumers. We see that Chinese coal inventories on the largest power plants sit at around 14 days of cover, compared to levels of 22 to 25, which we've seen at the same time during the year over the last years. Inving coal inventories are what can be categorized as critically low and currently sit at around four days of consumption. We continue to believe that the supply-side dynamics are the most attractive in our market seen in the last 30 years. The cave-size order book is around the lowest level seen in three decades and currently sits around 6% of the existing fleet. We also see that the yards are getting very full. A lot of this is due to the extreme ordering of container vessels following the surge in the container market over the last nine to 12 months. Looking at the major yards in China, we believe there's only around 10 to 15 slots for large, bulkier vessels being marketed between now and the end of 2024. As we've talked about before, there are new environmental regulations coming up in January 2023. We're not going to go through them in detail, but I think it's important to say that we believe there will be a slowdown in average trading speeds, particularly for older vessels, although it's hard to estimate exactly how much. It's quite interesting that this happens at a time when new-build deliveries are significantly coming down. The new point here since the last call we had is we've had an evaluation of our fleet characteristics. We believe that we are in the top 8% percentile of large bulkers on the water, measured against the upcoming regulations, meaning we will be very well positioned to handle the regulations when they kick in. Lastly, we'll summarize how we see the 2020 bulkers investment case. We have the most modern fleet of any drivable company that's listed on the main exchange globally, with an average age of one and a half years, Our vessels earn a significant premium to a standard cave size, and at today's spot rate, the index vessels would earn around $60,000 per day. We have a cash break-even budget for this year of 14,500, which we believe will not change materially for 2022. And if you want to look at that in context of what we're earning, we have six ships fixed for November and December at an average of 47,500 per day, meaning we'll generate significant free cash flow. The FFA curve for next year implies time chart equivalent earnings for a scrubber-fitted Newcastle Max of around $32,000 per day. We will continue to pay our free cash flow as monthly dividends or cash distributions. We're quite optimistic on the market, particularly given the favourable supply-side dynamic we're seeing, which is probably the best in 30 years. And with that, I'll leave it over to the operator for questions.

As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the hash key. Please stand by while we compile the Q&A roster. And your first question comes from the line of Magnus Feier from HC Wainwright. Please ask your question.

Yeah, good afternoon, Magnus, and congrats to a great quarter. Just a couple of questions. First, you know, given the disconnect of the current spot rates with the forward curve, should we expect 2020 bulkers to stay pretty short, you know, maybe due to two-month contracts that you've done during the fourth quarter? Or is there any appetite among charters to go longer given, you know, favorable fundamentals for 2022?

Hi, Magnus. Well, I think if you look at it historically, even when we've been very bullish on the market, we've always liked to have a little bit of coverage. And I think you should expect us to do something before we get into the new year. The way our contracts work, the indexing charters, is we can essentially convert them to fixed rates for a period of up to the full duration of the contract. And I think, as you pointed out, there's not just today, but I think historically there's been a disconnect between the FFA market and spot market. I think it's fair to say that the FFA market is not necessarily a good predictor of where spot rates end up. And I think this gets a bit technical, but it's a market that that of course is relevant to us because it's both sets where we can convert to fixed rates. However, it's a market also that's heavily influenced by the fact that charters do use it to hedge their exposure when they take in fixed rates. There's always that natural selling pressure out on the curve, whereas I guess there's less natural buyers, which means it tends to be little bit depressed. So we are monitoring it, of course, every day. Literally speaking, we think about our charting profile. And I think last year you saw, even without spot rates moving significantly, as you got towards the end of the year, what is now the 20, well, the current year, but the 2021 FFA curve started rolling up. So I think we are not in a hurry. We're watching it. And we will probably do something to bring our cash break even lower and perhaps also hedge out a bit of the first quarter, typically weaker. But overall, we are bullish and want to stay fairly spot exposed. And we don't necessarily... I think that the FFA curve, as it sits today, is going to be a good predication of where rates actually end up. It certainly wasn't last year. I think you could buy during 2020 for $12,000, $13,000 a day, and, yeah, the rest is history. You know where we've been.

Right, right. Thank you. And I guess, is there any appetite? I'm sure your clients would like to go long at a much lower rate, but is there any increasing appetite you've seen among the charters to – for longer-term contracts at some reasonable rates that are higher somewhere in between the current spot and FFAs?

I think generally speaking, there is definitely appetite for longer contracts. But again, a little bit back to the issue we just discussed, the FFA markets, does quite strongly steer what kind of long-term rates you can have. But there's been a change in dynamics there, in my opinion, at least over the last four or five months. I think last couple of years up to that, it was very mechanical how the period market was set related to the FFA curve, but we've seen more resistance This year, we're people looking to do long-term charters on fixed rates. Owners are not really willing to do it on the basis of the discount in the curve. So, we've seen a premium, not only in bigger ships, but also in the smaller dry bulk segments of a couple of thousand. So, I wouldn't call it a true disconnect, but there's starting to be a bit of a divergence between the FFA curve and the period markets, in a positive sense for the owner.

All right. Well, thank you. And just one more question, just on that point. downtown you had for your incident. You said there was 14 days off fire before the insurance kicked in, and it was by 0.3 million of expenditures. The vessel came back October 9th. Are all those costs related to Q3, or should we see any costs in Q4?

Yes, everything is taken in Q3, and It's worth noting also that that's also inflating our OPEX figures a bit this quarter, because our deductible on the Holland Machine Insurance is booked under OPEX. Okay, so what's that impact in the fourth quarter? It was $200,000, which is around $230 per day. just from the insurance.

Okay. Very good. Well, thank you for answering my questions.

Yeah, and I guess on that note, I mean, we didn't talk about it in the presentation, but this quarter we have a few things that are genuinely one-offs that inflated our OPEX a bit. We had the deductible on the insurance. We've been undergoing a program to change some ropes that were not up to standard. We did that on the last of the ships now. And we've had a propeller repair. We had the minor damage. So I think if you look at this quarter, we have costs which we attribute, I think, directly to COVID and inflated costs related to crew changes of around $230 per day. And then we have around $470. So a total of $700 of the OPEX, I think, are either COVID-related or these kind of repairs or special things that happened.

All right. That's very helpful. Thank you.

Your next question comes from the line of Martin Arsett from StatCon. Please ask your question.

Hello, and thank you. Good afternoon. And yes, thank you for a great presentation and for a great dividends last couple of months. I have three questions. The first question is that many freighter ships like bulk oil and so on are traveling empty nearly half the time. Do 2020 brokers have any numbers on this on percent? And do you have any plan to reduce it?

I guess that's just the nature of the trade, is that we transport iron ore, which is most of the time sourced in Australia or Brazil, to China or other Far East markets. And there is really no natural backhaul. So I wouldn't expect any change to that trade.

Okay, I see. My second question is, will the including of the shipping on the carbon trading market in the EU affect 2020 brokers since you are registered in Bermuda?

Well, not as we see it now, generally speaking, because our typical trades do not involve the EU. But I think, as you know, it's very much a developing landscape when it comes to carbon taxes. And I would expect that we and others at some point, if we have trades into Europe, will be affected by some kind of carbon levy. But I think in that sense, it's also helpful that we have among what's on the water today, a very modern fleet, which has low fuel consumption relative to the amount of cargo we're carrying. So that should, in a sense, be a, at least for many years, a relative competitive advantage for us.

Okay, I understand. Thank you. And lastly, how is it affecting the contract since one of your biggest shareholders also is your customers?

Well, I mean, they are a financial shareholder. They are not on the board, so they are not involved in running the company in any way. But we have a very good relationship, which we had also before they became shareholders. And I think we look to continue having that good relationship. But I think it's very clear that we neither can or will do anything special favors in terms of the commercial terms, just because we have a shareholder. We have an excellent working relationship, but of course we are out there to maximize the portfolio regardless of who the charterer and who our shareholders are. Okay, yes, great.

Thank you so much. No, thank you for your questions.

Once again, if you wish to ask a question, please press star 1 on your telephone. There seems to be no further questions at this time. Please continue.

Okay. Well, I think then we would like to thank the people who dialed in, and I think we will conclude the call here. As always, feel free to Reach out if you have any investor-related questions. And I'll also encourage you to get a lot of questions on where people can follow these daily rates. So we now have a 2020 Bolters Twitter account active, which posts the Baltic Cape Size Index daily. So that's a tip for all investors who want to be able to follow pretty much real-time what's going on in our market related to our index structures. Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect.