2020 Bulkers Ltd

At this time, I would like to welcome everyone to this 2020 Volkos earnings call for Q3 2024. Today's call is being recorded. If you have any objections, please disconnect at this time. All participants will be in a listen-only mode throughout the presentation, and afterwards, there will be a question-and-answer session. I'll now turn the call over to the chairman, Magnus Halvorsen. You may now begin.

Thank you, operator. Welcome to the Q3 2024 conference call for 2020 Bulkers. I'm joined here today by our chief financial officer, Vidar Halsund, as well as our chief commercial officer, Lars Christian Svensson. 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 regards to future events and thereby subject to risk assumptions that are subject to uncertainties. Actual results may differ materially. And with that, I'll start with the highlights for the quarter. We reported net profit of $11.6 million and an EPS of 50 cents. Trading-wise, we achieved time chart equivalent earnings of approximately 36,000 per day gross This compares to the Baltic 5TC index average of 24,900. During the quarter, we declared total dividends of 57 cents per share for the months of July through September. This represents an annualized yield of approximately 16% compared to our current share price. For October, we have achieved time chart requirement earnings of 31,400 per day gross. And today, we declared a dividend of 15 cents per share based on the earnings for October. And with that, I will lead over to Vidar.

Thank you, Magnus. 2020 Bulkers reports a net profit of $11.6 million for the third quarter of 2024. Operating profit was $12.5 million and EBITDA was $14.7 million for the quarter. Earnings per share was 50 cents. Revenues were $19.9 million for the third quarter. The average time charter equivalent rate was approximately 8%. $36,600 per day gross. Vessel operating expenses were $3.9 million, and the average operating expenses per ship per day was approximately $7,000 in the third quarter. G&A for the third quarter was $1 million. 2020 Bulkers charged Himalaya Shipping $0.4 million in management fee for the third quarter, which is recognized as other operating income in the financial statements. Net financial expenses were $0.7 million, including interest expense of $1.1 million. The interest expense is impacted by $1.2 million transferred from other comprehensive income relating to amortization of realized gain on interest rate swaps. As of September 30th, the realized gain on interest rate swaps have been fully amortized through interest expense. Shareholder's equity was $157.9 million at the end of the quarter. Interest-bearing debt was $112.5 million at the end of the third quarter and is non-amortizing until maturity in April 2029. Cash flow from operations was $14.8 million for the third quarter. Cash and cash equivalents were $21.2 million at the end of the quarter. The company declared total dividends to shareholders of 57 cents per share for the months of July, August and September 2024. That completes the financial section. And now back to you, Magnus.

Thank you, Vidar. Just to summarize our financial robustness, we'd like to show you this graph illustrating our very low cash break-even. As you can see, we have a cash break even of around 11,700 per day, which we should be able to achieve with standard capesize rates of 6,900, given our vessels earnings premium and the scrubber benefits. This is a great foundation for our ability to distribute dividends back to our shareholders. Now looking at our dividend potential, this graph shows the theoretical free cash flow with all vessels trading spot as they are today. The current FFA curve for the bounce of the year would indicate a dividend potential in the high teens on a run rate basis. And the FFA curve for next year, around 21,000, would indicate a dividend potential of around 15%. Of course, as we know, the FFAs are volatile, so should be taken just as an indication of where we could lock in rates today, should we wish to do so. However, as Lars Christian will go through now, we have a fairly constructive view on the market for 2025. And with that, I will leave it over to our Chief Commercial Officer, Lars Kristelm.

Thank you, Magnus. So far in 2024, we had a solid year with rates 66% above 2023 levels. We can thank much of this rate jump to the Cape Size Tonnweil impact, which has grown throughout the year. Iron ore and bauxite from Brazil and Guinea are the large drivers of this trend, and a ton-mile forecast for these two particular trades are anticipated to continue its positive trajectory as we're moving closer to 2025. The coal ton-mile impact so far in 2024, however, has been negative for the Cape and Newcastle-Mac sentiment. Even though we see healthy coal volumes transported, The Panamax sentiment, which is struggling to find its own feet, have been eating into the Cape size volumes and has been responsible for multiple Cape size cargo splits during the period. The Cape in Newcastle-Max congestion has moved from low range to mid range over the last month, which we identify as a bullish signal as less ships will be available to transport fresh cargo volumes. As we mentioned, the iron ore ton mile has been good in 2024, which is also reflected in the volumes imported to China, the largest iron ore importer in the world. A 5% increase compared to the previous year and a year-over-year increase of 5.1% from Brazil and 1.5% increase from Australia. Inventories are up about 25% year-over-year. However, if you take into account the inventories related to days of consumption, we are about on the historical average. The Chinese also require an increased working stock of iron ore for their physical forward traded contracts and more stock for their iron ore blending facilities for export. A reputable bank estimates this total working capital stockpile figure to be between 20 and 40 million tons. The global steel production market has been fairly flat during 2023 and 2024. However, we note with excitement that the Chinese steel output has returned after months of contraction. In October alone, the country exported 11.2 million tons of steel products. This is up 10% month-on-month and marks a 42% increase year-on-year, the highest amount exported in nine years. As discussed, bauxite has also been a significant contributor to tonn-mile in the Cape and Newcastle-Max segment. with a large 15% increase compared to the previous year. We are soon entering another Q1, which is the historical high season for bauxite exports due to the dry weather, which optimised the onshore logistics. This commodity, we believe, will continue to grow in terms of volumes, thus also tonne miles in the coming years. The Cape-sized Newcastle and Mack segments continue to thrive on new fundamental long-haul trades. The commencement of the new Simandou iron ore mine in Guinea will be yet another solid leg for this segment to stand on. Simandou is a joint venture between Rio Tinto, the Chinese and Guinean government, and will provide an additional 120 million fresh tons of iron ore to the market, commencing in 2025. Combine these volumes with the additional iron ore mines upgrades from Vale in Brazil, the added cargoes alone will consume an equivalent of 150% of the current Cape size order book. Speaking of the order book, we find ourselves in the grateful position of having visibility in terms of Cape size and Newcastle Max vessel supply for several years ahead. The order book for these vessels currently stands at around 7%, the lowest of any shipping segment of this size. The active shipyards are down 50% from the peak of 2009, and because of the large container, tanker and gas carrier market surge, Prior to the dry cargo rebound arrived around five years ago, it's close to impossible to find yard capacity able to construct meaningful amount of Newcastle Max and Cape size vessels for delivery prior to 2028. A dry bulk vessel is also a relatively low margin business for the shipyards and preference to build container, tanker or gas carriers continue to prevail. Mandatory dry docks every fifth year for the merchant fleet has historically been a non-event for the broader market impact. However, with a fleet that has not been modernized in scale for a long time, we now find ourselves in a scenario where the 2010 generation of vessels, over 10% of the fleet, will be forced to enter dry dock. If you combine the 5, 10, 15 and 20-year dock schedule for 2025, we have a 52% increase in dry dock compared to 2024. We expect this to have a significant impact on vessel availability and can restrict the total fleet with as much as 3% over the next three years. We would also like to add that yard congestion and potential scrapping for older tonnage has not been taken into account, leaving further upside to this scenario. To summarize. With new volumes from Guinea and Brazil, the dry dock impact on the total merchant fleet, and new vessel deliveries, the net effect will be a reduction of 6.5% available vessel days in 2028 compared to 2025. We have also forecasted zero scrapping into this case, which indicates these numbers to be on the conservative side. And with that, I will pass the word back to the operator. Thank you very much.

Thank you. If you do wish to ask a question, you will need to press five star on your telephone. To withdraw a question, please press five star again. There will be a brief pause while questions are being registered. Our first question comes from Bendik Nydignas from Clarkson Securities. Please go ahead. Your line is open.

Thank you. Good day, guys. As we look towards the first quarter, the FFA is pricing in around $15,000-$16,000 per day. Is there any level where we should expect to see you take some coverage, or do you expect to remain spot no matter what, given your new capital structure?

I think it's something that we monitor day to day and it's a function of, of course, what the FFA levels we can fix at this, but also look at it in the context of the spot market. The FFA, even if it's supposed to be future rates, tend to move quite a lot with the spot market. So I say now usually you should have a stronger period, as you know, driven by Brazilian volumes and the Bork site, which has been a more important trade in recent years, at least for the next couple of weeks. But there's a natural inclination to always look at whether we take some coverage for Q1. But I don't think we're there yet. I mean, we haven't done it yet. And the 16 or so that Q1 is trading at is... Of course, there's been weaker years, but then there's usually been something abnormal that happened. Now we have bauxite trade, which season is quite strong in Q1. So there's no urgency to lock in. And as you very correctly point out, we have a capital structure now where there's really not going to be a case where we have to do it out of necessity because we're going to be cash flow positive today. regardless uh so so i guess stay tuned don't rule it out but but we haven't done anything just yet and usually we would expect to have a couple of weeks of affirming rates which hopefully could give us a better position to do that thank you that's good color and um just looking at the iron ore inventories building in china

And then you see all this new capacity that you mentioned coming in on the iron ore side from the Atlantic producers. I believe the Pacific producers are guiding more or less flat production. But you have an inflow of additional tons here. Have you made any thoughts on what will happen if demand is not there to take off the additional tons from Val and Simon Duke?

Yeah, I think it's obviously a good question, but I think one thing that we find quite interesting is how domestic iron ore in China has been depleting both in terms of volume and grade. If you look at the last 10 years, we are probably down from around 1.4 to 1 billion tons in production. The grade has fallen from 40 to 20%. And this is unfortunately hard to verify, but our understanding is it's quite a lot of low-grade inventory sitting there in China. Another point is that if you look at, you know, Chinese interests have been financing a lot of this mining expansion. And I think it's reasonable to assume that given its high grade, it is going to be shipped to China, which will have a positive effect on ton miles. And I think Lars Christian found some research the other day suggesting China has increased their trade with BRICS countries, I think 11-12% year-on-year, which mirrors quite well what we're seeing today. in the current year, trading patterns where Brazil is up, as we touched upon, and some more flattish development in Australia. So I think, of course, I think people, to be honest, get a little bit too hung up on, is the GDP in China 4%, 4.5%? is it plus minus one or 2% on steel demand? You have to take into account that there's a balance between what you produce domestically and what you import. And there's been a very clear and steady decline in both volume and grade, declined and been flat around 20%, suggesting that even in a relatively modest end-user demand scenario, you're going to require these volumes imported from West Africa, which is probably why they've been financed by Chinese interest. So I think we view that as a quite big positive, and I think there's definitely a positive ton-mile story in Cape size for the next two or three years, just based on the similar volumes and what Val is guiding.

Yes, thank you. We absolutely agree with you. That's it from my end.

Thank you, Bendik. As a reminder, please press five stars to ask a question. We will have a brief pause while new questions are being registered. As no one else has lined up for questions in this call, I'll now hand it back to the presenters for any closing remarks.

Okay, thank you, operator. I think I'll just say thank you for everyone who dialed into the call. And if you realize you have any questions you didn't ask today, feel free to reach out anytime and we'll speak on the next quarter. Thank you.