Golden Ocean Group Ltd

NASDAQ:GOGL

Earnings Call Transcript 2021-Q1

[Operator]

Thank you for standing by and welcome to today’s Q1 2021 Golden Ocean Group Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today.

And I would now like to hand the conference over to Ulrik Andersen, CEO. Please go ahead.

[Ulrik Andersen, Chief Executive Officer]

Good afternoon and a warm welcome to Golden Ocean's Q1 release presentation. My name is Ulrik Andersen. I am the CEO of Golden Ocean and I am delighted to present our results today together with Peder Simonsen, the company's CFO.

In a moment, I will talk you through the highlights of the quarter. Thereafter, Peder will provide details on our financial results and we will round the session off with a market outlook and by discussing the company’s cash flow generation potential. After the presentation, as always, we look forward to answering any questions that you may have.

Q1 was eventful and had several highlights. First and foremost, we are satisfied with delivering the best quarter in the history of Golden Ocean. We achieved an EBITDA of $54 million and an associated net profit of $23.6 million.

We went into the quarter relatively low on fixed cover allowing us to capture most of the market strength. During the quarter, we also entered into agreement to acquire 15 modern dry bulk vessels and three newbuildings for a total price of $752 million from Hemen. At the same time, we raised $355 million in capital through a private placement.

We have already taken delivery of three of the acquired Capesizes and three of the Panamax vessels and we expect that the remainder of the vessels will be delivered by the end of May subject to attain rules.

For Q1, we reported TCE rates for the Capesizes of 16,600 per day and 14,800 for the Panamax vessels. During the quarter, we also converted three vessels from floating to fixed rates taking advantage of the market strength. The vessels are averaged index 115 and the achieved TCE rates reflects the solid increases we have seen in TCE levels since March. We will continue to derisk when the market spikes.

As a guidance for this quarter, we can advise that we have fixed 64% of the Capesize vessels days available at approximately 29,000. We have also fixed around 84% of the Panamax vessel days at approximately 18,800.

Last but not least, we are delighted to resume Golden Ocean’s proud tradition of paying out dividends and we have announced a payout of $0.25 per share. The payout for this quarter shall be seen in conjunction with Q4, while we hold the dividends due to the acquisition of the 18 vessels mentioned above.

It is the company’s ambition and policy to return value to our shareholders through dividends, of course, based on investment opportunities and market conditions. But we hope that the markets will support additional payouts going forward.

With that, I give the word to Peder.

[Peder Simonsen, Chief Financial Officer]

Thank you Ulrik. If we move to Slide 5, as Ulrik mentioned, we achieved Capesize TCE rates of 16,600 and Panamax TCE rates of just below 15,000 for the quarter. And this averaged out at a total TCE rate of 15,900, which is equal to achieved rates in Q4.

Our TCE revenue came in at $119.5 million, which is down from $125 million in the previous quarter and reduction is largely due to having six ships drydocked in the quarter, which resulted in a 280 day of – eight days of hire representing approximately 3.5% of total days.

If we move to the ship operating expenses, we recorded $48.6 million in ship operating expenses, which compares to $47.6 million in Q4. This has to do with – the increase has to do with higher drydock costs, while the running expenses actually decreased by just below $2 million. So, if you look at the daily OpEx per ship, we recorded $6,300 on average for the fleet in Q1 versus $6,100 in while the operating running expenses were $5,600, which is $100 per day below the previous quarter.

The ship operating expenses are also highly impacted by the ongoing COVID-19 pandemic, which increases the complexity and costs, particularly in relation to crew changes, quarantine hotels, testing, and so on. So, we expect that once this normalizes that the OpEx will come down on the running basis.

If we look at the administrative expenses, we see that are slightly up from Q4 with approximately $100,000. This was largely due to US dollar, NOK FX movements, because we have a large part of our cost base in Norwegian Kroner, which resulted in a $130,000 impact negatively for this quarter. In addition, we had some impacts of higher advisory fees mainly related to our 20-F publishing.

The charter hire expense was down from $17.1 million in Q4 to $13.9 million in this quarter and this is mainly due to lower trading activities during Q1 and this fluctuates also with the index rates as we have lot of ships out on chartered in index linked hire to get us an adjusted EBITDA for Q1 of $54.6 million.

Looking at the depreciation for the quarter, we recorded depreciation of $26.8 million, which is slightly down from the previous quarter and this is due to the sale of the Golden Shea and Golden Saguenay as previously reported. We also recorded a $4 million impairment loss on the sale of the Saguenay and which compares to a $700,000 payment loss in Q4 for the sale of Golden Shea.

On the net financial expenses, we recorded $8.7 million versus $9.4 million, which is to logics and attributed to lower LIBOR expenses and also lower debt issuance costs quarter-on-quarter where we refinanced a large facility in Q4 increase – increasing some of the costs in Q4 and in addition, the repayment of the RCF that we have done in Q1 of $50 million.

On our derivatives and financial income side, we recognized a very positive derivative movement from long-term interest rate swaps that we have in our portfolio of $9 million in Q1 and on aggregate, the derivatives position was up by the same amount versus $2.7 million in Q4.

On results from associated companies, which largely relates to Swiss Marine and our joint venture with Frontline and Trafigura, TFG Marine, we recorded a positive $0.7 million results versus a $1.2 million results in Q4.

Marketable securities were up by $800,000, which relate to our position in NETI or previously Scorpio Bulkers. Our net profit, as Ulrik mentioned was $23.6 million or $0.14 per share versus $25 million and $0.18 per share in Q4.

Moving to Slide 6, you can see that our cash position increased by $153. 4 million and this is to a large extent attributed to the private placement that we carried out which raised $335 million in new capital to finance the acquisition of ships from Hemen.

If you look at our cash flow from operations, it is unusually low this quarter and that is because it includes a $18.6 million payment for the final installment for the one of the new buildings we acquired in a transaction with Hemen Holdings, which was prepositioned at the end of the quarter, but with the ship being first delivered in mid-April. So, this is recorded under other receivables and thereby reducing the operational cash flow.

In addition, we recorded a negative working capital movement, which is shown in the increase in receivables and also in inventory and this has to do with mainly the timing of payments of bunkers and also payment of freight, as well as bunker prices and freight rates.

Looking at the cash flow from financing, it was positive $246 million. And this is due to the proceeds received from the private placement of $335 million. We will – in addition, in Q2 record a subsequent offering of approximately $16 million in addition to this.

Cash flow from financing also was reduced by the repayment of debt and finance leases of total $89 million, which also includes the repayment of the RCF revolving credit of $15 million and this facility remains available for drawing at our convenience.

Lastly, in the cash flow used in investments of approximately $99 million, this consists of a 10% deposit for the 15 ships that we acquired from Hemen , which was totaling $64 million and in addition a total of $44 million payment for the newbuilding contracts, which is less remaining installments that we acquired from Hemen as well.

Moving to our balance sheet on Slide 7, we can see that our cash position at the end of the quarter ended at $328 million, which also includes $19.4 million of restricted cash, which secures our hedging portfolio.

Our debt and lease liabilities totaled $1.15 billion and at the end of the quarter, following the scheduled repayment of debt and RCF repayments. Our total assets ended at just below $3 billion and an equity ratio to total assets of approximately 58% at quarter end.

And with that, I’ll leave the word to you Ulrik.

[Ulrik Andersen, Chief Executive Officer]

Thank you, Peder. And with that, we turn the attention to the market outlooks, but first a quick look at what happened in Q1. As those who follow Golden Ocean will know, we have been optimistic about the recovery in drybulk rates for several quarters. And so say that our expectations have been met would be understatement.

Q1 turned out to be the best quarter in more than a decade. Remember that first quarter of the year is usually the weakest due to seasonal factors. While the sharp increase in rates last year was almost entirely driven by the reopening of the Chinese economy, the global trade is now recovering more broadly as vaccinations rise and COVID-19 cases decline across many countries obviously with the exception of India.

The drybulk market is highly dynamic and two important related factors positively impacted the market in the first quarter of 2021. First, the Chinese ban on Australian imports widened to a larger group of commodities. This translated into longer sailing distances between exporter and importer and of course, effectively decreasing the fleet supply.

The iron ore trade from Brazil to China is the most notable, but not the only example. Secondly, there was an unusual cold winter in China, where coal derived electricity represents around 70% of total electrical output. Chinese coal inventories were relatively low heading into the winter moths and with the ban on Australian imports, trade lanes changed. This reflected in the strengths of the Panamax market.

That gave rise to the special situation that the Panamaxes traded above the Capes for a sustained period of time. The strength that has now reversed again. The market strength has of course persisted in Q2 and despite a correction over the past weeks, we remain bullish for the rest of the year.

Turning to Slide number 10, and looking forward, the stage is set for prolonged period of demand growth for drybulk commodities. GDP growth is a good proxy for drybulk demand and looking at the years ahead, we expect that at least two years of high GDP growth ahead of us driven by force of retraction of COVID, but also as a consequence of the huge stimulus packages that are being employed currently by China, the U.S. and EU.

Turning to the next slide, and looking more specifically at the commodities, then the recovery from the pandemic is also expected to resolve in multiple years of demand growth across all commodity groups really. Its forecast that would have been hard to imagine a few years ago, but we see this stay in the freight markets.

While 2021 will almost undoubtedly be exceptionally strong, the expectation for continued demand across all commodity groups in the years out is very encouraging. There has been a good deal of talk about a new commodity super cycle, while we won’t be the judges of whether we are entering a super cycle or not, high commodity prices support high freight rates.

Currently, the freight cost for bringing iron ore from Brazil to China are near historic lows and naturally, that leaves plenty of room for increases in the freight.

Turning to Page 12 under Vessel Supply. Then, it is clear that fleet growth is slowing down dramatically. In fact, we are looking at the lowest fleet growth in 30 years. At the moment, the order book is likely to stay muted.

That’s a very limited amount of slots available before 2024. We see increasing prices for the assets mainly due to steel, but also due to increased demand and of course, availability of finance and new emissions are also keeping the order book in check.

Looking at 2023, we have a potential for further catalysts as we will see the new IMO 2023 regulations enter into force. It is assessed by some that upwards 80% of the drybulk fleet is not in compliance with the new regulations and the easiest and speediest way to get in compliance is by slow steaming.

Therefore, we expect quite a lot of slow steaming from 2023 at a time where we are already seeing very, very few additions to the fleet. It will of course further reduce the efficiency of the fleet and could act as a catalyst also beyond the – through next years.

Turning to Slide 13 and putting the pieces together. It is clear that there are some very powerful market dynamics at play. We are already in a relatively strong market, yet for the next two to three years, we expect this situation to tighten even further. Demand is simply going to outpace supply until 2024. Should these forecasts unfold, fleet utilization will remain high and of course, continue to support strong freight rates.

Turning to Page 14 and before we end today’s session, I would like to talk about the cash flow generation potential. As mentioned in the highlights, we have recently acquired 18 vessels. They have increased our fleet size with 25%, obviously aiding us in bringing down cost. It has largely average aged and has increased our market cap.

On top of that, we have been able to lower our cash breakeven, which of course will be a benefit going forward. Finally, we get the vessels straight away in an exceptionally strong market.

Turning to Page 15 and to remind about our low cost base. We have depicted our industry low cash breakevens. You will note on the chart that spot rates are far significantly higher than these levels.

The time charter market is also well above breakeven levels, although we are primarily spot at the moment. We have continued to actively manage our spot exposure in order to both protect against downside scenarios, while maintaining significant exposure to increases in freight rates.

It is important to emphasize that we are not looking for balance per se, rather we are constantly assessing the market to look for opportunities to lock in cash flows without giving up too much upside. This requires us to combine our strong commercial capabilities with a flexible approach. We have proven our ability to pick good moments for locking in longer term TCEs in the past and latest with the three TCEs we did in Q1.

Turning to the last page of today’s presentation and to give you an idea of our cash flow potential, we have made the following graph. As it appears, on 18th of May, the blended average of Cape and Panamax rates were just shy of $30,000. On an annualized basis, that gives us free cash flow above $600 million, which the company can allocate freely.

We are always cautious not to paint too optimistic of a picture, but our first quarter dividends of $0.25 per share should provide a good indication for where we think the market is headed.

With that, we will open up the call for questions. Thank you very much.

[Operator]

[Operator Instructions] And we do have a question from the line of Greg Lewis of BTIG. Please go ahead.

[Greg Lewis, BTIG]

Yes. Thank you and good afternoon, and thank you for the presentation and that forward guidance around Q2. Those are some pretty healthy numbers. But I was kind of curious and maybe looking for a little more color.

There has clearly been a pickup in time charters and vessels being fixed on 6, 12 months, even longer, kind of curious, not necessarily thinking about forward days booking in the second half, but is there any way to think about vessels in the fleet that are already locked in at attractive rates in the second half? Any kind of color around that?

[Ulrik Andersen, Chief Executive Officer]

Yes. Hi. It’s Ulrik here. The deals that we have done now is about as much color as I can give you, because that’s what we have done so far. We did the three conversions recently. But we would be looking to do more when the market did picks up. As you may have noticed, the market took a bit of a correction in recent weeks, but it’s now planning up again and as soon as we risk value reward that is – that we see this as reasonable and which covers Q1 next year.

Then, we will build the book a little bit more. So, we will derisk going forward. We don’t see a lot of value in a three year time charter at this point. I think it’s undervaluated further out of the curve and that may change, but for now, we are focusing on the, let’s say 12 months horizon where we see the best value. Does that answer your question, Greg?

[Greg Lewis, BTIG]

Yes. Yes. That was perfect. And then, as I think about the balance sheet and leverages you are taking the delivery of the rest of the acquisition. Congratulations on that by the way. How should we be thinking about, maybe what like a pro forma fully built out debt looks like? And then, as we think about it, what is the company?

What is kind of the sweet spot knowing that, hey your fleet is very young and modern. And so, maybe you can maybe maintain more leverage versus some other owners that have top to bottom older fleets. Just kind of how do you think about that? And how – as cash accelerate – as we see this cash windfall come in over the next few quarters, maybe next few years, how were we thinking about that?

[Peder Simonsen, Chief Financial Officer]

Well, I think, as we - this is Peder. Hi, Greg. I think as we communicated previously that we are not seeking to lever up the company. I think in terms of risk, we have – we want to maintain the flexibility to be fully exposed to the spot market when that makes sense. And I think with that, we want to moderate our leverage.

We have indicated, we will finance the transaction that we did with Hemen at 55% and it’s around those levels that we expect to finance the ships. And I think that’s also sort of a target for us. We are more focused on the cash breakeven levels that that would entail rather than the absolute or the relative leverage that that will entail, because if that is – at the end of the day what drives our cash flow.

We are with that leverage able to, as we see it maintain a very strong cash breakeven, because we can afford to have quite long repayment profile and that would also give us the opportunity to attract very, very healthy terms on our financing. So, I think around those levels is where we expect to be positioned us in terms of financial leverage.

[Greg Lewis, BTIG]

Okay, great. Super helpful. Thank you very much.

[Operator]

Thank you. [Operator Instructions] And there are no questions coming through at this time.

[Ulrik Andersen, Chief Executive Officer]

Alright. Then, we say thank you very much for your time today and if there are any further questions, we can always be reached on our Investor Relationship email. Thank you very much. Have a nice day.

[Operator]

Thank you. Ladies and gentlemen, that does conclude your conference call for today. Thank you for participating and you may now all disconnect.