Golden Ocean Group Ltd

NASDAQ:GOGL

Earnings Call Transcript 2022-Q1

[Operator]

Good day and thank you for standing by. Welcome to the Q1 2022 Golden Ocean Group Limited 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] Please be advised, that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Ulrik Andersen. Please go ahead, sir.

[Ulrik Andersen, Chief Executive Officer]

Good afternoon, everyone. Welcome to Golden Ocean's first quarter release call. My name is Ulrik Anderson, and I'm the CEO; and next to me, I have Peder Simonsen, our CFO. Today is about looking back and ahead. We will give you insight and information on the key numbers from the first quarter, but also talk about how the outlook for dry bulk looks.

Today's overall message is that we deliver another strong and solid financial performance, courtesy of a firm Panamax market and a high degree of Cape contract coverage secured at attractive levels last year.

In the next 15 to 20 minutes, we will show that we have refinanced debt, lowering our already industry low cash breakeven, that we continue to pay out a significant portion of our net profit in dividend and that despite worldwide economic headwinds, the fundamentals remain in place for a sustained period of profitable markets.

With that, let's take a look at the main highlights for the quarter. In Q1, we recorded an EBITDA of $149 million, which resulted in a net profit of $125 million, or $0.63 per share. We achieved average time charter equivalent rates of $24,800 per day for the Capes and 23,600 for the Panamaxes.

Worth noticing is that the average rate for Capesize vessel in Q1 was 14,700. In other words, our strategy of hedging Q1 with fixed paying Cape contracts last year paid dividends. Our average Cape earnings were 10,000 per day better than the market.

Looking at this quarter, Q2, we have so far secured $28,000 per day for 78% of our Cape days, $27,000 per day for 77% of our Panamax days. Looking ahead and into Q3, we have secured $38,000 per day for 15% of our Cape days and $35,000 per day for 33% of our Panamax days.

During May, we signed a $275 million loan agreement. The new facility will reduce cash breakeven for the 14 vessels in the facility by $1,500 per day. Finally, we announced another significant dividend. We will pay out $0.50 per share for Q1. The dividend underlines our belief in the longer-term fundamentals and takes the total dividends paid over the past 11 months to more than $600 million.

Now I pass the word to Peder, who will dive into some of the numbers and financial details of the quarter.

[Peder Simonsen, Chief Financial Officer]

Thank you, Ulrik. If you look at our profit and loss, we recorded TCE revenues of $208.5 million, which was down from $306 million in the previous quarter. But as Ulrik mentioned, supported very much by strong performance from our Panamax segment and also the coverage in our Cape segment in an otherwise weak -- seasonally weak part of the year. The total TCE rate per day was 24,300, down approximately $11,000 from Q4. We had six ships dry-docked in Q1 versus five ships in Q4, which resulted in approximately 3.5% of our total days off hire or 294 days. We have five ships dry docking in Q2 this year.

Looking at our operating expenses, they were more or less flat adjusting for the additional ship that was dry-docked, compared to previous quarter coming in at around $58 million. Our OpEx continues to be impacted by COVID-19 pandemic, which impacted our OpEx by approximately $300 per day in Q1.

Looking at our G&A, it was more or less unchanged, slightly up due to the impact of profit sharing accruals, coming in just below $900,000. Charter expense was $10.3 million, which was slightly down from previous quarter, reflecting lower charter hire rates on charter in tonnage, while the chartering activity increased in number of days. Our adjusted net EBITDA was $149 million versus $243 million in Q4.

Moving to our financial expenses, we saw the expenses unchanged quarter-on-quarter, say, for an addition of capitalized interest on the new buildings of $300,000 which we recorded this quarter. On our derivatives and other financial income, we recorded a gain of $33 million in Q1, compared to a gain of $10 million in Q4. The main contributor share were the interest rates derivatives, which contributed with $16.4 million in gain as the LIBOR rates moved higher in the perfect curve.

From FFA derivatives and bunker derivatives, they contributed with approximately $2.5 million. In addition, we had the results from investments in associates gain of $15.3 million, of which our investments in dry bulk operator, SwissMarine, contributed with $13.4 million. This resulted in a net profit of $125.3 million or $0.63 per share.

Moving to the cash flow. We can see that we recorded a net decrease in cash of $94.3 million, which is the aggregate of cash flow from operations of $123 million, the cash flow used in financing of $223 million and cash flow from investments of $4 million. The most notable here is the cash flow return from our investment in SwissMarine, which returned both a shareholder loan repayment of $5.4 million and a dividend of $6.5 million recorded in Q1.

In terms of debt repayments, we had scheduled a debt and lease repayments of $33.8 million, which -- of which $6.8 million related to explorer repayments of the sale of one Panamax vessel.

Moving to our balance sheet, we recorded a cash position of $15.7 million, which includes $8.4 million of restricted cash. In addition to this liquidity, we also have $100 million of undrawn available credit facilities at quarter end. We have debt and lease liabilities of a total of $1.4 billion, and an unchanged book equity of $1.9 billion, which gives a ratio of equity to total assets of approximately 56%.

Looking at the new financing that we have signed during this or prior to this release. We have put in place a $275 million credit facility, which includes the $50 million revolving credit capacity. This is our first financing based on the software rate, which is the reference rate that will replace LIBOR in all new facilities and eventually in all our credit facilities. The financing is priced on the basis of software plus 190 basis points, a 20-year repayment profile.

If you look at the difference between software and LIBOR, software has traded approximately 15 to 30 basis points below the LIBOR rate historically, which means that the margin that we have put in place equals approximately 165 basis points on a LIBOR basis.

And as Ulrik mentioned, this cash breakeven -- the cash breakeven for the new facility will be reduced by approximately 1,500 for the facility and approximately $400 per day for the full fleet.

If you look at our cash breakeven for the both segments, you can see that the cash breakeven has increased somewhat due to the increase in reference rate or LIBOR during the quarter, which has impacted the Panamax cash breakeven by approximately $400 per day and the Cape approximately the same within the adjustment for this financing.

With that, I give the word back to Ulrik.

[Ulrik Andersen, Chief Executive Officer]

Thank you, Peder. Now, let's begin with a quick review of the market developments in Q1. In some ways, the quarter developed as expected. We saw a return to normal seasonality, a seasonality that was largely absent in 2021, but there were also other events and drivers at play.

We saw decreasing industrial production in China ahead of the Winter Olympics. We saw unusually heavy rainfalls in Brazil, hampering iron ore export. We saw the emergence of the Omicron variant and obviously, Russia launching an invasion of Ukraine. The Cape and Panamax markets responded differently with Cape rates coming under pressure and averaging shy of $15,000 per day, whereas the Panamax rates stayed firm throughout quarter at an average of $23,000 per day.

A war in Ukraine and energy crisis and increasing inflation mean that the world is facing new challenges in the aftermath of COVID. The IMF forecast global GDP to grow 3.6% in each of 2022 and 2023, which is a slight downward revision since its last forecast. Having said that, the forecast remains high from a historical perspective and worth noticing as well is that the growth from the emerging economies remain strong.

In this respect, it is interesting to look into the relationship between GDP growth and the demand for shipping. As it appears, seaborne trade has consistently grown over the last 32 years at a pretty solid 3.7% per year on average. Only during extreme events like the financial crisis and COVID did volumes retract.

There's a high correlation between GDP growth and seaborne trade. In fact, seaborne volumes are, on average, growing by 20% more than world GDP. In other words, it is the owners building too many vessels, which caused the markets to come under pressure, not the lack of demand.

On that note, of course, it is interesting to look at the supply side and see what the owners are doing. Counter-intuitive perhaps the ordering is at a 30-year low. The fact is that the owners are not playing -- any placing any orders and have not done for quite some time. There are several reasons for that. But the three main ones being that newbuilding prices are very high in a historical perspective. The capacity is limited and available delivery slots are minimum two years out; and finally, there are question marks over what technology is truly future-proof. On the back of that, we expect the order book to stay muted for this foreseeable future.

So pitching supply and demand together much point to an extended period of sustainable earnings. The world may be facing headwinds in terms of inflation and slowing economies, but it is not enough to offset the outlook for dry bulk, we believe. As we have shown today, demand will continue to grow. And at the same time, we are looking at a historically low influx of vessels, combined with inefficient allocation of coal and grain and inefficiencies from congestion and new IMO regulations next year. In our view, this will support a continued strong freight environment in the years to come.

As we have been explaining on our last calls, we planned our commercial strategy around hedging a lot of Q1 and some of while keeping more exposure to the second half of the year, which traditionally is much stronger than the first part. It is important to underline we do not want to be fully spot exposed at any time, but we seek to take out fixed contracts in the best possible market conditions. It mitigates risk, improve visibility and protects our capacity to pay out dividends.

As of today, for Q2, we have secured around 78% of our available vessel base at around $28,000 per day net. Looking into the next quarter, we have taken up 15% of our Cape days at $38,500 per day and 33% of our Panamax days close to 35,000 per day. As it appears, we are focused on securing Panamax days simply because the pricing in the last few months has been much more attractive for Panamax’s than for Capes. We always balance our commercial strategy between the segments to extract maximum value at the lowest risk.

On the last slide of today, we will focus on cash flow generation. Through well-timed acquisitions, economies of scale and access to competitive finance, we have achieved industry low cash breakeven as already laid out by Peder earlier.

As it appears, the cash flow generation potential in Golden Ocean is substantial. For instance, looking at the FFA or futures market for this year, Golden Ocean stands to generate more than $500 million in free cash over the next 12 months.

As we know, it is a board decision what we will do with future earnings, but with no material CapEx strong balance sheet and no appetite for new buildings. I believe, it's a fair assumption that Golden Ocean will continue to have dividends on top of the priority list, when it comes to capital allocation. Something which certainly has been the case so far, seeing we have paid out more than $600 million in dividends in the past 11 months.

Before opening up for questions, I'd like to shortly wrap-up the three main points from this release. Golden Ocean hedged Q1 and delivered a solid net profit of $125 million. Golden Ocean has refinanced part of the debt and lowered our already industry low cash breakeven, despite a slowdown in economies around the world, the 30-year low order book means that fundamentals remain in place for continued strong freight environment.

And now, we'll start the Q&A session, and I therefore hand the word back to the operator.

[Operator]

Thank you. [Operator Instructions] Your first question today comes from the line of Greg Miller. Please go ahead. Your line is open.

[Unidentified Analyst]

Is that me? Am I online?

[Ulrik Andersen, Chief Executive Officer]

Yes, you are.

[Unidentified Analyst]

Okay. Yeah. I think she mispronounced my name. Hey. Hi, how are you doing? Good afternoon, and thanks for taking my questions. Thanks for the detail on the slide, where you kind of outlined some of the challenges facing the Cape market at the start of the year. Clearly, the last few weeks have been very constructive for the Cape market despite some of the ongoing challenges in China. Could you talk a little bit about what you're seeing in the Cape market that has really kind of helped that market start to recover and get back where it traditionally is above the smaller vessels sizes in terms of rates?

[Ulrik Andersen, Chief Executive Officer]

Yeah. Sure. Hi, and good afternoon too. Yes, it has been a quite constructive few weeks, as you point out with our Cape rates in the mid-30s. So that's good to see. As always, with these things, it's a combination of several factors driving the market. But the main two reasons I would point to is the very, very inefficient allocation of coal with Russian coal now soon about to be banned. But in essence, in many – for many practical purposes already being banned by many, we see coal going from places we have not seen before. That is helping.

At the same time, we are now through the rain season in Brazil, and we have seen value return to the market with cargo, and that is obviously causing optimism and of course, longer – longer we can say ton-mile heavy demand. So these would be the two main factors. I would point to being behind the driver – being the drivers behind the uptick. And if you ask me, just for -- just one last comment, we think that we have turned the corner now with the rate burning them out here, well, about a month ago and from here on, we expect a firm Cape market, albeit as always, nothing is a straight line in shipping. There would be volatility, but we certainly see a strong market from here on.

[Unidentified Analyst]

Yes. And then, I did want to touch on that and thank you for those comments. Clearly, Russia has -- is important to the coal markets, low loss of those volumes is disruptive. As we think about changing trade patterns, and realizing that the grain is later in the year, but let's talk about coal now. As we kind of go through that, has the market kind of stabilized around the disruption from Russian coal, or is that something that probably continues to play out over the next few months?

[Ulrik Andersen, Chief Executive Officer]

In my view, that's going to continue playing out. There's a scramble right now for coal, primarily leading example on this is India that have been acquiring a lot of core, but also Europe. We have seen coal cargoes from Australia going into Europe, which really tells a story about how efficient -- sorry, inefficient this is.

We think that there's -- can you say, there's like a structural change in the trade patterns around coal, because we expect most countries to try and out-phase energy and commodities in general from Russia. So we expect this to be, if not a permanent situation, and certainly a longer-term thing.

And this is very good news for the Capesize vessels, of course. So for the next few months and perhaps also until the end of the year into next year, we expect coal to contribute to the ton mile quite heavily for the Capesize vessels.

[Unidentified Analyst]

Okay, great. And then there’s just one more for me. It's around fuel spreads. Clearly, those have risen again where the delta between high sulfur and low sulfur fuel oil is pretty attractive.

As we think about vessels going into dry docking, maybe just we'll just think about this year, realizing that a lot of the larger vessels already have scrubbers installed. Are there thoughts or plans to install any additional scrubbers on any vessels as we move forward in 2022?

[Ulrik Andersen, Chief Executive Officer]

We have a little more than 50% of our fleet scrubber fitted, and we are very happy with that. Investing more on scrubbers, I can categorically say, we will not be doing that. We are focusing on decarbonization efforts and investing into upgrading our vessels with a lot of other, can you say, energy-saving devices.

And we think that is the way forward to reduce emissions and reduce bunker consumption, rather than investing in a scrubber play, in a spread play in essence. So no, you will not be seeing us investing in scrubbers, but rather in other types of technologies to bring down emissions and power consumption.

[Unidentified Analyst]

Okay. Perfect. Thank you for the time everybody.

[Ulrik Andersen, Chief Executive Officer]

Thank you.

[Operator]

Thank you. Your next question comes from the line of Climent Molins from Value Investor's Edge. Please go ahead. Your line is open.

[Climent Molins, Value Investor's Edge]

Good morning, gentlemen. Thank you for taking my questions. You have one of the youngest fleets in the sector, which provides quite a significant edge in the current environment given lower fuel consumption. Vessel values remain well supported by freight rates. And I was wondering if you could provide some commentary on the oldest portion of your fleet, like the vessels built prior to the eco component being widely available. Are they still being like a central part of the fleet, or is it something you will potentially look to the best in the medium term?

[Ulrik Andersen, Chief Executive Officer]

Climent, thank you for your question. So you're absolutely right. We have the youngest lead among the large listed owners, and that is obviously giving us a good starting point, thinking about decarbonization and future regulations, but also, of course, extracting a lot of value out of the markets. Having said that, we cannot stand still. And we will be looking and we have already analyzed our fleet in that respect, on which vessels are possible to upgrade and to make future proof, and which ones will have to be sold off because our strategy is to bring down emissions going forward.

So it's always prudent as a ship owner to sell when markets are strong, and we will do that. But we will look not only at the age, but also at the performance of the vessels and what investments would otherwise be required to keep them competitive. So the short answer is, yes, we will sell vessels. We have sold seven vessels this year -- well, the last 12 months already. And we feel we can also do that having acquired 18 vessels last year and also have seven on order.

[Climent Molins, Value Investor's Edge]

Indeed, that's helpful. And do you expect incurring significant CapEx expenses due to the upcoming regulations, or is it something you believe will be negligible for your fleet?

[Ulrik Andersen, Chief Executive Officer]

I will actually deem it relatively negligible. But what you have to remember is that I mean for us, we wouldn't have to do anything to be more or less and wouldn't have to do anything to be in compliance with IMO. But how you need to think about this is that if you can make an investment into an energy saving device, let's say, low friction pain to mention something. And you can get a payback time of 12 months. You bring that because you bring down your bunker consumption, and you have four years to the next dry dock, then it's just a good sound investment.

So you save -- can you say, you save bunkers and it's a relatively easy investment. So -- and low investment. So this CapEx will not be particularly significant, but they will all have at least those we are looking at in terms of upgrading the fleet will all have relatively short payback time. So it would be not very smart not to take these low-hanging fruits, and that's what we are doing.

[Climent Molins, Value Investor's Edge]

Basically just like you do with the scrubbers. All right. That's all for me. Thank you for taking my questions, and congratulations for this quarter.

[Ulrik Andersen, Chief Executive Officer]

Thank you.

[Peder Simonsen, Chief Financial Officer]

Thank you.

[Operator]

Thank you. [Operator Instructions] There are currently no further questions. I will hand the call back to you.

[Ulrik Andersen, Chief Executive Officer]

Thank you for dialing in, and have a nice continued day.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may all disconnect.