Golden Ocean Group Ltd

NASDAQ:GOGL

Earnings Call Transcript 2018-Q2

[Birgitte Vartdal, CEO]

Good afternoon or good morning, and welcome to the second quarter of 2018 earnings release for Golden Ocean Group Limited. My name is Birgitte Vartdal, I’m the CEO of Golden Ocean management. And together with me today, I have Per Heiberg, the CFO of Golden Ocean.

With the current strength in the Capesize market, we are enjoying the benefit of having focused our fleet on larger vessel types. With the competitive cash breakeven level, we are generating good cash flow, enabling us to continue our strategy of deleveraging the balance sheet and at the same time, returning value to shareholders.

I will comment on the market environment and our outlook after Per takes you through the Company update.

[Per Heiberg, CFO]

Thank you, Birgitte.

I’ll go straight to the highlights. And we see that Golden Ocean reports a net income of $9 million and earnings per share of $0.06 for the second quarter of 2018, compared to $16.7 million in the first quarter. Adjusted EBITDA ended at $54 million, up from $53.3 million in the previous quarter. In May, the Company entered into a new $120 loan facility, refinancing 10 vessels. And this transaction was completed in early July. We entered into an agreement to sell Golden Eminence in April for $14.7 million to an unrelated third party. And the vessel was delivered to new owner on August 8. As we did through previous quarter, the Company announced a dividend of $0.10 per share for the second quarter of 2018.

Looking at the details for the net profit of $9 million. We see that time charter equivalent or TCE revenues decreased by $5.7 million compared to the previous quarter. As market rates were relatively stable compared to last quarter, the main reason for the decrease relates to fewer vessels chartered in on short-term trading. This is also reflected in our lower charterhire expense for the second quarter. Next, on lower charterhire, the underlying earnings from the core fleet was up for the quarter. Ship operating expenses increased by $1.9 million compared to last quarter. During the quarter, three vessels that dry docked, compared to only one vessel in first quarter. And at the Company expense, all costs related to regular dry docking. This explains the majority of the increase.

The Company booked an impairment of $1.1 million in the quarter related to the sale of Golden Eminence, and the remainder of the increased depreciation relates to full quarter depreciation of newbuildings that we took delivery of in the first quarter.

Net financial expenses increased compared to previous quarter. This is explained by a full quarter of debt in vessels delivered to us in the first quarter and the recent increase in the underlying floating LIOBOR rates. The Company booked $1.3 million gain on derivatives and other financial items for the quarter, most of this relates to gain on U.S. interest rate swaps bunker hedges, somewhat offset by losses on FFA hedges and other financial items. The Company reported TCE per day 15,215 for the quarter, slightly down from 15,593 in the previous quarter. The TCE continues to be above the Company’s long-term cash breakeven levels including full debt service on both recourse and nonrecourse debt. Adjusted EBITDA was $54 million for the quarter.

On the cash. During the quarter, we see that we started the quarter with $358 million in cash and generated $33.6 million in positive cash from operations. In total, the Company paid down $156.2 million in debt in the quarter. Of this, $124 million relates to refinancing of the 10 vessels and $32.5 million relates to ordinary repayments, buyback of the Company’s convertible bond and full repayment under the cash sweep mechanism set in place for the fleet acquired from Quintana last year.

Draw on new debt during the quarter was $103 million, related to 8 of the 10 refinanced vessels; an additional $17 million was drawn in July for the remaining two refinanced vessels. In addition, the Company paid $14.4 million in dividend for the quarter, the same amount that will be paid out for this quarter.

Moving on to the balance sheet. The Company ended the quarter with $322 million in cash, including restricted cash. The book value of the Company’s vessels is close to $2.5 billion, which includes $14.7 million related to the vessels held-for-sale. The decrease of value mainly relates to ordinary depreciation. The current portion of the Company’s long-term debt decreased by $59.7 million over the quarter as the new facility replaced two existing facilities booked as short-term in the third quarter. In addition, we bought back $9.6 million in nominal value of the convertible bond, maturing in 2019, and the remainder of the convertible bond is booked as short-term. At the end of the quarter, the company’s book equity was slightly above 50% and value adjusted equity is around 45%.

The graph for OpEx shows year-to-date average daily OpEx for remaining two vessel classes. Supramaxes are merged with Panamaxes as there are only two left in the fleet. The costs include fully-burdened costs of dry docking and show that OpEx is stable at around $5,200 a day on average for all vessels, regardless of sites.

During the second quarter, the Company, as mentioned, dry docked three Panamax vessels, none of which had to install ballast water treatment system. We expect two more vessels two more vessels to be dry docked during the year, one in each remaining quarter.

The graph to the right side shows an overview of our vessels with and without ballast water treatment systems. As you can see, more than 50% of the Company’s vessels already have these systems installed. And the cost of remaining installations is spread out from this year until 2023 with a total estimated cost of around $40 million.

Additionally, the Company today announced that it has entered into six contracts to install exhaust gas scrubbers on 16 of the Capesize vessels and with options to buy 9 more units. The plan is to install scrubbers on vessels due for dry dock in 2019 and early 2020, so that the installation coincides with the regular dry dock schedule for those vessels.

Following the sale and delivery of Golden Eminence, the Company’s fleet consists of 77 sailing vessels of which 46 are Capes, 16 are Panamaxes or of Kamsarmaxes, 12 are ice-class Panamaxes and 3 Ultramaxes. Golden Eminence was sold and delivered to an unrelated third party for $14.7 million and upon delivery of the same, generated $5.7 million in positive cash flow for the company.

Current coverage for our Capesize fleet is the same as it was in the previous report three months ago. And we have fixed rates for an equivalent of 12 vessels at an average rate of approximately $7,960 (sic) [$17,960] per day for the remainder of the year. Seven Panamax vessels are on fixed rate timer charters of which two expired during first half of 2019 and remaining five expire between January 2020 and December 2021. The current average rate for the Panamax vessels on time charter is approximately $19,550 per day.

The Company is heavily exposed to the spot market for the years to come. Most of our fleets are trading in spot pools on indexing contracts on short-term time charters. And the revenue will by that follow the development in the underlying markets.

In the next slide, we have updated the debt profile to include the Company’s new $120 loan facility and the recourse debt. The facility was fully drawn in July this year and the last $17 million is not reflected in the numbers as this is referring to the end of quarter. The facility financed 10 vessels in total has a seven-year tenor based on a 20-year age adjusted profile and bears interest of LIBOR with a margin of 2.25%.

Following the refinancing, recourse debt amounts to $987 million in addition to the $172 million nominal outstanding under a convertible bond at quarter end. Subsequent to the quarter, we have bought back an additional $1.4 million of the convertible bond and non-recourse debt is reduced to $234 million as we have repaid the seller’s credit, originally given by Hemen for four vessels and further paid down $11.6 million under the cash sweep arrangement on the debt related to the fleet acquired from Quintana in 2017. Non-recourse debt now only consists of debt on those 14 vessels.

Our cash position at the end of the first quarter was $322 million and in addition, we had $17 million in undrawn debt for quarter-end, which is now fully drawn. Besides cost related the scrubber investment, ballast water treatment installation and regular dry docking, the Company has no further CapEx commitments. Going forward, the regular quarterly amortization of the recourse debt is $16.8 million.

And by that, this ends my presentation. I’ll hand over the word to Birgitte to take you through the market update.

[Birgitte Vartdal, CEO]

Thank you.

Utilization turned back up in the second quarter of 2018 after declining slightly in the first quarter, and the average for the second quarter was just above 85%. This follows the normal seasonal pattern with an improvement from the first quarter. And if you look on the longer trend, you can see that there has been improvement in utilizations from start of ‘16 all through today. However, there is still intra-quarter volatility. The second quarter started weak and ended at strength that has not continued into the third quarter.

Looking at the demand side. The total demand continues to improve. However there are some variations between the commodities, as import of iron ore was slightly down quarter-over-quarter and flat to slightly down first half of the year compared to the same period last year. Coal increased year-over-year but also slightly down from the first quarter. However, agribulks and minor bulks had a good upward trend for the quarter.

Bearing in mind these numbers are the important numbers, so, it shows the time of discharge. Hence, the weak market early in the quarter may reflect weaker exports in the first quarter, and stronger numbers later in the quarter and going into the third quarter should show improvement in these numbers when we come to the third quarter.

As always, steel production is a very important parameter for the dry dock market. It continued to increase during the second quarter, as well as the updated numbers from July, showing strong year-over-year growth, both in China and in the rest of the world. This growth has continued for more than two years now. And currently, there is no sign of slowdown in the steel production. So, typically, in the Chinese markets, steel margins are very positive. Older, more inefficient mills have been closed down, improving the utilization and the margin of more modern mills that currently running. This, combined with a continued spread between various grades of iron ore, indicates strong incentive to spend money on quality ore to get most efficient production and to optimize the margin.

It is interesting to note though that the domestic iron ore production in China is down almost 40% year-to-date. However, as I pointed out earlier, there has not been growth in volumes of import but rather this has been compensated by some drawdown on inventories, increased use of scrap steel and as there higher content iron ore being transported, you get more ore out of each tonne being transported.

Going into the third and fourth quarter though, we expect that the sourcing has come mainly -- or increase this year has come from Australia. Now, we expect to see growth from Brazil towards the end of the year. As is well-known and reiterated several times, while has guided for 390 million tonnes for the year. This is something we see now in the spot market where we have a lot of volumes going out from Brazil. In addition, Anglo’s Rio Minas is expected to come back on track. And if you look at where the capacity growth is expected to be in 2019, this should also mainly be volumes coming from Brazil. Tonne-mile demand should therefore increase going forward.

Moving on to coal. Coal volumes were down from the first quarter but still remained at healthy levels. And if you look at Chinese imports, it’s clearly up year-over-year. India is also keeping their import up as the domestic production is not able to keep up to the demand. Combining these with relatively low stockpile and also that Coal India has announced that they are not able to meet their 1 billion tonnes production target by 2020, this should bode well for further imports into India as well as to China.

The strong activity is reflected in the electricity production, where we have seen very strong growth in electricity production in both countries. This graph shows -- the top graph the electricity production in China. In the shorter term, growth in electricity production has to be compensated by more thermal coal electricity production. Hydropower is more flat year-over-year and renewable is not able to compensate. Thus, the growth in coal-fired electricity production is more or less in line with the growth in electricity production in total.

Moving onto grain. There has been a lot of focus regarding trade wars and tariffs for the agri products, and in particular the U.S. to China soybean trade. This is also seen where there has been a normal seasonal upswing in the soybean exports, observed with Brazil, almost taking a bigger share than the U.S. Going forward, there is a lot of uncertainty, and this partly reflected in where we see the Panamax market today. There is news on tariffs every day. But, we would expect new trading patterns to emerge in response to tariff. However, whether it would compensate for any shortfalls that may come from the U.S. is more questionable. The grain export out of U.S. should start almost as we speak. And this will be something that is very key to observe through the next weeks and months.

Moving to the supply side. A bit surprisingly maybe but deliveries in the second quarter were almost the same as in the first quarter as normally we expect the first quarter to be seasonally stronger and then reduction going forward. Also, combined with hardly no scrapping in the second quarter of the year, we had a fleet growth of 6 million deadweight tonne, which is almost in line with what we saw in the first quarter.

For the year, as such, the gross order book is estimated to be 4% on including what has been delivered. However, as we will see at the next slide, there are some delays and some uncertainties in those numbers. Also, going forward, deliveries are spread between ‘19 and ‘20, but there is a bit variation between providers of data of how fast the order book will materialize.

Looking at the V&R numbers. The expected delivery for the remainder of the year is lower. And I think, it’s likely that we in the second half of the year, in total would see less than or around 10 million deadweight tonne. Looking at this graph, you can see there is still 30% almost of what is scheduled for delivery for the rest of the year, which has not even commenced. And there is also a part of the vessels scheduled for delivery in the first half of ‘19 that has not commenced construction. And that should happen relatively quickly, if those vessels are going to be delivered within the due date.

Looking at the sales and purchase markets. Capesize vessel prices improved during the second quarter based on some firm transactions that have lifted valuations and sellers’ expectation. In the smaller size vessel classes, valuations have been more sideways in the quarter. There have been frequent transactions observed on the smaller vessel segment, but this hasn’t been accompanied by improvement in the values and sentiment seems to be a bit more muted, tied in with the rate environment for those segments. And based on upcoming regulatory changes, the focus on the S&P market is on modern tonnage.

So to summarize, looking at our overall market outlook, we remain of the view that we are on an improving trend. The upside scenario here relates to increased exports from Brazil, continued strong coal imports by China and India, and less efficiency in trading patterns combined with more congestion. With bunker prices at the levels we see now, it will still take some time before we reach a level where this piece will speed up.

On the downside, risk of less activity is of course always there, also given that we are currently in a high activity environment. Uncertainty is related to tariff, it’s currently hampering the Panamax trade. But, it can also be a positive factor, ironically, supported by that the Chinese have announced further stimuli and infrastructure investments to boost their economy.

We should not forget the order book and the Valemax vessels scheduled to come which would take away some base load from Brazil and may continue to add some volatility in the Cape market. However, all-in-all, we believe that the demand will outpace the supply, and we’re very positive for the remainder of the year where we should continue to see strong rates as we observe today.

Regulations related to sulphur emissions are expected to have a positive impact on the market over some time as older, less fuel-efficient vessels are disadvantage and may ultimately be phased out. We believe we as a company are very well-positioned in this regard.

We’re able to live with the current risk market and believe the upside potential is higher than the downside risk, when all factors are considered. With the positive sentiment that we see in the market today, we feel there is support for vessel valuation, particularly for newer vessels. And we’re well-positioned with our modern and fuel efficient fleet.

To further increase our competitive position, Golden Ocean has decided to install scrubbers on part of the fleet, mainly timed with the dry docking schedules. This should make the valuation of the vessels even more attractive for charters when we potentially can use cheaper fuel than some of our competitors.

We continue to pay dividend. And for the third consecutive quarter, the Board has declared a dividend of $0.10 per share. Going forward, we aim to find the right balance between returning value to our shareholders and other use of cash flow, including further deleveraging, potential investment, if we find the right modern tonnage, as we believe it’s key to keep the focus towards an ever-changing regulatory environment.

This ends our presentation for today. We’re open to answer any questions that you may have. Thank you.

[Operator]

[Operator Instructions] We will now take our first question from Espen Landmark from Fearnley. Please go ahead. Your line is now open.

[Espen Landmark, Fearnley]

Hey. Good afternoon. I wanted to start on the closing remarks. I mean, you’ve done three quarters I think of $0.10 of dividends, which is 4 or 5% of the yield. As you say, Capes is averaging more than 25,000 in third quarter, which at least in our numbers, suggesting earnings potential well above what you currently are paying. I mean, the question is, given the balance sheet now, how do you kind of determine the right payout model in the quarters to come?

[Birgitte Vartdal, CEO]

It’s a decision that we take quarter-by-quarter. Obviously, if we see our earnings improve strongly, we expect that we will do some adjustments to the dividend. But, we will also balance that towards investments and deleveraging. So, I think, we are in a comfortable position and we should have the flexibility to deploy our cash, both thorough dividend but also deleveraging and potential investments. So, we are not guiding on a very fixed dividend policy. And that’s how we…

[Espen Landmark, Fearnley]

Yes, of course. And then, I guess, on values, I mean, as you said, a couple of or a handful I guess of transactions for modern Capesizes, well above I guess last time levels, close to 50 million for 2016 winter. I mean, curious to hear your thoughts on the current second hand values?

[Birgitte Vartdal, CEO]

I think, clearly, there have been some good transactions. I think, you -- it’s very linked to sort of the markets. The spot is very strong. If you look at the FFA curve, it’s bit below 20 for -- $20,000 per day for 2019. I think, if you see a push on the period market, you can see another push on the rate. But, clearly, there has to be some willing buyers. And I think, going forward, maybe a wider spread between modern and older tonnage. So, I think part of the value drive that you are seeing on those transactions is linked to the modern assets.

[Operator]

Our next question comes from Petter Haugen Kepler Cheuvreux. Please go ahead. Your line is open.

[Petter Haugen, Kepler Cheuvreux]

I was wondering if you could talk a little bit about why you overperformed in terms of earnings this quarter. Is that sort of -- is it about timing, positioning, is it the trading department taking in and out vessels, or is it simply the quality of your vessels being superior to what the benchmark is in market? And then, of course the intention here is to understand whether one can expect you to continue to outperform the market here?

[Birgitte Vartdal, CEO]

I think it’s a combination of the factors. You have mentioned that -- I mean, we had -- as you’ve seen, we had some long-term charters which has a bit higher time charter equivalent than the spot market, for the second quarter. We had some winter charters for our ice-class. We had good performance relative to the index, which is a combination of obviously great work from the chartering team and then good quality fleet.

[Petter Haugen, Kepler Cheuvreux]

Okay. So, overall, I guess that you do the same next time then, and then not to be disappointed of course. Another question, in terms of market outlook, I mean, you sound rather optimistic, I read your comments as optimistic. I don’t disagree to that. But, as you also mentioned, the FFA curve is flat, below 20k a day throughout 2020. Are you going to buy up that curve to buy FFAs now?

[Birgitte Vartdal, CEO]

We are around 77 vessels. So, I think we have a decent position in that market. I think, if you look last year as well, it took time during the year before you saw the FFAs lifting. So, for a long time cal ‘18 was trading at 15 and below. And first when you got closer to the year, it actually lifted. I think, it’s interesting to see now that if you take spot year-to-date plus the forward curve for the remainder of the year, you are plus with the FFA for next year. So, yes.

[Petter Haugen, Kepler Cheuvreux]

And just a final question for me then in terms of the vessel prices, asset prices there. In our modeling, we would say that compared to the current earnings in the market, values are still on the low side. But, if you were to make one investment now, you’ve been talking about larger vessels compared to the smaller vessels and also the new or modern tonnage as more compelling than order tonnage. But, if we are very optimistic on the market as such, the relative performance of older tonnage tend often to be better than on newer vessels. So, I was just wondering sort of if you were to -- had to make one investment today, what would that be in terms of age and vessel type?

[Birgitte Vartdal, CEO]

I think, an old vessel, yes, in the short term. But, you have to look on the duration, duration of the life of the assets and sort of also what you get back on earnings. I mean, there is an earnings difference between modern and older vessels. We are installing scrubbers on our 2009 and 2010 builds. Maybe that is the best at the moment.

[Petter Haugen, Kepler Cheuvreux]

So, scrubbers? That’s a good answer. Thank you. That was all for me

[Operator]

Our next question comes from Fotis Giannakoulis from Morgan Stanley. Please go ahead. Your line is open.

[Fotis Giannakoulis, Morgan Stanley]

I wanted to ask about the scrubbers. It seems that older big Capesize owners are keen on installing scrubbers, similar with VLCC owners. How long do you view this opportunity to last of the available high sulphur fuel oil? And based on your estimates, when you made the decision to install scrubbers on your Capesizes, what is the breakeven spread and the duration of the spread that has to last in order to make your investment profitable?

[Birgitte Vartdal, CEO]

Yes. I think, as you point out, many of those Capesize owners and VLCC owners that are installing scrubbers. Hence, I think, the availability of fuel will be there. It may be more favorable on some traders than orders. And then, as well, I mean, the profitability is likely to be best in the beginning, but you may end up in a situation where over time you have to have a scrubber installed to actually be competitive. But, that’s a bit early to speculate in that. But, I think it’s well worth to do the investment on part of the fleet. We’re estimating around $250 per tonne for a year plus or minus as required return. But that of course assumes that you have availability in all ports and on all trades, and that you will get the full benefit of it as an owner. So, in reality, it maybe bit longer but -- or a bit higher spread.

[Fotis Giannakoulis, Morgan Stanley]

But, I understand that in routes that your Capesize vessels are trading from Australia and Brazil towards China, you feel pretty confident that there is going to availability Is that the case?

[Birgitte Vartdal, CEO]

Yes, at least in Singapore, some ports in China. The question is if you will have it available all places in China or if you need to do some variations. But, I think, if you look at the Capes, 70% is bunkering in Singapore, something like that. So, it’s a big part of the volumes.

[Fotis Giannakoulis, Morgan Stanley]

There are some of the critics over the scrubbers investments. They talk about open loop, close loop scrubbers. Could you give us a little bit of clarity on this debate? And if there is any push from -- potential push from regulators towards close loop scrubbers or any restrictions that will make more difficult the use of the scrubbers as they are being invested right now by the majority of the ship owners.

[Birgitte Vartdal, CEO]

It’s my impression that the majority has gone -- decided for open loop scrubber. I mean, if you go for close loop scrubber, you also have to get rid of the residual, which -- it’s first of all big in volume and you’re dependent on the possibility to get rid of that at various ports around the world. I think that’s a solution that fits more type of A to B liner type of business where you know which ports you are going to. So, far there -- okay, there are at least what I have been reading, there are of course some skepticism from sort of the ones that are negative to scrubbers. But, I haven’t seen that from regulators, as such. This is any event, probably not the long-term solution for shipping. But, for the near-term, this is the way to solve the regulatory issues around sulphur content. There is also research saying that the main problem is the particles; and with the scrubber, you take it out of the air and put it directly into the sea. And as part of the sea level, on an average basis, this is not an extremely high sulphur content. But, you may end up, in some ports maybe you have to have cleaner fuel in addition.

[Fotis Giannakoulis, Morgan Stanley]

Thank you, Birgitte. I want to shift little bit on demand side. And if you -- you mentioned about the infrastructure spending and the stimulus China is considering of putting in place. If you can give us a little bit more color on your views of how much impact it can have on Capesize or dry bulk demand? And on the other hand, if -- what you think would be the impact on the seasonal production cuts that China is putting in place for the winter potentially even starting in fall, if you think that that can have any short-term negative effect on charter rates?

[Birgitte Vartdal, CEO]

Yes. I mean, the government has not been very statistic in terms of the amount of stimuli. Yes that they are reducing their lending rates. And there has also been announced some train -- rail infrastructure project. I mean, this is early days. And I guess the government is also looking at what’s happening on the trade war in the long-term and adding to that. So, it’s more potential marginally positive factor, which should be positive for iron ore trade and potentially also for coal, if they need additional electricity and energy. So, it’s positive on the margin. When it comes to the winter production cuts, that may add some volatility on the stockpiles, that may add on the quality of the iron ore demand, but still the modern mills may keep up with the -- but this is one of the factors of many that may add volatility. But over time, if the underlying demand is there, then the average rates and the average improvements should not be impacted that much.

[Operator]

The next question comes from Magnus Fyhr of Seaport Global. Please go ahead.

[Magnus Fyhr, Seaport Global]

Just a follow-up on the scrubbers. You mentioned you are going to install on some of the 2010 builds and over the next dry dockings. Where would you put -- can you be a little more specific where would you put the cutoff point, as far as -- would you consider some of the more modern 2014 builds when they in for dry docking, I guess next year?

[Birgitte Vartdal, CEO]

Basically, we are installing on most of our 2014 and 2009. There are some vessels that are on charter that we are excluding et cetera. But, we do the majority of the vessels. And with the sort of the agreements we have signed plus the options, if you exclude vessels that are on charter for a longer period, we should cover most of our ‘19 and ‘20, which basically is early 2020 dry docks. So, I’m sure if that answers your question, Magnus.

[Magnus Fyhr, Seaport Global]

Yes. No, that’s good. And, I guess, it’s only Capesize, right, that would put scrubbers on, or some of the other options that you have, would you consider smaller asset classes or just Capesizes?

[Birgitte Vartdal, CEO]

We have currently prioritized our Capesize vessels, both as the economic is factor, we are less concerned about fuel availability due to the trading happens as well as our dry dock schedule is more favored, so to say, on the Capes, where we have a lot of early dry docks, while on the Panamax, it’s more later, so.

[Magnus Fyhr, Seaport Global]

And just one last question. On the -- I mean, stock price, I mean, performance here, I mean stock is still up this year but with asset values moving up and we actually have you guys trading at a discount to NAV, which has been kind of unusual for Golden Ocean. So, with that said, would it be some potential buybacks here, what’s your thoughts there to add that to your tool box?

[Birgitte Vartdal, CEO]

That’s a possibility. But, I think, we would in the short-term prioritize dividends, unless we should see a very high discount on our share price, but -- over some time, but...

[Magnus Fyhr, Seaport Global]

All right, great. Thanks for taking my questions.

[Birgitte Vartdal, CEO]

Thank you.

[Operator]

There are no further questions. [Operator Instructions] As there are no further questions, I’ll now turn the call back to your host for any additional or closing remarks.

[Birgitte Vartdal, CEO]

Okay. Then, I would like to thank you all for listening in today. And we look forward to present our third quarter results in three months from now. Thank you.

[Operator]

That will conclude today’s call. Thank you for your participation, ladies and gentlemen. You may now disconnect.