Golden Ocean Group Ltd

NASDAQ:GOGL

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today’s Golden Ocean Group Limited Q2 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, the 15th of August 2019.

I would now like to hand the conference over to your speaker today, Birgitte Vartdal. Please go ahead, madam.

[Birgitte Vartdal, CEO]

Thank you. Good morning and good afternoon, and welcome to the second quarter 2019 earnings call for Golden Ocean Group Limited. My name is Birgitte Vartdal, I’m the CEO of Golden Ocean management. Together with me I have Per Heiberg, CFO.

We are very happy to see how the market has developed so far in the third quarter, even though we are reporting our weakest quarter in years, for the second quarter of 2019.

As usual, Per will take you through the Company update and I will revert on some comments about the current market and about our strategic positioning.

[Per Heiberg, CFO]

Okay. Thank you, Birgitte.

Golden Ocean reported a net loss for the quarter of $33.1 million, and a loss per share of $0.23 for the second quarter of 2019. This compares to a net loss of $7.5 million and a loss per share of $0.05 for the first quarter. This result includes a mark-to-market loss of $13.3 million, mainly related to falling U.S. interest rate levels and a reversal of the mark-to-market profit on FFA contracts.

Adjusted EBITDA ended at $21.1 million, down from $36 million in the previous quarter. We have declared the remaining four options to install exhaust gas cleaning systems, so called scrubbers, bringing the total amount of scrubber installations to 23 for the Company.

During second quarter, we completed the refinancing of the 14 vessels bought from Quintana, back in 2017, which will significantly reduce interest rates -- or interest expenses and cash break even going forward.

In the second quarter, we invested in Singapore Marine that has set the goal to be a significant operator in the larger vessel classes. I’m sure that will contribute to our existing operations through both valuable trading knowledge and profitable return on the investments.

As we announced earlier this week, the Company has entered into a term sheet to establish a joint venture with Frontline and Trafigura for supply of marine fuels. And on the back of the current strong markets, the Company announced a dividend of $0.10 per share for the second quarter of 2019.

Moving on to the P&L. Despite a slightly stronger average market index in second quarter compared to first quarter of time charter equivalent or TCE, revenue decreased by $8 million compared to the previous quarter. The decrease is a reflection of the weak market at the start of the quarter, which -- with fix things affecting most of the quarter. The market did not see material improvement until June, which was a bit late to be reflected in our quarterly P&L.

Ship operating expenses including dry dock and estimated OpEx on short-term lease in vessels, ended up $48.7 million for the quarter, of this $6.7 million related to dry docking of 8 vessels compared to $1.4 million of 3 vessels in first quarter and $4.7 million relates to estimated OpEx on these vessels. Effectively, the running OpEx on our own fleet is marginally down compared to previous quarter.

The G&A was stable over the quarter at approximately $3.5 million, while we had an extraordinary depreciation in the quarter, resulting in an increase of $1.1 million compared to the prior quarter.

Next, financial expenses are down by $1.1 million compared to the prior quarter. This is mainly due to the full quarter of reduced interest cost on the convertible bond that was repaid in January together with lower margin on the refinanced debt.

In second quarter, we booked a net loss of $11.8 million related to marketable securities and derivatives. This is mainly related to a loss on our U.S. interest rate swaps entered into for hedging purposes, but we booked that mark-to-market, and it’s a reversal of earlier mark-to-market profit on FFA options since the market recovered during second quarter, following the downturn, leading to a profit in the first quarter. These losses were partly offset by an unrealized profit of $1.6 million related to our shareholding in Scorpio Bulkers. [Ph]

Adjusted EBITDA came in at $21.5 million for the quarter, and achieved TCE per day worth $11,629 compared to $13,131 for the previous quarter.

Looking at the cash flow for the quarter. We entered it with $199.2 million and ended approximately $36 million lower. Despite that, we have that positive cash flow from operations and net cash from financing of the non-recourse debt into the new full recourse debt added $3.5 million, and ordinary repayment of existing debt was $16.6 million during the quarter.

The Company used $18 million on investing activity, of which $10 million was invested in Singapore Marine and the remaining $8 million related to investment in scrubber installations and ballast water treatment system. The Company also paid $3.6 million or $0.025 in dividends for the first quarter, during second quarter. Following other months’ [ph] cash outflow, we ended the quarter at still relatively strong cash balance of $163.3 million.

Looking at the balance sheet. The most notable change this quarter is in addition to the cash flow effect is the impact of refinancing of the non-recourse debt which is reduces the current portion of long-term debt by $73 million and net of ordinary repayment of long-term debt, the regular long-term debt has increased correspondingly.

At the end of the quarter, the Company’s book equity was at 51%.

Following refinancing related to 14 vessels bought from Quintana in 2017, all long-term debt is now aligned on structure and on covenants. Long-term debts in the Company are backed by assets and we have no outstanding long-term corporate debt.

In addition, we have a separate loan tranche available on certain of the vessels to be fitted with scrubbers. Going forward, the Company will pay $21.2 million in regular repayment of debt on a quarterly basis, and average interest rate of the debt has been reduced to 225 basis points above LIBOR.

As you can see from the graph, the various loans mature over six-year period starting with one facility that matures at the very end of this year. We are in the process of refinancing that facility and expect that to be completed well ahead of its maturity date.

In the P&L, the Company shows fully burdened OpEx cost including drydocking and fees to external managers. The running OpEx is relatively stable at 5,200 of Panamaxes and 5,600 for Capes.

During 2019, we expect 19 vessels in total to be dry-docked and 9 of them will also have ballast water treatment system installed during the same drydocking. Installation of scrubbers has commenced and so far three vessels are completed, while we expect 12 more scrubbers to be installed during the remainder of this year. And the last eight of the 23 in total to be installed early 2020.

Looking at the fleet, and at this, the core fleet was unchanged since previous quarter and still consists of 77 sailing vessels of which 46 are Capes, 16 Panamax/Kamsarmaxes, 12 ice class Panamaxes and 3 Ultramaxes.

During the most recent uptick on markets rate, the Company has taken some more cover for the remainder of 2019, and some for 2020 as well. In this context, it’s worth noting that we only include long-term cover in this overview. Voyage fixtures and short-term charter contracts are not included as we see those as a part of the spot business, even if such voyages can last up to 90 to 100 days and give cover well into the common quarter. These also include good cover on our ice class Panamaxes trading on pre-agreed COA during third quarter

For the Capesizes, we have then currently fixed out the equivalent of 8 vessels at fixed rate on an average of $20,440 for the remaining year -- or remainder of this year, and one vessel has been converted from index linked to a fixed rate of $20,500 throughout 2020. The cover for the Panamax vessels is more or less unchanged from previous quarter, with 8 vessels fixed out from now and until the end of 2021, with some various expirations, with the net average of $18,690 per day. The various charters -- and yes, as I said, between April 2020 and throughout end of 2021.

On top of this cover, we have six floor/ceiling Capesize contracts for 2019 and 2 for 2020, securing the downside at approximately 15,000 by giving away an upside about 29,500. These contracts are proven to be highly effective during the downturn experienced in first half of the year.

And that ends my presentation, and I’ll hand over the word to Birgitte, who will take you through the macro and the strategic outlook.

[Birgitte Vartdal, CEO]

Thank you, Per.

As an introduction to the macro, I think it’s fair to say that talking about the macro environment in dry bulk is obviously impacted by the volatile signs that we see in the global economy. I think, however, there are some interesting effects as well that can positively impact dry bulk, and I will touch base on those, when I go through the presentation.

Looking back at utilization. During the second quarter, we saw a slight increase compared to the prior quarter. Fleet supply grew modestly with new deliveries partially offset by scrapping of older vessels.

Looking at demand, the seaborne transportation was mostly unchanged compared to the last quarter and the second quarter of 2018. However, the quarter started on a very weak note caused by the sharp reduction in iron ore volumes following the Vale accident earlier in the year, which has been well covered.

Iron ore production has begun to come back on line. Rates have surged and have been at profitable levels since the start of June. And we expect to see a report -- to report increased utilization rates in the next report.

Focusing on demand, volumes, measured at the time it’s been imported, so there is a slight delay compared to if you measure at the time of export, were remarkably stable quarter-over-quarter, despite adjusting iron ore and the impact of trade war on the agri trade. Aside from iron ore, coal imports remained high with growth driven by China and India. Agri volumes grew compared to the first quarter, but reduced relative to the second quarter of last year, and other bulks continued its positive trend, showing strong growth quarter-over-quarter. I would like to mention bauxite in particular, which is having a strong growth and which is currently around 6% of the Cape trade.

Moving on to iron ore. As we discussed on the last call, market expectations for growth in iron ore changed following the tragic accident in Brazil at the end of January. In total, 90 million tons of Vale iron ore production was halted at the end of first quarter. While Vale continued for a while to supply volumes from port stockpile, this wasn’t sustainable and Cape rates fell to very low levels, by the end of March.

On top of this, which maybe has been a bit under-communicated, there were several weather-related issues in the northern system in Brazil, which also put pressure on exports. Since the end of the first quarter, 42 million of halted production has been restored, which had a dramatic impact on rates. The halt and the restart in production created a supply imbalance of vessels as there were more than 17 [ph] vessels waiting outside Brazil for cargo at one point. As the cargo came back, most of those vessels were heading front hall at more or less the same time, and Vale had to secure other vessels in the markets to cover up for the lack of volume access available. We expect when these vessels arrive in China, quite a few of them will have to install scrubbers which will keep capacity constraint and which will be very interesting to follow going forward.

Vale anticipates to restore an additional 20 million tons of production by the end of the year and the remainder within the next two to three years. If you compare to last year, Vale was initially guiding on an increase for 2019 over 30 million tons. So, based on what they actually anticipate to restore the production should be more or less in line with the 2018 production. over time.

Australian production as well has rebounded following a cyclone item in March that constrained the production in the west of the country. And the Q2 export was strongly ahead of their financial year close.

Steel production is key to the iron ore trade and the thermal coal trade. And due to supply constraints, iron ore prices went very high in the first half of the year. Despite this, global steel production increased in the quarter, growing 5% year-over-year, led by nearly 11% increase in Chinese steel production, while it was flat in the rest of the world. This follows additional stimulus program from the Chinese government, which has had a positive impact on investments and infrastructure spending, and steel margins continued to be positive despite the high cost of raw materials. This also responds to the international trade wars and uncertainties in the global economy, and as I mentioned at the beginning, this has been a positive factor for the dry bulk market this year.

Higher iron ore prices, and following the disruptions of Brazil, and the weather-related supply disruptions have led to a drawdown of stocks in Chinese ports and their steel mills. And with iron ore prices now coming down and volumes of iron ore coming back in international markets, we expect to see a flattening of stockpiles of iron ore and potentially we can see also return of stock building of iron ore later in the year.

Moving on to coal. As mentioned earlier, coal imports to China increased after the import restrictions at the end of last year were listed. And volumes in the second quarter were actually up to 17% year-over-year. However, coal stocks in China are relatively high and there are reports that the Chinese government will cast the 2019 imports at the same level as last year, which would negatively impact the fourth quarter volumes.

Imports into India have been up an impressive 30% compared to last year. Stockpiles are high in the historical context but not significant compared to the growing demand. In India, like China, would like to support their local coal production and look to increase their domestic production. But as opposed to China, the growth has not been sustainable in the domestic production and import volumes have been compensating for the lack of growth in the domestic production.

Chinese electricity production grew by 5% year-over-year in the second quarter and thermal coal makes 70% of the total balance of production. This is a decline from past quarter, due to seasonal higher hydropower electricity production, which should continue for a few months, before it drops back going into the winter season. Despite the decline in thermal coal electricity as part of the total energy mix, coal consumption continued to grow on an absolute basis.

The U.S.-China trade war continues to have significant effect on U.S. grain exports as can be seen on the bottom graph. The swine flu in China has also impacted demand for grain. South American export volumes declined in the second quarter along with the U.S. volumes. The trade war had an extremely negative impact, and unless there is a relief, volumes from the second harvest season may be lost.

Total export volumes, however, remained healthy. Brazil has compensated most of the shortfall in U.S. exports. And we saw that the Chinese came back in the market and immediately bought more soybean from East Coast, South America, once the U.S. announced increased tariffs last week. From a shipping perspective, the exports from Brazil or export from the U.S. is more or less similar in terms of days.

Moving on to supply. Despite deliveries in the second quarter totaling 10 million tons, up from 8.6 million in the first quarter, fleet growth in most segments had been moderate. In the Cape segment, 4 million deadweight has also been scrapped so far this year. So, the growth -- net fleet growth rate for Cape had a decline in the two quarters in a row. In the Panamax segment, there was an increase in the net fleet growth, as very few vessels have been taken out of the market.

Looking ahead, currently the order book represents around 10.5% of the current fleet, and in nominal terms are as low as in a very long time. And it’s not changed a lot lately. Few new orders have been reported over the last few months. These data represent an estimated fleet growth gross for around 6%, which to me, seems to be a bit high as we expect some delays and possibly some of the orders are not historic orders that may not materialize. Around 13 million deadweight tons were ordered in 2015 or earlier of the current order book. Final deliveries should therefore not be as high as the order book numbers indicate.

Net growth fleet will, in addition to demolition, be affected by the IMO 2020 disruptions, including offhire for scrubber installations, cleaning of tanks and timely availability of new types of fuel. We believe that offhire related to scrubber installations is impacting the market positively as we speak and this should last at least through the first quarter of -- be a supporting factor at least through the first quarter of next year.

The scrapping activity picked up earlier in the year, also in a period where the markets were weaker and a total scrap of 4.2 million deadweight tons at this time. This is a level not seen since the market was low in 2016. The majority occurred in the first quarter of the year, but almost 2 million tons was also scrapped in the second quarter.

This is a natural reaction to a weak freight environment. The historical relationship between strong rates and lower scrapping may be disrupted over the next year as all the vessels become less viable in a higher fuel price environment. In a weak market environment, vessels above 15 years of age are more likely to be scrapped, as investments in ballast water treatment systems, the dry dock itself, and the lack of a scrubber will both imply higher costs and lower earnings potential.

Looking at the sales and purchase market, it was very muted activity at the beginning of the year. The activity has picked up a bit lately but the transactions have been focused on the Panamax and Supramax segments and the middle aged to older vessels mainly. And there has not been a lot of activity in the Capesize this year.

Secondhand values have remained relatively steady lately, and time charter rates have picked up recently in contrast.

We would like to remind the fact that in the resale market, there is a clear preference for modern ECO tonnage. And in this slide we have data for a modern and ECO and non-ECO vessels. The value spread between the five-year old of the two different classes is quite big and then ECO vessel commands a significant premium.

Following the implementation of IMO 2020 sulfur regulations, one should expect that less fuel efficient vessels unless they are retrofitted with scrubbers, will fall further out of favor due to higher fuel consumption.

Looking ahead, the implementation of IMO 2020 is just over four months away. We expect to have scrubbers installed on 23 of our Capes by the end of the first quarter of 2020. This is an investment we believe will lead to strong earnings potential.

The 23 vessels represent 50% of our Cape fleet and two-third of the part of the fleet where we have economic interest and exposure to fuel prices as 10 vessels are charted out for a longer period on index linked time charters. We have consistently installed the scrubbers in line with our dry dock schedule, although a few of the 2020 dockings have been moved into the first quarter of that year.

We are also pleased to have announced earlier this week that Golden Ocean together with Frontline and Trafigura Group have entered into a non-binding term sheet for a joint venture that aims to be one of the world’s leading suppliers of marine fuels. Trafigura is one of the largest physical commodities trading groups in the world and has an existing physical bunkering business that has a broad geographic footprint and will be contributed into the joint venture.

Subject to agreements and final terms, the joint venture will commence operations in the third quarter and Golden Ocean will have a 10% equity ownership. From an operational point of view, having access to a wide variety of marine fuels at competitive prices is important as the industry prepares for potential logistical issues that may limit availability in certain ports, and also for issues relating to different fuel blends and specifications.

We believe that our joint venture with Trafigura and Frontline will ensure that we have prompt access to both high sulfur fuels and compliant fuels.

Setting aside the economic opportunity, we have either created a further competitive advantage or at least protected ourselves against the significant potential risk.

After a disappointing first half of the year the saw rates collapse with the disruption in iron ore, we’re obviously pleased with the current market environment. Rates are well above cash breakeven level, and we are clearly well-positioned to generate significant cash flow in the third quarter. We are also certain that the market will continue to be volatile and not without complications. And for this reason, we continued to opportunistically add coverage at profitable levels through fixed contracts and contracted floor/ceiling structures at the time when the forward curve was at its high in July.

The forward curve is in backwardation, and the spreads between the current spot rates and the calendar 2020 is now huge. So, at the moment, we will play with spot market mainly and wait until we potentially see an adjustment in the forward curve before we add coverage at the further end of the curve.

Headlines continue to move both the freight and equity markets, but our outlook remains constructive and we are focused on controlling things we can control and maintain our strong financial profile with low cash breakeven levels.

Our balance sheet is strong, and we have a significant liquidity position. And as a reflection of this and performance so far in the third quarter, the Board has decided to declare a dividend of $0.10 per share. We will also continue to review additional measures to create value for our shareholders, including potentially additional share repurchases.

We have limited CapEx requirements related to installation of ballast water treatment systems, a requirement for all vessels that were built without this, which typically is for vessels built earlier than 2014. And 48 of our vessels have ballast water treatment systems installed. The remaining cost is marginal and spread out over several years. And we believe, this is the competitive advantage of having a young fleet, which has not been so high in focus.

We are on the contrary investing significantly in upgrading our fleet this year with 23 scrubber installations. The competitive advantage of the modern fleet is reflected in the way asset prices for modern prices have held up, and should together with scrubber installations significantly impact our earnings potential as we approach 2020, and in an environment where higher fuel prices are very likely.

We are confident that the investments on the strategic initiatives we are undertaking will provide additional cash flow benefit, heading into 2020.

And this ends our presentation for today. We’re open to answer questions you may have. Thank you.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Greg Lewis. Please ask your question.

[Gregory Lewis]

Yes. Thank you, and good afternoon.

[Birgitte Vartdal, CEO]

Good afternoon, good morning.

[Gregory Lewis]

Yes. In the slide deck, you clearly did a good job of explaining the overall macro picture. But, could we just dive a little bit deeper into what’s going on in the Cape market? It seemed like it was really moving higher in July than pulled back a little bit here in August and then, as we’re looking at it over the last week, it seems like it’s really got like a second leg behind it. Any kind of color, what you’re seeing in the markets that kind of you think is helping push rates, kind of reverse downward slide we started to see as July was ending?

[Birgitte Vartdal, CEO]

I think, it’s a bit back, on and off, with sort of the cargoes and when the miners are out fixing the vessels. Also, things like holidays or typhoons, et cetera. So, there is like the short-term volatility is maybe reflecting such elements. And we feel that there is still a good demand in the market, and there is good activity on the spot fixtures. Obviously, with where the rates are now and where the fuel prices are, you potentially can see some speed increases over time. But, the demand side is there. And combined with fewer vessels in the Atlantic market, potentially an imbalance with more vessels in the Pacific also preparing for scrubber installations and offhire scrubber installations, that is supporting the market as we see now.

[Gregory Lewis]

Okay, great. And then, just -- clearly, there was a nice increase in the dividend this quarter. I mean, as I look at Q2 versus Q1, maybe that doesn’t sort of lay out a reason to really be pushing the dividend. But as we look forward, is that kind of how we should -- how should we be thinking about the dividend as it stands today, and as we’re looking into the back half of the year, in this sort of strong rate environment?

[Birgitte Vartdal, CEO]

I think, you are right. I think, the decision on the dividend is very much taken also in the -- when you are in the midst of the next quarter. So, it’s not only a reflection of the quarter that we are reporting on but also a reflection of the quarter we are in. And so, in a sense, you can say that the cut we did from 5 to 2.5 was in a way a reflection of Q2 and how the increase is a reflection of Q3. And since -- I mean, we have the investments in scrubbers and ballast water and dry docks, but beyond that we don’t have CapEx, and we are fully financed. So, it’s how we see the running cash flow and what the capacity we have, but still to maintain a decent cash position and a strong balance sheet. So, we don’t have a very formula based dividend but we are willing to pay out dividend when we view that we generate the cash flow to support it.

[Gregory Lewis]

Okay, great. And then, just one last thing on the scrubbers. Clearly, it’s still early days, but as you’re monitoring the market, are you seeing any examples where charterers are willing to pay a premium for vessels that have scrubbers on them?

[Birgitte Vartdal, CEO]

They are willing to pay a premium but not necessarily the premium you want to see, if you look at the spread in the fuel prices. And so, mainly the fixtures that we have seen have been fixture on the time charter rates but with a profit split for instance on the scrubber, so that the charterer gets 50% and the owner gets 50% or some with fixed rate, but then not getting the full benefit. But, in my mind, it looks -- or what we have seen so far is more of a profit split on the scrubbers.

[Gregory Lewis]

Okay, perfect. Thank you very much.

[Birgitte Vartdal, CEO]

You’re welcome.

[Operator]

[Operator Instructions]

[Birgitte Vartdal, CEO]

Okay. We would like to thank you for listening in today. And we will speak again in three months from now. Thank you.

[Operator]

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