Golden Ocean Group Ltd

NASDAQ:GOGL

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Second Quarter 2023 Golden Ocean Group Limited Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Lars-Christian Svensen. Please go ahead, sir.

[Lars-Christian Svensen, executive]

Hello and good afternoon from Oslo. My name is Lars-Christian Svensen, and I'm the interim CEO of Golden Ocean. Today, CFO, Peder Simonsen and I will guide you through our Q2 numbers and share our views on the market going forward.

We start with the highlights for Q2. Our adjusted EBITDA in the second quarter came in at $80.4 million compared to $54.7 million in the first quarter of 2023. The net profit amounted to $34.9 million and earnings per share of $0.17. This compared to a net loss of $8.8 million and loss per share of $0.04 in the first quarter.

Our TCE rates for Capesize and Panamax vessels were $19,100 per day and $15,600 per day, respectively. This amounts to a fleet-wide average net TCE of $17,660 per day. For the third quarter, we have secured a net TCE of $18,300 per day for 79% of the Capesize days and $13,510 for 98% of the Panamax days. For the fourth quarter, we have secured a net TCE of $21,500 per day for 34% of the Capesize days and $16,500 per day for 26% of the Panamax days.

We also welcome new additions to the fleet with 6 of our 10, 85,000 deadweight Kamsarmax newbuildings being delivered and 6 modern Newcastlemax vessels, which have commenced long-term contract with the Brazilian iron ore miner. We entered into 2 credit facilities of an aggregate amount of $120 million, part financing the 6 new buildings at a highly competitive terms. And last but not least, we announced a dividend of $0.10 per share for the second quarter of 2023.

I will now pass the word over to Peder.

[Peder Carl Simonsen, executive]

Thank you, Lars-Christian. If we move to Slide 5 and our P&L, we can start looking at our revenues. As Lars-Christian mentioned, we achieved a TCE rate of $19,100 for our Capes and $15,600 for our Panamax and Ultramax fleet.

Our total fleet of TCE was $17,700, up from $14,900 in Q1. We had 6 ships dry-docked in Q2 versus 3 ships in Q1, resulting in approximately 215 days off-hire in Q2 versus 146 days in Q1. We have 1 ship that we expect to dry docked for Q3, and this dry dock has been completed at today's date. Just below 375 vessel days have been added through new ship deliveries, net of ships leaving the fleet. So some of this resulted in TCE revenues of $153 million, which compares to $131.2 million in Q1.

Looking at our operating expenses, we recorded $62.4 million in total OpEx compared to $61.6 million in Q1. The increase is a result of higher dry docking costs due to more ships being dry-docked. In addition, we incurred -- increased costs relating to the change of technical management for approximately 25 ships during the quarter. This was offset by lower OpEx reclassified from charter hire as we record each quarter.

Our OpEx ex dry dock was $6,200, which was largely unchanged from Q1. Looking at our general and administrative expenses. We ended with a total expense of $5.2 million, which was up from $4.2 million in Q1. The increase is attributable to nonrecurring personnel expense, mainly relating to profit sharing. Our daily G&A came in at $556 per day net of cost recharge to affiliated companies, which is up from $444 per day in Q1. Our charter hire expense was reduced from $16.8 million in Q1 down to $10.2 million in Q2, which is a result of fewer vessel days in our trading portfolio.

Moving to the net financial expenses. We recorded $23 million in net financial expenses versus $20.5 million in Q1. This is due to higher reference rates, both LIBOR and SOFR. And higher average debt during the quarter.

On our derivatives and other financial income, we recorded a gain of $14.3 million, which compares to a gain of $2.7 million in Q1. On our derivatives portfolio, we recorded a $9 million gain versus a $2.1 million loss in Q1 with interest rate swaps being the main positive contributor offset by a loss on FFA and bunker derivatives.

On our results from investments in associates, we recorded a gain of $4.9 million, which is unchanged quarter-on-quarter. Stemming from our investments in SwissMarine, TFG and UFC. A net profit of $34.9 million, $0.17 per share and a dividend of $0.10 was declared for the quarter.

Moving to our cash flow. We see a net decrease in cash of $15.9 million. On our cash flow from operations, we recorded a positive cash flow of $45.5 million, which includes a $1.6 million of dividend received from associated companies.

On cash flow provided from financing, we recorded $102.0 million drawdown relating to deliveries of 3 Newcastlemax vessels. And we drew down $80 million relating to delivery of 4 Kamsarmax newbuildings. We also drew $25 million under our revolving credit facilities, leaving $75 million undrawn and available at quarter end.

We made prepayment of $25.8 million relating to the sale of Golden Feng and Golden Suek, and we recorded $30.3 million in scheduled debt and lease repayments. We recorded a dividend payment of $20 million. And finally, we spent $6.9 million in payments under our share repurchase program. As announced during the quarter.

On our cash flow used in investments totaled $184.6 million, which is mainly relating to $43.6 million in net proceeds received from the sale of Golden Feng and Golden Suek. $130.1 million in asset investments, the majority relating to purchase price per 3 Newcastlemax vessels and payment of newbuilding installments of $98 million.

Moving to Slide 7 on our balance sheet. We can see that our cash and cash equivalents was $107.3 million, which includes $3.4 million of restricted cash. In addition, we have $75 million, as mentioned, undrawn and available under our revolving credit facilities at quarter end. Our debt and finance lease liabilities totaled $1.5 billion at the end of Q2, up by approximately $152 million since Q1. Average fleet-wide loan-to-value under our debt facilities per quarter end was 45% and our book equity of $1.9 billion led to a ratio of equity to total assets of approximately 54%.

And with that, I'll give the word back to Lars-Christian.

[Lars-Christian Svensen, executive]

Thank you, Peder. Moving over to the GDP growth. GDP growth is the leading indicator for dry bulk demand. The graph on the left shows the G20 diffusion index. This index illustrates a number of G20 countries that are growing above the long-term potential. As you can see, this correlates well with historical cyclicality of the Baltic Dry Index and indicates another potential upturn in the near future. The global GDP outlook has been revised downwards over the course of the year but shows healthy growth rate's according to the IMF with China and India remaining important contributors. Over to the market development. We have all seen and read the macro news over the last 6 months, which has created unusual volatility in the freight and trading markets.

For the Capesize market, especially the physical story paints a solid picture. Iron ore exports from Brazil are up substantially from last year, about 12 million tonnes to date. Bauxite from West Africa increasingly so, and China's appetite for imported coal, albeit record domestic production being high has surpassed 2022 year-to-date.

We also need to mention the extremely high fleet efficiency currently well below 5 years average. Where the Capesize market has a large upside, much like to what we've seen in the Panamax space over the last month where sudden congestion in South American ports and a dry Panama Canal has pushed to freight markets. Panamax has so far trailed behind the Cape segment this year. However, with the congestion delayed soybean season and good corn crops from the U.S. Gulf. We foresee more Panamax activity for the second half as well.

Moving over to the steel and iron ore inventories. The Chinese iron ore and steel mill inventories are also telling a very compelling story. Iron ore port inventories are down 25% and 40 million tonnes since last -- since the height or beginning of 2022.

And steel inventories has also been drawn down almost 30% and 34 million tonnes over the same period. This is well below the 30-day critical consumption level for the country. It also explains the vast amount of iron ore volumes being shipped so far this year and thus indeed indicate that China is continuing to utilize steel. The iron ore price is currently trading around $115 per tonne and has so far not shown weakness, volatility rather on the back of macro news yet to be implemented.

Finnish deal, as in terms of rebar, long and flat steel, is also at normal levels, i.e., steel in every shape and form is being absorbed and the underlying demand continues. Brazilian iron ore and bauxite, the tonne mile in the Capesize segment continues to increase. Last year, the iron ore tonne mile was down about 3%. However, with the aid of other commodities, much thanks to Guinean bauxite, the overall tonne mile for Capes increased 3% in 2022.

The trade has become significant, currently 10% of Cape tonne mile with analysts expecting 30% to 40% growth in 2024. So far in '23, with more volumes being shipped from both Brazil and Guinea, the tonne mile will continue its positive trajectory.

Another point we would like to raise in this call is the more structural impact of the bauxite trade. If I can draw your attention to the bottom left graph, you will see that seasonality in the Capesize market has experienced less volume during Q1 and also in turn, lower freight rates. This has been due to the wet season and maintenance of the iron ore terminals in Brazil.

But as you can see, with the increased bauxite tonnes exported during the same period, the tonne mile gap narrows every year. We are under the belief that the so-called traditional Q1 slow season can be challenged and that we will have a more steady trade flow all year round for the larger sizes. If you have a look at the favorable supply dynamics, as mentioned previously in this presentation, we see limited downside in the larger sizes when it comes to efficiency. There is simply put little room to turn the fleet faster during port operations than what we're currently experiencing.

If anything, with the new CII regulations coming in full force in 2024, large parcel of fleets are likely to slow steam even further. At the same time, the order book and supply dynamics for dry cargo vessels are encouraging and very much unchanged over the last 12 months, largely due to uncertainty surrounding propulsion technology and yard capacity restraints.

Next slide here, we go through the resilient business model of Golden Ocean. We strive to maintain our position of having the lowest breakeven in the industry, currently fleet-wide around $13,000 per day. With our premium fleet, hands on execution and good financing, we are continuing to outperform the markets every quarter.

For the first half of 2023, we have across both Cape and Panamax segment outperformed the market with $4,700 a day. We aim to continue our fleet renewal program and enhance further energy efficiency devices across our fleet to bring our cash breakeven down further. With our low cash breakeven and fleet composition, we will float in almost any market as seen on the graph on the right side.

Now let us guide you through our next 2 quarters. The forward outlook from a market standpoint looks promising as discussed earlier in this presentation. We have for Q3 locked in 79% of the Capesize available days at $18,300 per day and 97% of the Panamax available days at $13,500 per day. Q3 to date, we have outperformed the market by $5,300 a day on a fleet-wide average.

For Q4, we are locked in 34% of the available Capesize days at $21,500 and 26% of the available Panamax days at $16,500 per day. And this combined, we have contracted a TCE revenue of $181 million for the second half of the year. This couple will protect a healthy bottom line for the rest of the year and at the same time, give us leverage needed to capture rising market going into Q4.

Cash flow potential. To round off this presentation, we would like to show you the significant earnings potential in Golden Ocean as we move into the historical high season. The assumed freight rates set out in the graph are achieved rates and based on the best-in-class fleet efficiency and low-cost model, the free cash flow can generate healthy dividend yields even at current freight levels.

With that, I'll pass the word back to the operator. Thank you.

[Operator]

[Operator Instructions] And now we are going to take our first question and the question comes from the line of Omar Nokta from Jefferies.

[Omar Nokta, analyst]

I wanted to ask about the dry bulk market. And I think you gave some interesting commentary about the bauxite trade potentially offsetting the typical wet season in Brazil. Do you think, basically, going forward, we may be able to throw out the conventional idea that dry bulk is always the weakest in the first quarter? And do you look to capitalize on this dynamic potentially here, as you get into '24 with maybe some charter ins or some FFAs, how do you think about playing the potential of bauxite offsetting iron ore?

[Lars-Christian Svensen, executive]

I think, Omar, that when it comes to the bauxite rate, the growth there is -- the growth potential is huge. The volumes are there. The mines are there and the infrastructure works very well. This is already contracted volumes going into a different trade than what the traditional iron ore would do. So we are quite bullish on this particular commodity that will drive it forward with the tonne mile, if that increases 2%, 3%, 4% per year next year and the year after, we're looking at a quite healthy Capesize rates going forward.

[Omar Nokta, analyst]

Yes. And I guess in terms of the iron ore activity that we have been seeing, you mentioned that it's been relatively strong, actually going into China and with a big step-up out of Brazil so far this year. When we think about the pace of activity, obviously, the first half looked really good going into China. It looks like elsewhere was a bit softer. What's the pace been like as we look to here as we started the second half year, these were 2 months in. How is the pace of iron ore going into China in relation to the first half from your vantage point? And are there any shifts or promising signals for volumes outside of China?

[Lars-Christian Svensen, executive]

The second half has had in terms of iron ore story has started at a much higher pace than the first half of the year. Just today, the output from Brazil combined with all the miners are over 1.2 million tonnes per day. So compare that to January this year, this is a significant increase and will drive these volumes forward 100%. And in terms of Oslo, countries and places taking the iron ore, we see the European growth as well as slowly but sure increasing from what we've seen from the second half -- first half, sorry.

[Omar Nokta, analyst]

Okay. That's interesting. And maybe just 1 final 1 on the market. In terms of coal, we have seen here a jump in LNG prices of late, at least in relation to where things were a couple of months ago at the lows. Have you seen any effect on that on coal volumes or coal interest or activity? Any shift or any sort of, I guess, any impact of that on the coal trade?

[Lars-Christian Svensen, executive]

Yes. The coal trade has been active all year, especially from Australia into China since they reopened their relationship there. India has been active in the first Q1 this year. And now with the monsoon season over, we expect India to continue to import that the stockpiles are low as well. But the gas prices going up, we have seen in the market lately, more cargoes as well going from east to west. So maybe that's a strong signal that the continent is starting to build a little bit more security to avoid what happened last year.

[Operator]

[Operator Instructions] Dear speakers, there are no further questions at this time. And I would now like to hand the conference over to our management team for any closing remarks.

[Peder Carl Simonsen, executive]

Well, thanks a lot for dialing in and have a continued great week.

[Lars-Christian Svensen, executive]

Thank you very much. Bye-bye.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.