Golden Ocean Group Ltd

NASDAQ:GOGL

Earnings Call Transcript 2017-Q4

[Operator]

Good day and welcome to the Q4 2017 Golden Ocean Group Limited Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mrs. Birgitte Vartdal, CEO. Please go ahead.

[Birgitte Vartdal, CEO]

Thank you. Good morning and good afternoon. Welcome to the fourth quarter 2017 earnings release for Golden Ocean Group Limited. My name is Birgitte Vartdal, CEO of Golden Ocean Management. And together with me, I have Per Heiberg, CFO of Golden Ocean Management.

We have now finished en eventful year for the company following various transactions previously announced. Our fleet has grown by over 30% and currently stands at 78 modern vessels with major exposure to segments that have the most leverage to market strength. We have also significantly strengthened our balance sheet through this period and delivered improved operating results.

Per will take you through the company update and then I will follow up with some comments on the macro environment and our outlook.

[Per Heiberg, CFO]

Thank you, Birgitte. The highlights for the quarter is that Golden Ocean reports a net income of 27.1 million and earnings per share of $0.19 for the fourth quarter of 2017, an improvement of 20.7 million compared to third quarter. Adjusted EBITDA ended at 65.3 million which is up from 40.4 million in the third quarter.

During January and February of this year, the company took delivery of the five remaining Capesize vessels in the current newbuilding program. In October, the company raised 100 million in capital through a combination of an equity offering of 66 million and 34 million in equity in-kind related to acquisition of two 2006 built Capesize vessels. One of these vessels was delivered to the company in November 2017 and the second in January 2018.

Following the last equity offering, the company terminated the covenant waivers on the recourse debt and resumed ordinary debt to amortization with no outstanding deferred debt at the quarter end. Following our fourth quarter that produced strong cash flow, the company is pleased to announce a cash dividend of $0.10 per share for the quarter.

Looking at profit and loss, the company reports a net profit of 7.1 million for the quarter. The time charter equivalent or TCE revenue increased by 28.2 million compared to the previous quarter. All vessels classes contributed to the increase due to a stronger market across all fleet sizes, but the Capesize vessels contributed the most.

Ship operating expenses decreased by 0.8 million compared to last quarter. The main reason for the decrease was that no vessels were dry docked during the quarter while we docked two vessels in third quarter. Running OpEx was stable quarter-over-quarter.

Depreciation decreased by 1.4 million compared to last quarter as the six Ultramax vessels sold in third quarter and delivered in December were held for sale at the end of the third quarter and not depreciated during fourth quarter prior to delivery.

The company booked 2.4 million in gain on derivatives and other financial items for the quarter. Most of this relates to gains on U.S. interest rate swaps and bunker hedges which is somewhat offset by losses on hedges in the FFA markets.

The company achieved a TCE per day of 16,444 for the quarter which is up from 12,928 in the previous quarter. This is significantly above the company’s long-term cash breakeven level, including debt service. Adjusted EBITDA was 65.3 million for the quarter.

Then I will look a big on the various cash elements over the quarter. The company generated strong cash flow during the quarter and cash from operations contributed 56.9 million and we drew down 25 million in debt on Golden Nimbus. This vessel was delivered and paid for at the end of third quarter.

Further, the company received 64.3 million net from the equity offering in October and 134.2 million in cash proceeds related to the six Ultramax vessels delivered in December. The company also received 910,000 shares in the acquiring company as a partial payment for one of the vessels. The value of those shares is not included in this graph.

The company paid down 92.3 million in debt during the quarter; 40 million related to debt on sold vessels, 32 million was for deferred debt following the termination of the covenant waivers and the remainder relate to regular amortization of debt in the quarter and buyback of 9.4 million in nominal value of the company’s convertible bond. In addition, the company paid 4.9 million related to purchase of one vessel delivered to the company in November and had some minor additional cash outlay.

Moving on to the balance sheet, the company had 372 million in cash including cash booked as restricted at the end of the quarter, an increase of 181.7 million compared to the end of third quarter. The book value of the company’s vessel decreased by 120.3 million following the delivery of the six Ultramax vessels to their new owner and ordinary depreciation. This was somewhat offset by delivery of one of the acquired Capesize vessel Golden Behike in November.

The current portion of long-term debt increased by 81 million over the third quarter as two facilities with approximately 60 million outstanding mature in the fourth quarter of 2018 and became current in the fourth quarter of 2017. This comes in addition to ordinary amortization of debt during the year. The increase of equity includes 64.7 million from the equity offering and issuance of new shares related to vessel purchases which add to the quarter’s ordinary results. At the end of the quarter, the company’s book equity was approximately 52%.

Looking at the fleet, the graph for OpEx shows the full year average OpEx for each of our vessel classes and includes fully-burdened cost for dry docks. During 2017, the company dry docked six vessels and the same number of vessels are expected to be dry docked in 2018. Going forward, investment in ballast water treatment system will add to the cost for dry docking to the extent dry docked vessels don’t currently have such systems installed.

The graph to the right shows all of you our vessels with and without ballast water treatment systems installed. And as you can see, more than 50% of the company’s vessels have this system installed already. The cost for installing ballast water treatment systems on the remaining vessels in the fleet are spread out from 2018 until 2023 with an estimated total cost of $41 million. These costs are only estimates and are subject to change.

The company has an average young fuel-efficient fleet with an average age of approximately five years. This makes our fleet well positioned in advance of new environmental regulations and also helps to keep operating expenses competitive.

Following the delivery and completion of the current newbuilding program and delivery of all vessel transactions reported last year, the company’s fleet consist of 78 sailing vessels, of which 46 are Capes, 17 are regular Panamax and Kamsarmaxes and 12 are Ice class Panamaxes and three are Ultramaxes.

Looking at the current cover for the fleet, we have added cover for three more Capesize vessels since last report and have fixed rates from equivalent of 10 Capesize vessels at an average rate of approximately $17,400 per day which is up from $16,805 per day in our previous report.

Five Panamax vessels are on fixed rate time charter contracts, one of which expires at the end of 2018 and four of which expire between January 2020 and December 2021 at an average rate of approximately $22,100 per day. All remaining fleet is trading into spots, into spot pools or on index linked contracts or on short-term charters expiring within six to nine months.

In the next slide we have updated recourse and non-recourse debt following the recent deliveries. Since year-end, we have drawn down 171.5 million in debt related to six vessels delivered and paid 149.5 million in cash proceeds for the same vessels. In addition, we issued 2 million shares as part payment for one of these vessels.

Following this, recourse debt amount to 974 million in addition to the 191 million in nominal outstanding under our convertible bond expiring in January 2019. Non-recourse debt amount to 311 million related to the fleet acquired during 2017. This includes 65.5 million in the seller's credit on vessels bought from affiliates of Hemen Holding.

Adjusted for CapEx paid and debt drawn so far in 2018, our cash position is stable at 371 million and the company has no further CapEx related to newbuildings or acquired vessels. Going forward, the regular quarterly amortization of recourse debt is 16.5 million. Two of the recourse debt facilities mature in fourth quarter of this year and are booked under short-term debt. The total amount outstanding on these two facilities is approximately 60 million.

The company amended covenant on the non-recourse debt remained in effect with no regular amortization, although we expect to make payment on these facilities under the prevailing cash sweep mechanism. The initial cash sweep amount is determined at the end of first quarter 2018 with payment in second quarter 2018. The maximum amount to be paid under this cash sweep is 11.6 million.

And by this, I handover the word to Birgitte to take you through the market section.

[Birgitte Vartdal, CEO]

Thank you. Starting out with the utilization, this continued to improve during the fourth quarter and averaged 86.6%. This was on the back of supply constraints, congestions and low fleet growth as well as increased sailing distances. As you can see from the graph, there were slightly lower demand numbers for the quarter but this was compensated by a reduction in available supply.

The rate spike that we observed in the fourth quarter was primarily related to the number of vessels held up in port and waiting to discharge. Producers then had to replace vessels in the program with spot vessels leading to higher rates for the few vessels that were available.

Transported volumes were slightly down in Q4 relative to Q3 but it followed the same seasonal pattern as was seen in 2016. Encouragingly, seaborne transportation was still up in the fourth quarter of '17 versus the fourth quarter of '16.

Congestion also impacted the import numbers as export numbers were seen as relatively higher. It was confirmed by good import numbers in January this year compensating for the delay seen at the end of last year.

Moving on to steel production. The trend of positive global growth continues and this is also reflected in these numbers. The graph shows that year-over-year there was a continued improvement in steel production volumes both in China and in the rest of the world, although the Chinese growth have been slower in the last few months of 2017.

I believe this is attributable to the production constraints over the winter period and active to curb pollution. China removed the export tax in steel as of January '18 and this can support further strong production in China and potentially see Chinese production compensating partly for production in the rest of the world going forward.

With the capacity cuts on the production as previously mentioned, steel margins have remained strong and we’re at the highest levels observed over the past several years towards the end of 2017.

The spread between the various grades of iron ore has also expanded due to the flight to quality. And with new policies that additional tons of steel capacity that is going to be added in China need to be replaced by 25 tons of old capacity being taken out, mill productivity and quality of raw materials will continue to be in focus going forward.

Looking at the major exporters, this is positive for the seaborne transportation environment. Australia and Brazil continued to be the major exporters and this is also where the best quality of iron ore comes from, in particular from Brazil and from certain Australian producers.

As mentioned in previous presentations, guidance for our 2018 from the various producers indicate that increased volumes will come out from Brazil which should be supportive for the ton mile demand.

Moving to coal, transportation of coal remains steady in the fourth quarter. We are in the high season for coal demand at the moment. There are low stockpiles both in India and China and we have seen some strong import numbers and also increasing longer haul trades.

The arbitrage window for our Colombian and U.S. coal export is also open and with lower imports to Europe and low gas prices in the U.S., this coal may find its way to the pacific market.

Electricity consumption in China continues to grow and still majority of the electricity is generated from thermal coal. With low stockpiles and some time still before hydropower production ramps up, we are positive for coal imports in the coming months.

Previously, China tried to control and limit import of coal in some ports but seemingly based on the low stockpiles and the need for coal imports, they have changed the strategy to try to cap the price as they are currently not in a position to constrain volumes.

Moving on to grain, total transportation of argibulks are up in 2017 versus 2016, in particular soybean export has been stronger and the volume increase comes from export from Brazil, mainly. There are currently good expectations for the South America gain season, although it is a bit delayed, a good crop and decent volumes are expected this year.

Moving on to deliveries. As normal, fleet growth in the fourth quarter was low. Deliveries were below 4 million deadweight ton which is around 20% of what was delivered in the first quarter of the year. There were some slippage in the order book towards the end of the year and the net fleet growth was practically zero in the fourth quarter.

The remaining part of deliveries that was scheduled for the fourth quarter of '17 were pushed into 2018. And the order book for 2018 thereby increased by more than 6 million deadweight tons from the forecast provided in prior reports.

In January alone, 4.6 million deadweight ton was delivered and there are reports that a further batch of deliveries has procured first half of February prior to Chinese New Year which is typical before the yards close for the holidays.

Most of these vessels should therefore be included in this chart of the blue bar which is the vessels that have been launched as per year end 2017 and we believe that these have been likely delivered for now.

Although with the current order book, there should be less slippage than earlier. Still there is 15 million deadweight ton that have a potential for a delay relative to the scheduled delivery time, and this means that we expect the pace of deliveries will slow down from where we are now for the rest of the year.

Looking at the fleet growth, gross fleet growth is expected to be around 4% now for both 2018 and 2019. In addition to the orders that have been pushed from '17, new orders have been added in 2019 in particular and also started to add to the 2020 order book.

The total order book is still below 10% of the total fleet and new orders that are going to be placed now is expected to be placed into 2020 and 2021. However, this is something that we monitor carefully going forward.

Given the current rate environment, we expect scrapping to remain relatively low. Combined with a small portion of either delays and cancellations in the order book, the net fleet growth for '18 should be in the area of 2%.

Moving on to asset prices, both have been fairly stable over the last few quarters and there was a bit less activity in the S&P market in the fourth quarter. Following some orders, newbuilding prices have started to increase which can support a further lift in second-hand values. Higher earnings for vessels on the water have the potential to do the same going forward.

Uncertainty around new regulations and investment costs may lead to slower S&P markets over the coming period more than we normally would expect in a rising environment. In particular for older, less efficient vessels and those without ballast water treatment system, the market may be more subdued.

Moving on to the outlook, we continue to support a view that we have communicated in earlier releases. We expect the market to improve but within inherent volatility that is common in the dry bulk market. A lot of delay rates have already been absorbed and Q1 is seasonally the weaker quarter. Looking at the month, it will be interesting to see the development in rates from where we are now.

With control of the supply growth, demand is the dominant factor that will impact the rate development. If the global economy continues the growth trend, the quality and location of the better iron ore should provide support to the market. Coal can also have the same effect with increased consumption, restocking and also the potential for arbitrage opportunities.

Downside risk to the market relates to policy implementations in China that may affect coal import and steel production more negatively than what we anticipate and leading to lower requirements for steel based on lower activity, as well as a general drop in the macro environment that will also cool the demand for dry bulk goods.

To conclude, following the delivery of all our newbuilds, Golden Ocean is in a strong position to generate significant earnings in a strong market environment due to our competitive cash breakeven levels, including ordinary debt repayments.

We expect the market environment to be supportive assuming that the demand trends remain intact, although we also expect volatility and seasonality that will affect individual quarterly results.

We are pleased that the Board has declared a dividend for the fourth quarter of $0.10 per share. This is a reflection of our strong operating results for this quarter. We remain committed to return value to our shareholders, but the company will carefully consider all uses of cash and the underlying market backdrop in future as Golden Ocean seeks to maintain the financial strength and flexibility in various market environments.

This ends our presentation for today. And we are open for any questions that you may have.

[Operator]

Thank you. [Operator Instructions]. We will take our first question today from Magnus Fyhr from Seaport Global. Please go ahead.

[Magnus Fyhr, Seaport Global]

Good afternoon. Just two questions, first on the chartering strategy. You fixed 10 of your 46 Capes at currently above market rates. Capesize rates have been all over the map in the fourth quarter. How should we think about your chartering strategy going forward? Is that room for more vessels to be fixed at current levels or would you wait for market to improve?

[Birgitte Vartdal, CEO]

I think what we have done over the last year is to gradually add cover as we have rates increase and also try to opportunistically time it when we have seen a push in the market. So I think we will continue that strategy to gradually add cover but not significantly change the cover at the current rate environment.

[Magnus Fyhr, Seaport Global]

Okay. And just as a follow up on the dividend strategy. At $0.10 dividend you made about $0.19 in the quarter. How should we think about that as well going forward? Rates are a little bit lower in the second quarter. Is that kind of – is that going to pay out over earnings or how do you think about the dividend?

[Birgitte Vartdal, CEO]

We try to keep our options open and not give too strict guidance on that. The Board would like to have the flexibility to decide from quarter-to-quarter based on how we see actual earnings predictions and any other needs.

[Magnus Fyhr, Seaport Global]

You have a good cash position. You have a convert due in the year. What’s the main priorities here as far as capital allocation going forward?

[Birgitte Vartdal, CEO]

I think when you look at the convert, our base case is that we can pay that back with cash unless there are some very good opportunities combined with some new financing. So the base case is at least that we have cash available to pay that out. That will in combination with ordinary debt repayments continue to deleverage the balance sheet and we would like to do that as well as try to return money to shareholders if there is room for that and potentially if there are accretive transactions.

[Magnus Fyhr, Seaport Global]

Okay. And just one last question, if I may. Any thoughts on asset values now. You’ve been extremely active over the last couple of years. Can we say that you guys have moved in more to the harvest mode or you’re still looking at the potential acquisition opportunities?

[Birgitte Vartdal, CEO]

Asset values have come up to close to newbuilding priorities. I think there is room for some movement and we have a good equity if there are good transactions one way or another, we would look at that. But I think we are sort of – we are off from the bottom but we are not at the top. So we will still look at new deals but selectively.

[Magnus Fyhr, Seaport Global]

Okay, great. Thank you, Birgitte.

[Birgitte Vartdal, CEO]

You’re welcome.

[Operator]

Thank you. We will now go to our next question today from Fotis Giannakoulis from Morgan Stanley. Please go ahead.

[Fotis Giannakoulis, Morgan Stanley]

Yes. Hi, Birgitte and congratulations for the very profitable quarter. I just want to follow up on Magnus’ question about your capital allocation and ask you about your target capital structure. I calculate your loan to value at just 50% at this point overall and you just mentioned that you’re planning to pay down your convert from cash which will obviously going to bring your leverage even lower. How do you think that the capital structure should be in terms of loan to value going forward?

[Birgitte Vartdal, CEO]

I think with what we plan to do, we are getting to an acceptable leverage. What we try to focus on as well is to keep the cash breakeven at low levels because the asset values are fluctuating over time as we have seen, so it’s about also managing the cash flow through the cycle. To be in the range shy below 50% I think we’re not far from where we want to be.

[Fotis Giannakoulis, Morgan Stanley]

Thank you for that. And given the new regulations, ballast water treatment and low sulphur, can you first tell us how are you planning to deal with this requirement, if you have budgeted any amount for upgrade of the vessels and the installation of the ballast water or potential scrubbers, how many vessels or how much – what percentage of your fleet do you expect, if any, you will install scrubbers?

[Per Heiberg, CFO]

To take the ballast water first, we have a slide showing that in our presentation which is where you will see how many vessels that have these already installed, which is more than 50% of the vessels. And for the remaining fleet, we will install ballast water treatment systems when the docking comes through so that we are in compliant with the rules when they come into effect. For the scrubbers, that’s – I’ll give that to Birgitte to…

[Birgitte Vartdal, CEO]

So for the ballast water systems, the cash numbers are pretty limited as you can see. It varies from 4 million to 9 million per year, so it’s nothing that we are particularly concerned about covering with our existing cash flow. On the low sulphur, first of all, we have a very modern and fuel-efficient fleet, so regardless of which strategy we do, I think that will be positive in the market going forward. We are still considering our options and haven’t decided which strategy to take. If we decide to install some scrubbers, there are also possible financing alternatives around that will be able to be covered by cash flow plus financing.

[Fotis Giannakoulis, Morgan Stanley]

Thank you both. One last question about the market. If you can give us your estimate of where the market is right now for period contracts, if there is any increase in availability of period charters from your customers? And how do you view the rates developing the next two, three months given that we are coming out of a seasonal weakness? And if you have seen any impact or if you see any impact from the U.S. sanction 232 regarding the Chinese exports of steel?

[Birgitte Vartdal, CEO]

Since we are not very active in the Supra segment which is typical where the export is, nothing we have noticed as such on the sanctions part. When it comes to the market, the latest period charter that we did was equivalent to 21,000 gross for a year on a Cape, on a modern Cape. The spot rates obviously is lower as we believe that coming out of Chinese New Year and out of sort of the vendor-related issues and the maintenance issues that you normally see in Q1 that we should see an improvement in the spot rates from where we are today. And what was your --

[Fotis Giannakoulis, Morgan Stanley]

Thank you, Birgitte.

[Birgitte Vartdal, CEO]

Yes.

[Fotis Giannakoulis, Morgan Stanley]

I think that covers everything. Thank you.

[Birgitte Vartdal, CEO]

Thanks.

[Operator]

Thank you. [Operator Instructions].

[Birgitte Vartdal, CEO]

Okay. Then we would like to thank you all for listening in to our presentation today.

[Operator]

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