Golden Ocean Group Ltd

NASDAQ:GOGL

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. And welcome to the Q4 2019 Golden Ocean Group Limited Earnings Conference Call. At this time, all participants are in a listen-only mode.

I would now like to hand the conference over to first speaker today, Ola Lorentzon, thank you. Please go ahead.

[Ola Lorentzon, Chairman and Interim Chief Executive Officer]

Thank you. Good afternoon. And welcome to the fourth quarter 2019 earnings call for Golden Ocean Group. My name is Ola Lorentzon, and I am Chairman and Interim Chief Executive Officer of the company. Together with me, I have Per Heiberg, our CFO and Thomas Semino, our Chief Commercial Officer. Much like in past calls, Per will take you through the company updates and financials. Then Thomas will provide his perspective on the current market environment. And then I will directly conclude to the meeting. Before proceeding, I should note that the company's search for a permanent Chief Executive Officer is ongoing, and we are actively searching for the most appropriate candidate for the Group.

With that I turn the call over to you, Per.

[Per Heiberg, Chief Financial Officer]

Thank you, Ola. Golden Ocean reports net profit of 41 million and profit per share of $0.29 for the fourth quarter of 2019. This is up from 36.7 million and a profit per share or $0.36 in the previous quarter. The profit for 2019 in total ended at 37.2 million compared to 84.5 million in 2018. Adjusted EBITDA was 73.9 million, down from 81.1 million in the previous quarter.

In December, we completed the refinancing of 15 vessels at attractive turn ahead of the maturity of the private loan facility, and we completed the amendment of seven charter agreements with SFL to fund investment in scrubbers on these metals as available fund investment at charter rates for this will be increased. The company announces a cash dividend of $0.05 for the quarter.

Moving on to the P&L. Net P&L for the quarter was 41 million, an increase of 4.3 million from the previous quarter, and taking the profit for the full year to 37.2 million. The strong market in third quarter eased-off during the fourth quarter, but with a natural lagging of earnings and some reversal of U. S. GAAP adjustments from previous quarter, our time charter equivalent or TCE revenue net charter higher paid, increased by 4.3 million compared to the previous quarter.

Shipped operating expenses, including drydock and estimated OpEx and charter on leased in vessels was 56.6 million for the quarter. Of this amount, 9 million relates to drydocking, compared to 1.6 million in third quarter. 6.2 million relates to estimated OpEx on leased vessel, which is at the same level as previous quarter. Effectively, the running OpEx on our own fleet increased by 3.3 million compared to the previous quarter, mainly due to additional costs in conjunction with increased drydock activity.

The G&A increased slightly in the fourth quarter compared to third quarter, but through the year G&A was slightly less than previous year. Net financial expenses was down by 1 million compared to the prior quarter due to a decrease in LIBOR rates but had a positive impact on our floating rates loan portfolio. Unlike last quarter, we've booked a profit of derivatives amounting to 6.4 million in this quarter. Most of it relates to profit on U. S. interest rates hedges with 3.9 million due to the increase in forward rates as we booked the hedges mark-to-markets.

Further, we booked gains on both FFAs and broker hedges but took some losses on FX hedges. We also booked an unrealized profit of $0.6 million related to our shareholding in Scorpio Bulkers and we sold the shares in Scorpio Tankers received as dividend for the net proceed of 1.1 million. Adjusted EBITDA was 73.9 million for the quarter and achieved TCE per day was 21,668 compared to 19,777 for the previous quarter.

Moving on to cash flow. The company entered the quarter with 139.3 million in cash and generated positive cash flow from operation of 84.1 million. Increased working capital in third quarter was to some extent reversed during this quarter on top of an underlying strong cash generation. As we refinance one of our loan facility and drew down additional debts on bond facility related to scrubber investments, net repayment was only 12.2 million during fourth quarter compared to ordinary quarterly repayments of approximately 21 million.

The company paid 21.5 million or $0.15 cents per share in dividends for third quarter payable in fourth quarter, and we repurchased 380,000 shares for a total cost of 2.1 million. We also invested 25.4 million during the quarter, mostly this relates to installation of scrubbers and ballot water treatment systems on certain of our vessels. Following other minor cash out flow at the end of the quarter, the cash at the end of the quarter amounted to 163.2 million, an increase of 23.9 million from the start of the quarter.

Looking at the balance sheet. The most notable change this quarter is the reclassification of seven of our SFL leases from operational leases to financial leases. The reclassification relates to charter amendments made to finance scrubbers for seven vessels, resulting in a fully updated calcification step on the leases. We determine that these leases need to be reclassified from operational to financial leases over the remaining lifetime. At the end of the quarter, the company's book equity was 51%.

Under our credit facility, we see that in December we completed the new 155.3 million loan facility with six banks refinancing 15 vessels that were financed throughout prior to 84 million facility. The new facility has five-year tenure with an interest of LIBOR plus 210 basis points and has the same 20 years age adjusted profile as the previous facility.

During the year of 2019, we have extended and refinanced five of our loan facilities. We've postponed maturity significantly and repaid our corporate debt. The result is that now our earliest loan matures in March 31, 2021, and the remaining facilities mature from 2023 to 2025. The company continues to amortize all debt on a quarterly basis with approximately 21 million per quarter.

The 17.5 million financing of the seven scrubber installations on our SFL leases was fully drawn in early January 2020, and we have started to pay down through $1,535 per day per vessel and increased charter hires. We drew down 9 million from our 420 million facility in December to finance scrubbers and the remaining 18 million in scrubber financing was drawn during January 2020. The company has not made any amendments to existing covenants during the refinancings done in 2019.

Looking at the OpEx. In the P&L, the company shows fully burdened OpEx costs, including drydocking and fees to external managers. The running OpEx increased slightly during fourth quarter, mainly due to cost related to upcoming drydockings. Daily running OpEx ended at 5,100 per day for Panamaxes and $5,750 per day for Capes. In the fourth quarter, we had high docking activity. Eight vessels completed drydocking during the quarter and five vessels are still in drydock at the year-end.

Scheduled drydocking activity is high for the first quarter of this year and we managed to complete a few prior to Chinese New Year and the impact of the corona virus. Presently the situation at the yard is that the fluid due to the corona virus, which has resulted in lack of workforce and difficulties getting equipment at spare parts into China. Today it is not possible to be precise in the guiding of the outcome, but our drydock schedule will surely be a bit delayed.

This also affects our plans to install scrubbers. 14 out of 23 planned scrubber installations have been completed so far. The nine remaining vessels that are scheduled for installation during first half of 2020 are currently trading in the market, and they're constantly monitoring the situation to determine timing of the installations.

The current long term operating fleet of the company is 29 vessels, of which 46 are Capes, 16 are Panamaxes or Kamsarmaxes, 14 are ice class Panamaxes and three are Ultramaxes. Given the current weak markets, the company have not taken any additional long term cover since the last report. Although, we do consistently utilize the best options to fix between short-term fixed charter, index linked charters or operators. The total fixed rate cover for 2020 is therefore relatively low, which will impact our revenue in the present quarter.

That ends my presentation. And I hand over the word to our Chief Commercial Officer, Thomas Semino.

[Thomas Semino, Chief Commercial Officer]

Thank you, Per. Expectations for the New Year were relatively positive as 2019 came to a close. The market was resilient throughout the majority of 2020 in spite of severe iron ore production customers in Brazil and Australia of this part of the year, and the continued overhang created by the trade tension between U. S. and China.

Trade rate peaked in the third quarter with better supply constrained due to the large number of scrubber retrofit projects that were underway as iron ore response began to increase. The strength of the market in the third quarter impacted our results in the fourth quarter as number of strong fixture we concluded in the third quarter for voyages but actually occurred in the fourth quarter.

As the year concluded, the decline in rates accelerated following the position of restriction on Chinese coal import, which also occurred in 2018. The drydock market have seasonal factors and the first quarter is generally the weakest quarter of the year. 2020 of course saw emergence of the new corona virus in China but is continuing to cause significant disruption in the trade flow. The impact of the new corona virus has been compounded by lower than anticipated iron ore output in Brazil due to heavy rain and disruption in Australia.

In the mean time, the new IMO 2020 sulfur restrictions have seemingly become a forgotten backdrop. Now standing in current market condition, it's worth spending a few minutes discussing overview of IMO 2020 as it relates to vessel economics and feed supply. At the end of 2019 and the start of this year, the spread between the higher sulfur fuel oil and compliant fuel briefly had $300. While the spreads as things come in a bit, it is quite wide and sufficient to create significant competitive disadvantage for owners of older less fuel efficient vessels.

This disadvantage is reflected in what seems to be a fleet tiered market comprised of modern Eco vessel equipped with scrubber and older vessels without scrubber. In the current market environment, older vessels are earning practically nothing while modern Eco vessels are earning closer to OpEx and the scrubber fitter vessels are earnings above OpEx. While market condition might be extreme at the moment, they're untenable for owners of older vessels. The secondary market is also pricing the same as the price premium for an Eco vessel as compared to a non-Eco vessel continues to increase. The message from the market it is very clear.

It is worth noting that longer the weaker vessel market persists, the greater the light group that vessel will be scrapped. In January 2020, five Capsized vessels were damaged. The high preloads in 2019 and there are other others at an additional five Capsized were scrapped in February and the nine vessels are already sold and will be scrapped over the next six months. In the Capsized class, there are 74 vessels that will be over 20 years of age by the end of 2020, representing about 5% of the total excise fee based on the deadweight tonnes, and 230 vessels but would be 15 years of age or above by the end of the year. The order book remains somehow flat. We don't expect to see fleet contract but any level of demolition is obviously here.

With respect to the order book, the situation in China has already resulted in delays in newbuildings and also on scrubber retrofits. Yards and supply chain might take some time to resume their operation, which would result in delayed and perhaps more spread out in delivery schedule. It is too early to forecast the potential impact of the corona virus beyond the short term, but it is unlikely that the normal business operation will quickly resume. Many market observers expect a swift recovery in the second half of 2020. We would of course welcome these but it is simply too soon to adapt.

As the dynamic unfolds, we're focused on controlling the factors that we can control, including our commercial operation and the quality of our fleet. When the market does recover the notion is very well-positioned to generate earnings as our fleet is focused on the larger vessel classes, where rates tend to move the most dramatic fleet in other direction. The modernity of our fleet and our plant to install scrubber are two-thirds of our vessel based on total fuel consumption becomes market a bit more manageable and we also likely to rate incremental earnings going forward.

With that, I would like to thank you for your time today, and turn the call back to Ola.

[Ola Lorentzon, Chairman and Interim Chief Executive Officer]

Thank you, Thomas. While Golden Ocean’s strong earnings potential has been demonstrated over the course of last year, the market is currently presenting a challenge that will impact our results in the near-term. Despite near-term factors, we're confident of the medium to longer-term development on drybulk transportation demand and as the current market dynamic continue to unfold, our focus remains on maintaining efficient operation, a strong balance sheet and a strong liquidity position. Thank you for listening.

[Operator]

Thank you. This is the operator. Thank you for participating. There is no Q&A in this conference. If you have any questions, please contact the company. And once again, thank you for participating. There is no Q&A in this confidence. If you have any questions, please contact the company. That does conclude our conference for today. Thank you for participating. You may all disconnect.