Golden Ocean Group Ltd (GOGL) 2015 Q1 法說會逐字稿

Good day, and welcome to the Q1 2015 Golden Ocean Group Limited Earnings Conference Call.

Today's conference is being recorded.

At this time I would like to turn the conference over to your host today, Mr. Herman Billung.

Please go ahead, sir.

Thank you very much.

Welcome everybody to the First Quarter Results presented by Golden Ocean.

Just initially, our forward-looking statement, and then I go to the agenda.

I will briefly take you through the highlights.

And then I will hand over to Birgitte Vartdal, who will go through the recent developments, financials, fleet information, and then I'll just go through a few macro slides before we open up for Q&A.

Going to the highlights, obviously the big thing for us which has taken quite some time has been the Merger between Knightsbridge Shipping Limited and the Former Golden Ocean Group Limited, which successfully was completed by the end of March this year, with Knightsbridge as the acquiring company.

And following the merger, the Company was renamed to Golden Ocean Group Limited.

Then in April the new Golden Ocean completed several transactions in order to strengthen its position and balance sheet.

Birgitte will take you through-- will come back to that later on in the presentation.

The current fleet of Golden Ocean as per May 28, is 47 sailing vessels -- 24 Capesizes, one sold, not delivered and eight sale/leasebacks; eight Kamsarmax vessels; 10 Ice-class Panamax vessels; and five Supramax vessels.

We still have 24 newbuildings on order, out of which 21 are Capesizes, and three Supramax vessels.

Out of these 24 newbuildings, four will be transferred to new owners once completed.

In addition to that, we have two vessels on bareboat in; and one vessel on long-term time charter in; and one vessel, a Capesize, in a joint venture.

So then I leave the floor to Birgitte.

Thank you.

It's been an active first half year for both the old companies, and now for the new one.

Knightsbridge took delivery of five Capesize newbuildings during Q1, and drew $148.6 million in debt related to these five deliveries.

In addition, Knightsbridge announced an agreement with RWE for 15 index linked time charter contracts over 5 years.

So far we have delivered five vessels to RWE, and we expect the remaining 10 to be delivered during the next 12 months.

Former Golden Ocean took delivery of four Supramax newbuildings during the first quarter.

And we have also taken delivery of one Supramax now during the second quarter.

As part of the transactions announced in April, we have sold our Capesizes, Channel Navigator and Channel Alliance.

Channel Navigator has already been delivered to new owners.

And we expect the same with Channel Alliance shortly.

The former Golden Ocean had time charter vessels in from what we called the [Drafus] deal.

The last vessel was Golden Sakura, which we have now decided not to declare any further optional periods on.

And we expect to redeliver her during June.

As Herman mentioned, and also as part of the transactions announced in April, we have agreed to sell four of our Capesize newbuilding contracts.

They will be delivered to new owners once completed, as we will also charter three of them back, two for 12 months and one for six months before the new owner takeover (inaudible).

Also we have had various discussions and negotiations with our yards, and have managed to postpone delivery with 79 months in aggregate on most of our newbuildings, split on most of our newbuilding contracts.

Knightsbridge completed the second step of the acquisition from Frontline 2012 in March, whereby 12 vessels, 12 Capesize vessels were transferred from Frontline 2012.

And Knightsbridge issued 31 million shares, and also received $108.6 million in cash from Frontline 2012.

There was an agreed CapEx, the transfer of $404 million, but due to the timing of payments, this was exceeded with $108.6 million.

So the Company took over $512 million, and also then received cash to net out at $404 million.

The merger closed on March 31, and initially the Company issued 61.5 million shares, but then a few shares were cancelled due to fractional shares as well as shares held by the former Golden Ocean were cancelled, so net 61.4 million shares were issued [in] the merger.

Knightsbridge entered into a $425 million term loan facility in February to finance 14 of the Capesize newbuilding vessels, where also the two new (inaudible) are included.

The financing was done at the margin of 2% and on a 20-year repayment profile.

Former Golden Ocean has had several arbitration processes with Jinhaiwan where we placed orders back in time which were cancelled in 2012 and 2013.

And in April, we received $40.1 million for the claim, which was the final outstanding amount in relation to the nine cancellations.

In total, we have received $215.8 million, whereby $40.5 million has been interest accrued.

Also in April, we announced the agreement to sell eight of the sailing Capesizes to Ship Finance International, and to charter back on time charter contract for 10 years.

The sale size enbloc in $272 million.

The time charter rate is $17,600 the first seven years, and then $14,900 for the last three years.

This includes a fixed OpEx element of $7,000 per day.

So effectively the bareboat rate is $10,600 for the first seven years, and $7,900 for the last three years.

There is also a profit split of 33% to Ship Finance for any earnings above the time charter rate.

There is a purchase option for Golden Ocean after 10 years of $112 million.

If we do not declare that option, Ship Finance has an option to extend the charter for another 3 years.

We expect to close the transactions between now and September, and it will be closed vessel by vessel, depending on their trading.

When we look at the Q1 numbers it is important to note that these are the results of the former Knightsbridge Shipping Limited, except for the bargain purchase gain, arising on the consolidation at the end of March.

The EBITDA for Knightsbridge was minus $3.6 million for the quarter.

Then there are two significant one-offs in the quarter.

The Company has taken an impairment of $141 million related to the sale of five of the vessels to Ship Finance that was in previous Knightsbridge, where the book value has significantly exceeded the sale price.

The other one-off is related to the bargain purchase gain on the consolidation of $80.9 million.

And I will come back to that a bit later.

When it comes to our Q2 numbers, we need to prepare a new depreciation and amortization schedule based on the consolidation.

So there will be a change in, for instance, depreciation numbers relative to what have been seen in former Golden Ocean and former Knightsbridge if you add that together.

For the balance sheet, at the 31st of March, we have merged former Golden Ocean into Knightsbridge.

The main changes in former Knightsbridge was the closing with Frontline 2012, and also the five deliveries during first quarter.

In addition we have added the fair value of asset and liabilities of Golden Ocean to the balance sheet.

Total cash as per end of the quarter is $244.8 million.

You will see $57 million is classified as restricted long-term cash.

Under US GAAP this is related to the cash covenants under the financing agreement.

And it's free cash in our account, but is restricted for covenant purposes.

The current assets also include the $40.1 million received from Jinhaiwan in April, as well as a part of the fair value that has been allocated to contracts.

In the long-term debt, the convertible bond is valued at fair value.

It was trading at 80.6% at the 31st of March.

So that's valued at $161.2 million and not $200 million as the nominal value.

When calculating the bargain purchase gain, we have compared the fair value of the assets and liabilities of Golden Ocean as per the 31st of March with the value of the shares issued by Knightsbridge to the shareholders in Golden Ocean.

And the difference is calculated as the bargain purchase gain of $80.9 million.

The newbuilding overview is from the start of Q2 2015 and until the end of the program.

So thereby the Supramax delivered in May is here presented as part of the newbuilding.

And you can also see that by the green color on the graph, showing the capital commitment.

We expect to take delivery of one Capesize end of June.

The four Capesizes that we have sold were part of the announced $425 million facility.

And we have obtained the consent to swap those four vessels with four other Capesizes, which means that we only have three Supramaxes with delivery in 2016, and two Capesizes with delivery in 2017 that remains unfinanced of our newbuilding program.

When it comes to the open positions, our Capesizes are spot, the same with our Supramaxes.

On the Panamax side, we have two Ice-class Panamaxes and four Kamsarmaxes that are on long-term charter at rates higher than today's market.

And we thereby have some coverage on the Panamaxes.

The operating expenses for Q1 was average $4,600 on Supra, $5,500 on Panamax, and $5,000 on Cape.

These are a mix of numbers from old Golden Ocean and old Knightsbridge.

So it's not comparable with the operating expenses in the Q1 results reported.

We have had two dockings in Q1.

These costs are not included in these numbers.

We expect to dock six to seven vessels in total during 2015.

Okay.

Thank you, Birgitte.

Then I will take you through a few macro slides.

And as I previously said, and we will open up for Q&A on completion of the macro update or the market update.

I would like to mention that all of these graphs I've used Plateau Research or Clarkson Plateau Research for -- as a source.

Then to the first slide, I mean we can all agree that the market is, I would say, in a devastating state, basically.

Not covering operational expenses on any segments, apart from Supramaxes now and then.

Utilization has been hovering around 80% on aggregate or on average for all the segments during first quarter.

On the Capesizes, I dare to say that utilization most likely has been well below 80%, maybe 77%, 78%.

For the first time, we have, for many, many years we have seen that China's market share has on total trade has gone down.

In Q1 it was like 39% compared to 41% in the first quarter in 2014.

And it's been disappointing again, both on coal and on iron ore.

But it's also interesting to see that at least on the iron ore that it looks like the Chinese have been destocking, at least the last 6 to 8 weeks.

If you look at the next slide, it's more of a breakdown showing iron ore, coal, and the grain/soybean to the left, and say what we call all the commodities to the right.

And that it's been in general, a fairly bleak picture for all commodities, basically.

I think the most difficult and the biggest gray box these days is the coal imports to China.

And if you look at what this Chinese State Council action plan, going through 2020, I mean the relative share of coal in the energy mix seems to be fairly stable.

And on the assumption that the total energy consumption in China will go up, also it is expected that the usage of coal as energy source will continue to grow.

However, I mean what makes this so difficult to predict is the relative share of imported coal compared to domestic coal.

China is still -- I mean it's the biggest coal producer in the world, producing around 3.5 billion tons of coal every year.

And the import is expected to be around 8% right now.

What we do see, however is -- I mean right now we have noticed for the last, say, month or two, is that the water level at the reservoirs are coming down slightly in China.

And another question is what will the El Nino effect have on, say, rainfall, coming months in China.

Because even though they have a big capacity of producing hydro power, they need the water.

And I would say, most -- I mean the spread between the analysts on coal imports to China is really -- it's a wide spread between those expecting it to come down to almost zero over the next five years, to those who are, say, having their assumption that it will be fairly stable, say an annual import of around 200 million tons.

But I think you could easily see here quite a lot of volatility, dependent on what's happening on the hydro power situation.

Next slide is just showing India, which is growing steadily.

India has surpassed China.

And we do not really believe in what we have seen of Indian policymakers' statements over the last couple of months that they will increase their own production capacity domestically over the next coming years.

We don't see that really happening.

And we expect India to increase their coal imports going forward.

On the iron ore supply, I mean that still looks decent.

It's been disappointing during Q1.

But even though you have a fairly, say, a relatively weak outlook on steel production in China, if you look at, say, in the timeframe between 2004 and 2009, China increased their steel production by around 300 million tons.

In between 2009 and 2014, they increased by 240 million tons.

And if you take an average of the forecasters, they believe that steel production in China will increase on an aggregate 60 million to 70 million tons between now and through 2019, which is a very low number compared to what we seen over the last previous 10 years, so the previous decade.

However, the ability for the Chinese to produce competitive iron ore will remain a challenge.

And we don't expect the Chinese authorities to support the Chinese iron ore makers.

So I think it's fair to say that an increase of say 2%, 3%, even 4% is foreseeable over the next couple of years when it comes to iron ore imports.

Right now we have seen destocking.

Prices are still low.

So short term, we could easily see an uptick in iron ore imports, if the forecasters are right in the 2% to 3% growth this year.

It has to happen over the next six months.

So in a way, again, short term, if you see any spikes in the dry bulk market, we still believe that will be -- or volatility will be for the Capesizes.

Looking into dry bulk trade in the longer term, this is just an illustration, both from when it comes to major importing countries to the left, and world seaborne trade by commodity to the right.

I think right now the most exciting thing is not really on the demand side, but on the supply side.

This terrible market is really having a great impact.

We have seen -- the latest number I saw this morning is that 71 Capes have been scrapped so far this year, against something between 45 and 50 deliveries.

We should expect scrapping to be slower during the monsoon season, i.e.

over the next three months.

But then in the meantime, the scrapping activity itself, I mean will still happen on the beaches at the Indian Subcontinent.

And I think if the market remains weak into Q3, you will see brisk scrapping activity at the end of the year as well.

And for the Capesizes I don't foresee any fleet growth at all this year.

And the only really segment that will have -- not substantial, but fleet growth, will be for the Ultramaxes.

The same is illustrated in the next slide.

I would also like to point out that again and again the official order book seems to be too big.

And I think there are big question marks already now for vessels supposed to be delivered in 2016.

Because given the state of the market, I think there are a quite a few of the smaller and less-substantial owners who will struggle to really take delivery.

The vessel will not disappear.

But I think the delivery profile will be looking quite different.

Then this next -- the final slide on the macro is just what Plateau is assuming when it comes to demand and supply growth.

My personal view is that the fleet growth I think is going to be -- the fleet growth will be slightly lower and demand growth slightly higher this year.

And I think in general that fleet growth, in general, will be lower through 2017.

But to conclude, 2015 will be a challenging year for dry bulk owners.

In a way, my personal hope is that the market will remain low for another quarter or two.

Because that will have even a more serious effect on the supply side.

Which means that the oversupply that we have been witnessing for quite some time now, will in a way repair itself quicker, faster than what we believed, say, six months back in time.

So that concluded our presentation.

And we'll then kindly ask you, if you have any questions, we'll leave that up to you.

(Operator Instructions) Jon Chappell, Evercore ISI.

Thank you.

Good afternoon.

Herman, you've obviously done a lot in the last several months to prepare the Company to withstand this downturn.

And it seems like your liquidity will help you make it through.

But you also mentioned in the press release the idea of being a consolidator.

So when do you start shifting from a defensive mode to prepare to weather the downturn, to more of an offensive mode?

And what's your true capital structure ability to make acquisitions today?

I mean first of all, I think the way we see it today, it could be that corporate transactions in a way looks more appealing compared to buying straight assets.

And this will be, in a way, a little bit event-driven.

But in case we are going to -- we need to have a project if we want to use equity.

And time-wise, this is my personal view.

I think we don't have a lot of time.

But hopefully there will be some interesting opportunities.

We are looking at several within the next three to six months.

Are those that you're looking at forced sellers, or are they people who made orders who maybe didn't have a platform, and now are finding out they don't want a ship to deliver within (inaudible)?

Are they kind of distressed activity?

I would say it's not -- to put it that way, there are quite a few, say, forced sellers in a way, which are not visible today.

But again, I mean we are looking at various alternatives here.

But it should also be a fit, in a way, with our fleet.

I mean Golden Ocean will remain an asset-heavy, pure dry bulk play, which is important to us.

So it must be a fit.

And I think still our focus would be on, say, on the bigger sizes.

I mean that could, I would say -- from Ultramax and up, not necessarily Handysizes.

Right.

Just the last one, the asset values, as we see them as being quoted don't seem to match up directly with the current market environment.

And I'm sure there's been a dearth of S&P activity in a pretty illiquid market.

Do you think that opportunities present themselves where you could get assets, whether from the corporate side or just one-offs that are substantially below kind of quoted values, and maybe closer to what the market dictates today?

The interesting thing, what we have seen, at least last week, there are still -- if you look at straight assets and particular on modern Capes, sales on five-year-old, four-or-five-year-old have been -- I would say some transactions done in the last few days, which is a slight uptick really.

I think you still might have a small downside on the resale, but not much.

But it's -- I think the market will take a breather for now, before we see new benchmark in either direction.

Because there have been quite a few, particularly Greeks, out inspecting, and even a few Norwegians, not ourselves but other Norwegians, been out inspecting vessels.

And there are -- it seems to be a floor right now for the time being.

Okay.

That's very helpful.

Thank you, Herman.

Fotis Giannakoulis, Morgan Stanley.

Yes.

Hello, and thank you.

Birgitte, I would like to ask you about your cash breakeven.

You have given us your operating expenses, which they seem to be quite competitive compared to your peers.

Can you also give us your number of your cash breakeven after interest payments and after debt repayments?

And in the event that the market remains weak, how long do you think that your cash position can support your balance sheet?

And what other alternative do you have in order to increase your liquidity?

Yes.

We can start with the cash breakeven.

Including a portion of the G&A, we assume that our Capes are in the range around $13,000 on average.

And our Supras are around $9,000, the same with our Kamsarmaxes.

And our Ice-class Panamaxes are in the average around $10,000 -- $10,000-ish.

That was question number one.

Question number two, how long our cash will last.

We are talking sometime in 2016, I would say, given the FFA market.

And what alternatives do we have?

We have not had any discussions with the banks yet.

And we do not intend to do so yet.

But obviously that's an alternative to discuss repayment profile with them.

The equity market is an alternative we've not explored yet.

We also see from time to time that the unsecured debt market is open.

That are the alternatives on the financing side.

And then of course there's always an alternative to do more on the transaction side.

But I wouldn't say that's the priority at the moment.

May I just add one thing?

For this, just one comment.

Out of those, I think, right now equity is the least likely scenario unless we have a decent project to present, given the share price.

Got it.

Thank you, Herman.

And so if you would have to prioritize the alternatives, obviously the debt repayment seems to be the most -- the debt repayment rearrangement seems to be the most favorable.

Can I say that even sale of assets could be more preferable versus equity offerings at this point?

I would say, yes, or structures that we get (inaudible).

I mean we don't really want -- obviously it's sad to have all this exposure.

But on the other hand, we want to have the exposure going forward.

I think it's a question of time.

We know all of us have been through this a few times.

That whether it's happening in 2016 or 2017, I mean, we wouldn't like to take down our exposure too much.

We have tools in our kind of basket still that we haven't explored.

But I would say that raising equity just like that today is not a favorable option.

Okay.

Thank you.

And one question about the market, and especially I want to focus on your slide, page 18 with the Chinese iron ore supply.

From what I see here, you have the Chinese imports that they are expected to grow by around 100 million tons from 2014 to 2017.

And on the other hand, if I'm not mistaken, there are approximately 300 Capesizes on order.

Given the usual conversion factor of one vessel, one Capesize per 1 million ton, how this gap can be bridged?

I assume scrapping, but mostly I want to ask you about this import demand, the import forecast numbers, which they do not match with the projections from several iron ore analysts with export numbers from Australia and Brazil.

This excess capacity that Australia and Brazil is planning to bring on line, how much of this can be shipped, given the fact that the iron ore imports from China do not seem to grow that much?

I mean I think still -- again, on the iron ore or like the coal, there is quite a big spread between what people are stating here.

I think the most negative part from my perspective has really been -- it's not only the Chinese kind of ore producers who have been suffering here.

Also particularly some of the smaller iron ore makers globally and also particularly West African.

And West African is, from a ton mile perspective, that kind of shortfall has been detrimental for the imports.

But if you look, I think still it's -- I'm a little bit doubtful to say 300 Capes.

Maybe I would take that down a little a bit.

And have in mind that there are about 250 Capes that are standard Capes that are built 2000 and earlier.

There are 14 million deadweight of [Yellow Sea] older than 20 years, which will disappear definitely over the next three years.

And if you look at -- I think if you take 15-year plus, and the actual standard Capesize, the order book is more or less at par with what is older than 15.

But I think we have, over and over again you have seen that the delivery ratio has been like 80% or even lower.

And right now I think perhaps there are quite a few things happening around with the yards.

But that didn't really answer your question.

On the iron ore side, I think that you will see that the relative share of Chinese iron ore production compared to what they import will continue to go down.

And so it's -- for all practical purposes, I have used in this presentation, it's an average of shipping analysts, more than say, iron ore analysts.

Okay.

Thank you.

And regarding all this iron ore supply that the iron ore analysts are projecting which does not really match with the demand, Chinese import demand; what do you think that this excess seaborne supply is going to happen?

Is it going to stay at the producer's side?

Or do you think that part of this can be shipped?

And what are the factors that will determine that?

I think, to be honest, that we are still dependent on Chinese iron ore imports.

There's no really clear alternative here over the next three years.

Okay, thank you.

And one last question about the state of the shipyards.

We all know that the order book, the newbuilding orders these last few months have been practically none.

How do you think that the shipyards will react?

And are there any discussions of potentially bringing the prices down?

Or do you have any view about the shutdowns of certain shipyards?

And what are the risks from many of the Chinese shipyards offering [high] attractive payment terms and prices, now they could further increase the order book?

I think the yards are getting more and more flexible when it comes to delays.

So anything where they haven't starting steel-cutting, they will basically delay anything.

Because they would rather spread out the production over time.

On the prices, I still see a little bit of downside.

I mean you haven't had any.

I mean really last reported I think Japanese Capesize newbuilding is low 50's and I guess China is 46-47.

No owners are there at those levels.

But to be quite frank, I think that the yards, even though their steel costs have gone down, labor costs have gone up, particularly in China in the meantime.

So I don't see Chinese yards, state-owned yards are willing to go -- sell anything below $42 million,$43 million.

So this is going to be quite a struggle.

And again I can't see any really ship owner out there at any kind of payment terms.

Because they will still have the commitment and the obligation in this market to commit for newbuilding.

So I think it's going to be an uphill fight, both for the ship owners and for the shipyards in the coming six to 12 months.

(Inaudible).

Thank you very much, Herman.

I'd just like to comment, Fotis, on the cash need.

When we are talking 2016, it's related to our covenant of 5%, which is quite significant as well.

So that's sort of when we are closing in on the covenant.

Also on the banks, I think I would like to say that they are sort of satisfied, or our major banks are satisfied with the actions we have taken.

We feel they are very supportive.

And they also say that they see others that will struggle earlier than us with the current balance sheet.

So I would assume from this comment that your cash, even under the current market get extended, it can last even beyond 2016, and we can reach 2017 quite comfortable with some assistance from the banks.

Yes.

Okay.

Thank you.

Magnus Fyhr, GMP Securities.

Good afternoon.

Just a question.

You mentioned in the press release that your average TC rate for the Capes were at $3,100 during the first quarter.

Some of that was due to some startup costs.

But can you give us some guidance for the second quarter, where that number is currently?

Yes, Magnus.

I think the main reason for us -- I mean it's not time to be [risky] in a way, but whether you make $3,000 or $4,500, it doesn't make a big difference.

And we have been trying to -- I mean we have been having some idling time to kind of try our best to kind of hold back and not fix at any rate.

Which obviously then every day you miss idling, you will never kind of get that money back.

So that will have an impact on top of some startup costs.

And also when you take delivery of a new vessel from a yard, you also have to pay on the maiden voyage, the initial [bank], the price you pay from the yard is slightly higher.

But it's kind of difficult right now to kind to make a proper guidance on the earnings.

But we still have some idling also in Q2, maybe not to the same extent as in Q1.

But it's too early to say.

But we try to hold back and hope that market will be better tomorrow than it is today.

And sometimes that's not a good decision.

But as I said, whether you make $3,200 or $3,800, if other owners were holding back to the same way, I think we would have a different market.

But that's not been the case really.

Okay.

But you think at least it's going to be on par with that number that you reported in the first quarter?

Yes.

It should be.

Okay.

Fair enough.

Just one more question on the sale of the four Capesizes, sales proceeds of $92.4 million.

What's the timing of that?

You said 2015 and 2016.

But what are the net proceeds from that sale?

The number you mentioned is for two vessels each year.

So the total proceeds is double.

We expect deliveries in Q3 and Q4 this year, and then in Q1 and Q4 next year.

So those vessels are not final.

But we will fund the capital commitments until delivery.

And then we will get the sale proceeds.

Okay.

And what's your estimated net cash proceeds from these vessels?

We haven't split that out.

They are partly paid to the yard as of now.

The remaining is part of the [936] that we have reported.

And then you can net by the [92.6] times 2.

Okay.

All right.

Thank you.

(Operator Instructions).

There are no further questions over the telephone at this time.

Okay.

Thank you so much everybody for who listened in or watched the webcast.

At least we can guarantee that we are doing our utmost to make our shareholders happy, even though the market is not that easy.

So thank you, all of you, and bye-bye.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.