Golden Ocean Group Ltd (GOGL) 2015 Q4 法說會逐字稿

Good day, and welcome to the Q4 2016 Golden Ocean Limited earnings call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Herman Billung.

Many thanks. Welcome to the Q4 presentation by Golden Ocean. We are obviously in a very challenging market environment, which we all are painfully aware of. We will come back to a few thoughts around that in the market update.

But first, I would like to hand over to Birgitte Vartdal, who will take you through highlights, financials, the agreement on amended financing terms, and as I said, I will talk a little bit about macro with a focus on supply, and then we will leave, say 10, 15 minutes for Q&A in the end. So please, Birgitte, go ahead.

Thank you, Herman.

I will start with the key highlights for the fourth quarter of 2015. The result for the fourth quarter was negative at $69.3 million. This includes the $41.7 million in various one-offs, mainly related to impairments on several investments.

As previously communicated, the Company converted two Capesize newbuildings to [max contract] in November, and these were sold to Frontline. The transaction was closed on December 31st, and they are therefore not as newbuildings on our balance sheet, but as a receivable from Frontline with money received during January. The Company has taken delivery of, and sold, two more of the four Capesize vessels during the period since the last earnings call, one in November and one early in February. There is therefore only one remaining vessel to be sold to the third party, which is expected to be completed in the fourth quarter. The Company also took delivery of four Capesize newbuildings in January 2016: Golden Barnett, Golden Bexley, Golden Scape, and Golden Swift. We drew down $117 million in debt in total on these four [vessels].

In December, we made an agreement with our lenders on the $425 million facility to amend some of the terms, including margins, repayment profile, and an increase of the drawdown. Recently, we have come to a new agreement with our lenders, whereby we have obtained a repayment holiday for 2.5 years, starting on the first of April, and amended covenants. This agreement is subject, too, that the Company raise $200 million in equity. I will come back to the details later on.

If we look at the result for the quarter, the operating revenues, at $56.5 million, is down from $65.9 million in the third quarter. At the same time, wage expense is down by $1.7 million, so reducing the reduction in time structure [activities]. Chief operating expenses is slightly down in Q4 relative to Q3. This is mainly explained by one dry dock in Q4, as opposed to three dry docks in Q3.

As you are all aware of, asset values and rates have dropped, and we have, therefore, had impairment testing and made some impairments related to various assets: on our lease asset, Golden Lyderhorn; our joint venture vessel, Golden Opus; a provision on the future receivable; and impairments on securities. The net loss for the quarter ended at $69.3 million, and if you exclude the various one-offs, the net loss is a total of just $27.6 million.

Turning to the balance sheet. The changes during Q4 were relatively limited. We took delivery of and sold one vessel to a third party, and received $46.2 million in sales proceeds. We also paid newbuilding installments, including the delivery installment on the same vessel, for a total of $65.3 million; and we paid down ordinary debt repayments by $11.2 million. As of year end, cash and cash equivalents is in total $151.5 million. This includes the minimum cash requirement of $48.5 million, which is classified as restricted on the balance sheet. However, it's freely held on our bank account.

For the operating expenses, we have split out running operating expenses and dry docks. For the Q4 numbers, the operating expenses are based on 51 sailing vessels in total. The operating expenses are slightly down from the third quarter, and ends up at $4,600 per day for Supras, $5,200 per day for Ice-class Panamaxes and Kamsarmaxes, and around $5,400 per day for our Capesizes. In addition, one Capesize was docked in the fourth quarter. We expect to have three vessels docked during 2016.

Looking at our open position, in terms of majority -- or in terms of exposure, the majority of our fleet is still trading in the stock markets, and there are no significant changes to this since the last quarterly report. Our total remaining CapEx, as of year end, is $570 million. During January and the start of February, we have taken delivery of five vessels, including the one sold; and we have to-date paid $156 million out of the $570 million in CapEx. The remaining CapEx is split into non-recourse and recourse CapEx. The non-recourse CapEx means that the delivery installment on the vessels are not guaranteed from the group company. The recourse number also includes the vessel that was sold to a third party, with expected delivery in October. Based on the current market environment and the rate, we have initiated and had good discussions with our yard in order to postpone the delivery of the newbuildings. If we are able to succeed on this, this will have the effect that the CapEx will be pushed out in time. As you can see, the average non-recourse CapEx is $34 million on the Cape, and $18 million on the Supras.

Based on the new refinancing agreement, the financing for the Capesize vessels will be fixed at $25 million, meaning that we have a total financing of $225 million. Currently, we do not have firm financing on the Supramaxes, but we have commitments that will improve the cash effect, should we be able to conclude on that financing.

We have provided you with a breakdown of the various bank facilities, presenting the outstanding amount at year end. The remaining commitments, which is subject to the new financing agreement capped at $225 million. Currently, it is $30 million per vessel, but with a drawdown test at 70%. Then we have included the quarterly installments, and we also have a comment on the increased quarterly installments following delivery of the nine Capesize vessels -- at the time of delivery. As you can see, the margin ranges from 200 basis points above LIBOR to 275 basis points above LIBOR, and the volume weighted average margin is 230 basis points above LIBOR.

I would like to spend some time going into the details on the refinancing that we have just agreed with our financing banks. The agreement is subject to $200 million in new equity, and is not effective before this equities raise. However, we have an agreement that we have a waiver on the minimum value covenant and the market-adjusted equity ratios until the June 30, 2016, prior also to any equity issue. We have agreed that we will have no ordinary debt repayment for the 2.5 years starting from April 1, 2016. With full deferral of payments, and assuming the current delivery schedule, this is equivalent to $165 million in deferred payments.

A cash sweep mechanism is in place to ensure that, should the Company's cash flow improve for the period, including the commitments that we have today up until Q3 2018, then we will pay down the deferred amount pro rata between the various loan agreements back to the original schedule. We have full waiver on the market-adjusted equity ratio for the same period, and the minimum value covenant is set at 100%. So the covenants for the Company at the time is then to have positive working capital, to have minimum 5% of interest-bearing debt, and NBCs at 100%. We will continue to pay the agreed current existing margin on the debt outstanding according to the original debt repayment schedule, and we will pay an increased margin of 4.25% above LIBOR for any deferred amounts only.

In order to remove uncertainty for the Company in terms of drawdown on newbuild, we have agreed a fixed drawdown of $25 million per [CAGR]. We believe that this will create visibility on our liquidity run rate regardless of how the asset values develop. The repayments holiday have the effect that we take our average Capesize cash break-even for the total fees, including time charter in, from $14,000 per day down to $10,500 per day. For the fleet on average, we'll reduce the cash break-even from $12,200 per day to $9,200 per day. This will reduce our running cash burn in a period where the market projections are around OpEx levels.

Starting with the cash balance at year end of $151 million, we have received $46 million and we have expected proceeds for the remaining $46 million on sale of newbuildings. We have committed debt financing of $342 million. This includes the $117 million that have been drawn year to date -- the $200 million for 8 Capesizes that are non-recourse, and $25 million for one Capesize that are recourse. Assuming new equity of $200 million, this will provide us with total sources of $788 million. The remaining CapEx is $570 million per year end, as previously described, split into $156 million paid to date, $327 million non-recourse, and $87 million recourse. This will provide us a pro forma excess liquidity of $218 million, following equity issuance.

This will end the information on the numbers and the financing. I'll hand it over, back to Herman.

Thank you very much, Birgitte.

Before we go discuss, say, the fundamentals, I just would like to give my compliments to Birgitte (inaudible) for the -- I think it's fantastic deal we have stuck with the banks. And also obviously, we appreciate that the banks have been supportive. On top of that, I would also like to add that I think it's been a little bit under the radar screen, the non-recourse CapEx. I have been asked a few times, why don't you get a haircut rather than postponing? But I think the optionality has a big value. And if you can continue to extend, I think that's the way to go ahead.

On the market -- as I said in the beginning, it is a very serious situation. We are in a territory, both when it comes to asset values and spot market levels, which we have not seen in, I would say, (inaudible) not in a fairly long history of the dry bulk shipping space. The effect of this, I think it's still to come. We are not, as I have said a few times, necessarily very bullish on the demand, but our view is that these market conditions are not sustainable for anybody, and we believe that the dry bulk supply side will repair itself faster than most analysts have been able to catch up with at this point of time. If you look at what the effect is, obviously, that looking at the first slide on the macro, that nothing has been ordered so far in 2016. According to our records, it's not nothing -- that's one Handysize and one Handymax. And I think it's fair to say that under the present market circumstances, also because the yards are very close to the breakeven cost already a year ago and the resale values are much lower, I don't see, first of all, that people are able or in the position to order new capacity. So I think you will see a record low ordering in 2016.

If you look back, obviously, what you see, the 103 million ton -- deadweight ton -- that was ordered in 2013. That was not -- that was what they really didn't need. And, unfortunately, we have to take our share of the blame there. But things are -- as I said, will repair itself much faster.

What is the actual order book today? Officially by start of the year, equals about 126 million deadweight ton. We have seen, over the last few years, that the combination of, say, cancellations, conversions, and what is called slippage, that the actual delivery ratio has been around -- is hovering between 65% to 75%. Given the present market environment, I think again, who are able really to take delivery, even if they are forced to, and I think there will be massive delays at very, I would say, lack of visibility when it comes to what will actually be delivered, at least in 2016. I think it's a fair assumption to make that the adjusted order book is around 90 million deadweight. Maybe a little bit more. And it will be spread out more in time.

Then, looking at scrapping. You see on the bottom there that we are saying that 21 Capesizes have been scrapped year to date. I just got information today, there were 2 scrapped yesterday and another 2 today. We are now at about 25, and the rate is massive. On the Capesizes, on a standalone basis, its 30 million deadweight for the year. We doubt that, that is going to happen, but on the total fleet, we are at the run rate of 60 million deadweight. But again, any vessel that is -- at least for the Capes -- any vessel which is older than 15 years old or is due for a third special survey is a scrapping candidate. This is not the functional scrapping prices. And people are asking, is it enough scrapping capacity? Yes, it is. And I think it's -- that this scrap pool of the, say, of 120 -- between 150 to 160 million deadweight is realistic within next, say, two, two and a half years, or through 2018.

On the demand side -- just to conclude on supply, what we have made -- various calculations on what is needed to -- and then looking at Capesizes on a standalone basis, what is needed to get the utilization of 85%. I think today the utilization is down to 78%. And I think, based on our previous estimates, it is a fair chance that we will get back to that, because we believe that, given that market will remain soft in 2016, which is -- I think is really the base case for most analysts; and earnings below OpEx, I think you could potentially see negative [feed] growth already in 2016.

Then on to demand. We are -- as I said, on the demand side, we are not overly optimistic. We believe that Chinese [steel] production has peaked, and it will be more or less at the same level, or even slightly below. But base case is zero growth. With that in mind, you should believe that the Chinese imports will be flat or even decline; but that's not really the case, because what we are seeing is that Chinese production is getting more and more inefficient. Quality of the ore itself is lower and lower. And we believe that the new capacity coming into the market will still support iron ore case.

We are not talking a massive demand growth. And if you look in -- I think it's fair to say that over the next two to three years, based on new capacity coming and the price picture we are seeing, and the new -- and the domestic production, I think it's a fair assumption that you could add another 40 to 65 Cape-equivalents into demand for a Cape equivalents over the next two to three years. And have in mind that is still based on zero steel production, which obviously, steel is the -- I would say the spreads among the analysts, here, is quite huge. You have used, say, something consensus, which is zero growth.

Coal imports -- we see announcements from Indian authorities about safe sufficiency. But we still believe that you will have modest coal import increase to India. But more interesting is what is happening in China. We believe that within, say, the next three to four years, even though China has invested a lot into renewable resources, at the same time I think they are basically truly invested within this forecasting period on hydro power capacity. So we believe that even in a very modest energy consumption growth scenario, you should still expect the energy -- on fairly stable energy mix, say, 63%, 62% coal dependence. We still believe that coal consumption in China will be more or less flat.

But the sensitivity here is massive, and there is a lot of closure of coal mines in China. About [1,000] mines were closed in 2015, and we expect more closures. It's obviously a more, say, political commodity than iron ore. Have in mind that 1% decrease in domestic production came to 435 million tons of all the higher imports. But that is the wild card, and we don't have a strong view on that, but we just want to highlight the sensitivity.

So, finally, some consideration. We all agree that the market is oversupplied. Utilization around 75%. And as I said, the spot market is not sustainable for asset owners, and supply will definitely come down. The consensus for total demand growth through 2018 is 2% per annum. You can also discuss that. There are various views, and we just use consensus, which means that implies an accumulated demand growth of 50 million deadweight. And we all know that utilization is very sensitive to demand, I'm sure. And I've already discussed the iron imports to China and Chinese coal producers who are under severe financial and ecological pressure.

So I think that concludes our presentation, and we leave it to you for questions. We will try our best to answer properly.

Thank you.

(Operator Instructions)

We will now take our next question from [Needa Backesh] of Lloyd's.

Good afternoon.

I just had one quick question for you. It's regarding the pool, the Cape 5 pool that you have entered into with three other companies. I was just wondering, how is that going to work and how is that going to help -- help your earnings?

I mean, it's more to, say, be able to have a more operationally efficient way of operating our Capesizes. We are today doing it in two offices. One in Singapore, and one Amforht. As we all know, the Capesize fleet is usually fragmented.

So, I mean, the effect on earnings will be limited. But what we hope is that we -- that through this revenue sharing agreement, we will be a preferred customer for various industries, and we can offer them better service than most other owners.

How long do you think you'll stay in the pool? Is there a minimum time period?

We are very happy about the pool and we haven't thought about that.

Okay. Thank you.

Thank you. We will now take our next question from Erik Folkeson of Swedbank.

Good afternoon.

You have poor [camsem] access on -- in today's market, quite profitable, [tom shockers]. So for you, they are extremely [gullible] but they must be a disaster to the [chartre]. Who is the counterpart of those four contracts, and how firm are you that those contracts will hold in today's distressed markets?

Say it this way, If you can say that any counterpart is bankable, at least this counterpart is bankable. We rather don't like to disclose, since we have private and confidential agreement in the charter party with the counterpart. But just to let you know that we have had absolutely no issues, no signs of any renegotiations, and they are performing like a Swiss watch.

Okay. Thank you. That's all for me.

Thank you. We will now take our next question from Herman Hildan, of Clarksons Platou.

Good afternoon. Just the first question on the non-recourse CapEx. Is it possible to give any indications on how much liquidity you would potentially release, if you walk away from that commitment? And also the timing of it?

There are three different yards in question. We rather don't like to go into details on -- because it's a little bit different on each yard. So as it looks -- I think we'll leave it at there for now.

It's split out for quarters in the graph. So, I don't know what --

It's more on the potential cash release, if you were to walk away from it. In a scenario where the (inaudible) materializes. You have some additional liquidity to release down the road, if that's required? And that -- the amount of that --

This is mainly the delivery installments, that is in the non recourse.

Okay. And a final question on the cash -- (multiple speakers)

-- that we would have drawn.

Yes, yes. And the final question on the cash sweep. Is that -- how is the accounting mechanism, there? Is it 100% above the cash break-even until it's fully repaid? And is it on a quarterly basis or monthly basis, or how is the mechanism there?

It is agreed to be on half-yearly basis, and it will have to take into account the commitments all until 2018, and of course, the actual earnings as we go along. So it would be a model that will pay out all the commitment that we have and the projections and the actual earnings. Then we will pay down.

And when you're -- and it ceases to hold when the full debt repayment until 2018 is repaid, correct?

Yes. And it can extend beyond the waiver period, if we are not fully repaid.

Okay.

Back to the original scheduled. But there is no wall of maturity at the end of the waiver period for that amount.

And the benchmark is versus the cash break-even that you give in your presentation?

No. It's our projections that we are agreeing with the banks.

Okay. Okay. Thank you.

Thank you. We will now take our next question from Harsha Gowda of Blue Shore Global Equity.

Good afternoon, gentlemen. A quick question for you on -- a few questions, actually. Number one, I am seeing a lot of banks deferring principle payments out to 2018, and some of your competitors out to 2020 and 2022. Do you believe that's going to forestall the supply correction for the fleet overall, if the banks, you know, per se, kick the can down the road?

These are four vessels on the water. So are you thinking that this will give the owners more -- (multiple speakers)

Exactly. Instead of scrapping the vessel, bringing their cash break-even down, they are able to keep their vessel for a few more years. Are you seeing the banks being that favorable with many of the other owners, especially in the private market?

I think it has a little bit to do on the age of the vessel, because if you look at what we -- if you just look at the vessel today, a Capesize which is 15 years old is hardly worth more than the scrap value. So, and then you have to add easily to take the vessel through for a very special survey. And then, again, I am talking about the Capesize.

And in particular these days, and I think a lot of owners are not really spending a lot of money on the maintenance. I think their final drydocking costs really reflect that, which means you have to add some steel renews, painting, coating, balance tanks, blah, blah, blah, and it could easily be $2.5 million to $3 million. And I think that is what really is the decision maker, to your point, for an owner.

Okay. So the banks -- the deferrals of amortization, et cetera, that is not going to slow down the scrapping rate, you believe?

I don't think so, really. If I were a bank, I would be slightly hesitant to give waivers on a 16, 17 year-old vessel, and then think about -- okay, hopefully the market will recover in three years' time, and in the meantime the vessel is 18, 19 years old. So I don't think that's really realistic. I don't think that disturbs our scrapings.

Okay. Great.

And my next set of questions is in regards to yards. Are you -- I would love to get some color from you on how you're seeing just the evolution of the yards, especially in China. Are you seeing a large shrinkage in the number of yards, especially the yards as we look down two years, three years down the road, so there actually is limited ability to bring on new capacity, especially if the market rebounds? That's number one.

Number two, how much more room do you believe there is in newbuilding prices to come down? Especially as resale prices -- the spread between resale and newbuild are so significant?

With -- I just, you know, we have had -- kind of been looking into this. If you look -- first to your first question, about yard capacity and how it looks like. I think it would be a very interesting territory going up Yangtze River today compared to all the activity you saw there three years ago. I think 50% of the private China's yards haven't received the order since 2012.

And it doesn't look really that, strategically, ship building industry's important for the Chinese authorities. And then you could say that, okay, it's a lot of workers. But today on most Chinese yards, 70% -- 60%, 70%, 80% of the work force is not employed by the yard. So they are traveling around. So I think, strategically, it's not important.

We ask the questions. We got an answer from a Chinese yard, what is the break-even cost of a 207,000 tonner? They said $46 million. You can take it for what it's worth.

I met with a Japanese yard two days ago. Asked what their break-even cost was on a 180,000 tonner. They said about $45 million. And as long as you see resale prices, say for a similar vessel, Japanese resale, say, at $37 million, then I think it's (inaudible) for the yard to attract owners to order new capacity.

Okay. Great. Thank you very much.

Thank you.

(Operator Instructions)

We will now take our next question from Eirik Haavaldsen of Pareto Securities.

I wanted to touch up on the slide 9, with your remaining CapEx. And I assume the reason for including that slide is to show your flexibility. And how are you thinking there?

For instance, in Q1, you have about $78 million of non-recourse remaining CapEx. Is this market bad enough to walk away from that CapEx? Is that an option? Or is that something that you can comment on, how you're thinking in terms of those remaining installments right now in kind of the all time low market?

You know, as Birgitte said, most of this is -- basically all the weight is related to deliveries. And to put it that way, as I also said, the tactics or the strategies to postpone, which means that it's very, very unlikely that we will, unless the market should make a u-turn. It's very unlikely that we will take deliveries within Q1 or Q2.

That's beyond that, it's still an option game. It's like, you have to roll the position.

Maybe at one stage, the yard will come to and tend a notice of readiness or tend a notice, and then we have to make a decision. But we have a very good dialogue, and the yards are maybe looking at The Golden Ocean also from a group perspective.

And you know that the group search have been very active at various shipyards in the world. So I think they are really bending forwards to assist us.

Thank you. That was very clear.

Thank you. We will now take our next question from Jonathan [Sapo] of Friendly Securities.

Hello. I was wondering, you spent some time talking about scrapping. How about idling vessels? You referred to utilization now at 75%. Is this something you're considering yourself, or are you seeing a lot of it in the market today?

Yes. You know, the thing with idling is you don't save much money unless you have a certain timeline here. You have different -- you can do different ways of laying up a vessel. You can do a cold lay-up, which where you save most per day, but then you have commissioning, decommissioning costs which you have to add, and that will typically not be economical unless you lay-up for seven to nine months.

Then you could do something, what we in the revenue sharing agreement among the Cape openers, we had called it a lukewarm lay-up, where you could send the shore part of the crew, and you can do some savings in the region of $2,000 to $2,500 per day. Still, due to transportation of crews, etc., you still need the three months arise.

But, we are seriously considering this. As I said, and we will then most likely lay-up vessels that are less economical, which is not the last generation of newbuildings, but rather, vessels built, which today, not scrapping candidates, but three- to five-year-olds. So it's -- but we are considering that. But that is also a part of what we discussed within the revenue sharing agreement, because then we share the burden and the risk, which is obviously positive.

So I think you will see more lay-ups for vessels that are, say, any vessel older than five years. But vessels older than 15, I remain confident that you will see massive scrapping.

Thanks, Herman. And then just one for Birgitte, perhaps.

About the commitment you received for in the Supramaxes to be delivered. Is it fair to assume that this will be slightly lower than what you did draw down from the last delivery you did for the Supras?

So we are discussing a sale/lease-back structure. So in case we are able to conclude that, this would be higher, but obviously that also affects the cash break-even accordingly. Should that not materialize, I will assume that we can do a regular bank financing on the lower amount, if you indicate following predictable equity rate.

All right. Thanks a lot. That's it for me.

Thank you. Currently, there are no question signaled.

(Operator Instructions)

We will take our next question from Nicolay Dyvik of DNB.

Hi. Lots of questions off on the CapEx. Just in terms of your preference, would it be to obtain a discount on the remaining CapEx or postponements?

For now postponements. I mean, the moment you start to discuss the discount, then you are a little bit -- it's a little bit Catch-22, in a way. So you'd rather just play the -- I think it gives us more optionality to keep that can closed for now.

Okay. Thank you.

We will now take our next question from Erik Stavseth of Arctic Securities.

Hello. My question relates to the SSI leases have you in place. They are currently running at $17,500, give or take a thousand dollars day. Is there any chance that you might look into doing something here? I mean, that's -- it's a pretty high cost. It's almost $60 million of cost per year all in. Is that something you're looking at, too?

You know, Erik, it's -- this was part of the solution just a few months ago, and in the meantime, market has deteriorated even further. The delivery took place in September or October -- or September 2015. So we felt it was a little bit premature to discuss that. And in that type of discussion, most likely you have to give some to get something back. So I think at this stage, we have not had any discussions with the owner.

We take the OpEx rate. And in case we run the OpEx below $7,000, which we do, then we get that reduction. So the actual run rate at the moment is more around $16,000 than $17,600.

Every dollar helps. Thanks so much.

Thank you. (laughter) Okay. If you don't mind, we have a few things, interim things, to discuss. So it would be nice, if there are no further questions, if you could end it by now.

Certainly, yes.

Then I would like to thank everybody for their participation, and we wish you all the best for the rest of the day.

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