Golden Ocean Group Ltd (GOGL) 2016 Q2 法說會逐字稿

Good day and welcome to the Golden Ocean Group Q2 2016 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Birgitte Vartdal. Please go ahead.

Thank you and welcome to the Golden Ocean Group Limited Q2 2016 earnings call. Today's agenda will be as earlier. Per will present highlights, financial, fleet, and newbuilding status, while I will run through some comments on macro and also a summary on the Company's status at the moment. So please go ahead, Per.

Thank you, Birgitte. I will stick to the highlights for this quarter. The Company reported a net loss of $39.2 million for the quarter and year to date a loss of $107.5 million. Q2 is down, as you can see, a bit better than Q1 but with still significant loss. In Q2 in June, we agreed to -- with one yard to postpone delivery of six of our Capesize newbuildings, so all of them will be then for delivery in cal 2017. And we moved $132.1 million in installments from 2016 to 2017 in that process.

In the beginning of August, we affected our five-for-one reverse stock split, and that was due to a notice that was given to us in February that this share price was trading below $1. So now we regained the compliance with NASDAQ rules by doing this reverse split.

Going to the numbers, as you can see, the net revenue increased from Q1 and Q2 mainly due to better market conditions. And it's also worth a mention that we performed better than the market rate published at Baltic Exchange in Q2. The operating expenses is more or less in line with previous quarter. We have a full quarter for the newbuildings delivered in Q1, and we also have a -- some impact on the one vessel that we took delivery on Q2, so it's with a slight increase.

In Q2 we took an impairment on the capital leased vessel, Golden Lyderhorn, with $1 million, and I will come back to that later on. We have an increase in interest expenses mainly due to full-service of the debt drawn in Q1 and also increased margins on the deferred repayments on loans. When it comes to derivatives, we still experience pressure on long-term dollar rates, so that is mainly related to the mark-to-market losses unrealized on the interest rate hedges in the Company. We also have some bunker hedges in the Company and that has a small profit in the quarter. So all in all, this lead to an improved result from Q1 to Q2.

On the balance sheet, we see that the unrestricted free cash is down by $42.9 million. This is mainly related to -- that we took delivery of Golden Fulham in the quarter, and that we have a cash drain on operations of $14.9 million. The decrease is then offset by drawn debt on Golden Fulham by $25 million. The asset values of the vessel increased by $36 million, also then related to Golden Fulham, and then an ordinary depreciation of vessels. As the same as for in Q1, we have no bank debt classified as short-term -- Q2 delivered that we received in Q1 with all our loan facilities. And the increase in debt related to draw down on debt on Golden Fulham, in our -- but that's the main reason for the increase.

Then we move to the fleet development. As mentioned in May, Golden Ocean took delivery of Golden Fulham from the Japanese yard JMU, and paid the final installment to the yard of $41.1 million and draw $25 million in debt. The vessel is trading in the spot market and as -- as a part of the CZN revenue sharing agreement. In May, the owner of Golden Lyderhorn that we had on their books, they exercised their option to sell the vessel to Golden Ocean at the price of $9.5 million, net. We then decided to search in the market to see what we can do with the vessel and we decided to sell the vessel. And managed to do that early July with the delivery on Monday this week, actually, to the new owners for $3.5 million. It's worth mentioning that even if we take a loss and we have lost a lot on that vessel during the last couple of years, but all in all the 10-year project has been very profitable for Golden Ocean in its lifetime.

So after this, the current fleet has not had changes since Q1. We have then taken delivery of one vessel, one Capesize, and we have then sold Golden Lyderhorn; take the total fleet to 70 vessels all in all. For the -- on the employment side, we have basically -- or not done any changes. Since last quarter most of the fleet is trading in the spot markets except for the vessels coming on long-term charter that have been there for several years. And then Golden Lyderhorn is taken out of the fleet in this overview.

Over to the newbuildings. As you can see, we still have 12 newbuildings to be delivered. We have then postponed, so that six of them are now delivered in 2017 and 2016. One Capesize is already sold and expect to be delivered to new owner in Q4 2016. And if you look at the recourse or nonrecourse CapEx, the remaining nonrecourse mostly relates to the vessel that is sold. And for the remaining eight Capesizes, we have financing of $25 million on each at delivery and the three Supermaxes, they are still unfinanced. That being said, we have -- we are still in negotiations for further postponement on the deliveries. That's an important factor for us.

When it comes to operating expenses, they are relatively stable. The average for the fleet is around or even slightly below $5,000 per day. As you see, we tapered out the drydocking costs in Q2. It was no such -- no vessels in drydock, but we expect the two -- we have two more vessels to be docked in 2016, and both of them will be docked in this quarter, Q3 2016. Yes. And that ends my presentation and I hand it over to Birgitte to take you through the macro updates.

Thank you, Per. This time I have used input from Clarksons Platou, Lorentzen & Stemoco, and Fearnley Shipping in my presentation. When looking at the overall picture so far in 2016, I think it's fair to say that the demand has been better than what was expected at the start of the year. However, even with this strong demand, rates have not shown a lot of response to the volumes transported. Utilization in the second quarter is up to slightly above 80%, while it was below -- around 78% in the first quarter, and probably Capes were as low as 75% in February. Except for our rate increase in April on the Capes, the rates have been more or less around operating expenses during the second quarter; Supermaxes, slightly better.

In this picture, where rates have been very low and also utilization have been low, it is important to remember that at the start of the year around 100 Capes were idling. When rates came up during April, these vessels were released and now we are at around 20 vessels is idling. So utilization -- this is of course reflected in the utilization, but should demand continue to increase there are not more vessels to be released from idling. The reason for the increase in demand is the strong import numbers seen from China, in particularly on iron ore, but coal has also surprised on the upside year to date.

At the start of the year, Beijing realized that it hasn't been that easy to transform the growth from consumer spending -- or to consumer spending. And demand for Chinese goods abroad have also been subdued due to the general state of the economy. New stimulus packages were therefore announced, and in order to keep up with the growth targets, they are a bit back to the traditional way to fuel the economy. For dry bulk, this is of course important due to spending in infrastructure investments. These numbers on slide from Lorentzen % Stemoco shows National Bureau of Statistics numbers for infrastructure and real estate. These are the most steel intensive industries and have thus fueled the need for steel and iron ore. We have also seen that the steel prices for [fiscal] steel have gone up, which is indicating that this is actual physical demand.

Some analysts think this trend will continue during the year while others indicate that the GDP growth has been 6.7% for first half of the year, i.e. the government is happy it's above their target for 6.5%, and it'd likely that the [stimulus] will be reduced towards the end of the year and then rather push back up beginning of next year. This graph from Clarksons Platou shows a correlation between financing and steel, implied steel, and this has a quite an immediate effect. Should this correlation continue, then we can see a more dampened steel production or consumption in the second half of the year.

Another factor that we have of course been discussing earlier but it's still relevant is the substitution effect and the prices -- and the effect of the prices of the iron ore. It is now in the low 60s, and most international producers are generating profits on these levels. And they have an interest in holding up and increasing their production. Should prices come further up, it's also likely that they will push more volumes into the market to keep prices in the profitable range for them, but below prices that are profitable for domestic producers in China. Therefore continued substitution of domestic ore is ongoing and it is still expected to continue.

Another factor that has supported the steel production is the export of steel, which is at all-time high numbers with around 150 million ton a year. Although imports to EU and US have been reduced, most of these volumes go into other Asia and import growth in these countries are seen as strong, although from small numbers at the moment. Some of these countries also produce steel themselves but the quality of the Chinese steel is better and attractive as imported material.

The big surprise probably in -- on the demand side -- or the other big surprise on the demand side is the rebound of imports of coal. It's been on the negative trend now for a few years, while the local domestic production was cut this year and it has been a substitution by global or international produced coal. One factor that has impacted this is that domestic mines have been regulated to reduce the production from 330 to 276 days, likely to get coal prices back at higher levels and to reduce the overcapacity. This has succeeded. Coal prices are up, but the last thing we now heard is that the government has asked some of the mines to be able to increase production again, if requested to do so. This is probably in order to balance the price of coal to reduce the increase that have been seen lately.

Even if China has surprised positively on coal, it is important to remember that there has been drop in other areas which have more than compensated the increase in China. In aggregate, the coal trade has dropped by 5% to 6% year to date. This drop is however less than last year, and should we get a cold winter we can see the volumes will flat out and maybe you get a slight increase again in the overall coal transportation. In particular, the European countries have reduced their import of coal and they are getting more renewable energy and at the same time less energy need. So there are negative factors both on the demand and supply side for coal.

Another country where there are some uncertainties on the coal trade is India. Currently there are very high stockpiles and lately they have produced significant volumes themselves. This is also politics that they have said they would like to continue with. The question is, however, how will the infrastructure work out between the coal mines in the East and the areas with power plants on the coast. Currently it has been monsoon season, but this is now slowing down and we can see increased coal transportation after the monsoon.

[Agric boats] is a commodity that has a steady growth pace. High volumes have gone out from Brazil and Argentina so far this year, but it is likely that the season will end sooner this year. Last year it was far into October. Now the season will probably slow down during September. There are expectations for good crops in the US which will lead to strong exports in Q4 of this year and Q1 of next year, which should give some good rate out of the US Gulf for Supra and Panamaxes.

On the supply side, there have been relatively low delivery pace this year, a run rate of 50% to 55% so far. At the start of the year, we had a scheduled order book of 84.5 million deadweight ton. So far, 31.5 million has been delivered. Usually there is less deliveries towards the end of the year and July alone was 2.7 million. Should this continue, we would end up at a yearly volume of 45 million deadweight ton.

Chinese yards have shown particularly slow on the delivery relative to the performance. As you can see from this graph, only 51% in 2015 of the scheduled order book was delivered in China, while Japan was at 77% and Korea at 66%. With a significant part of the order book remaining in China, and current performance, this supports a view that there should be less deliveries towards the end of the year and less than the official order book.

As you can see, the delivery progress for ships on export are between 25% to 29% for the various segments, while delivery for domestic market is -- in particularly for Cape and Panamaxes -- extremely low. This is other elements indicating the uncertainty in the order book.

Scrapping started off very strongly of the start of the year, but unfortunately dropped off too fast when rates came up in April. You can clearly see the effect on this graph. During the summer, hardly anything has been scrapped. This is also normal due to the monsoon, but the rumors are saying that there is little forward commitment at the moment and little discussions on starting. We need to see through September to see how the scrapping will develop. I think many owners are waiting for the market to improve in the second half of the year. If this does not materialize, we will see higher scrapping again.

Another interesting element which has been talked about many times before, but the ballast water system regulations. There is only lacking 0.05% before this will be rectified by the IMO. The next count is on 1 January, 2017. Should it be approved, there will be a one-year -- before this has to be implemented by each vessel going into the dock. Should this happen, this could affect on the scrapping candidates going forward, as you would not invest in a 15-year-old vessel with the amounts that are required.

Coming from a situation with a significant order book, we are at least closing down to more normalized levels. The gross order book is currently around 12%, but it is probably likely more in the area of 8% to 9% realistically. If so, this is then on par with vessels above 20 years of age, so there is some balance to the fleet.

The order book is different in different segments. As you can see from this graph, there are expectations that the growth on Capesize will be more or less zero. Panamax is 1% to 2%, while in particular the Supra has 8% growth last year, 5% expected growth this year, and 3% next year. In the Supra segment, there is a lot of vessels in the 60,000 range, normally called Ultramaxes, but they are also competing a bit into the smaller Panamax segment.

All in all, with the order book coming down, supply growth is slowing, maybe negative in some segments if rates are down, with some demand growth in the area of 2% to 3%. Markets will balance itself over time. However, we need the scrapping to continue, we need to see some support from demand, and this is not a quick fix. But it is required in order to get the market into rates which are manageable for all the owners in this market. We think it's important to be in a position that can stand through this. We have a strong cash position, no debt repayments, and low cash breakevens, and we can live through these scenarios.

After we sold Golden Lyderhorn, we only have a fleet of vessels from 2008 and onwards, with an average age of four years. This gives us a young fleet and a competitive fleet, which should be attractive. The market is at -- not at sustainable levels, but we need to focus where we can have an impact. And I am therefore very pleased to see that we have managed to delay our newbuildings. We have very good dialogue with the yards and we have also had good performance in the quarter and we keep focused on our costs.

It's also important to forget -- or not to forget sensitivities. A $1,000 per day increase in market rates will have an impact of up to $20 million per year on a fully delivered fleet. And this is of course a significant sensitivity and should have a potential for a good upside when rates come back to more normalized levels.

Then we will open up questions if there is anyone.

(Operator Instructions). Fotis Giannakoulis, Morgan Stanley.

Guys, this is actually Ben stepping in for Fotis. I just had a question on -- some more clarity on the supply side of the equation. So, it seems as though newbuild cancellations have persisted, along with some slippage. But the order book is still about 15% of the current fleet and slippage is occurring. So I'm curious on how you expect this dynamic to play out and whether newbuild delays will necessarily -- might have an impact later on in terms of weighing on a potential recovery.

Yes, well, I think the order book is around 12% of the fleet at the moment. We have 95 million deadweight ton on the gross order book out of 770 million, so a bit lower. I think it's a combination. Some vessels have been constructed and they are idle at the yard. They will go out trading, regardless of whether it is for the current owner or for another owner. Then there are other vessels that are under construction where owners are not performing. If you have just cut some steel, then the yard will maybe not continue to build on those vessels.

Of course if you have come too far in the process, then it's a question of whether the yard wants to continue to build and finance this on their own. So part of the order book will be delivered, but delayed. Other parts will likely not be delivered at all. If you look at the status of the progress, I think with the current financial struggle that the yards have, if a vessel is not started or just steel cut, it is very questionable whether that will be [comment that's little].

Right. And then I guess just one more question more geared towards you guys is -- I know you were successfully able to postpone the delivery of your vessels. If the market were to continue to stay low or depressed through 2017 or something like that, will you think that you would be able to anticipate continued delivery delays, or you think these dates are relatively firm?

We take one step at a time and it's vessel and yard specific. We try to postpone delivery where we can, but sometimes we may have to take a decision as well. So it's -- we will try to optimize our newbuilding program as possible, but it's a bit difficult to give a very clear guidance on where that will be.

Okay. Thank you so much, guys.

Amit Mehrotra, Deutsche Bank.

Just a couple ones. One, just to follow up on these push-outs of the deliveries. One of the questions I had was -- I'm just trying to understand how these negotiations go. And from one standpoint, is there an economic factor vis-a-vis maybe restructuring of some of the predelivery payments? Or something like that, where the shipyards get something and you obviously did something. Or is it just more relationship based, where there is obviously future business down the pipeline and those shipyards obviously negotiating more relaxed with a company like you, like yours? I'm just trying to get a sense of what the factors are on the negotiations.

It's a mixture, I guess. It of course depends a bit on how much has been paid in and how much is due. Some yards we have other companies within our sphere, so to say, that are building at the same yard. We have good relationships, but again, it is not sort of one receipt for each negotiation. You have to take a specific view on it (multiple speakers).

With respect to these two then, was there any specific adjustments to the payment schedule from a predelivery standpoint, or anything other -- from an economic standpoint? Or was this just more relationship based?

Most of our vessels, we only have the delivery installment left, with a few exceptions. What we have paid is maybe a small layup fee to the yard, which cover part of their cost to actually keep the vessel idle at the yard. But in general, there are not large compensations paid.

And my understanding of those layup fees -- laying up predelivered vessels at the yard is a lot cheaper, obviously. I don't know, but I've heard that it's a lot cheaper. So, when people quote $2,000, $3,000 a day in cold or warm layups for existing on-the-water vessels, this would be significantly less than that. Is that a fair assumption?

At least significantly less that we have paid, but the yard has some costs of manning to keep the engines running, insurance. Sometimes they need cost for the key, depends on they have (inaudible). There are some costs involved also on that side.

Okay. That's great color, thank you. Let me ask a couple specific ones, if I could. Just one on the new breakeven rate for the Company, you mentioned low cash breakeven levels. Obviously you've done successfully pretty significant -- I would call it maybe capital structure gymnastics here. If you could just give us an indication of what the actual cash breakeven levels are pro forma for restructuring of the amortization schedule and things like that, just so we can get a sense of the cash runway relative to the cash position of the Company.

Yes, we have had that in our previous presentations.

Yes, I think you can just go to the presentation for Q1 and they haven't changed much since then. So if you just look back (multiple speakers).

Yes, $10,500 on Capes and $9,000 -- slightly below $9,000 on average for the whole fleet.

Got it. Okay, great. And then the share count, is it -- split-adjusted, it's 106 million, is that right?

Yes. A little bit less, but yes.

Okay.

105-point-something, yes?.

Let me ask one bigger picture last one, if I could. It's a little bit of an odd question, but it's something that I've been thinking about more recently, is the impact of La Nina on the dry bulk market. I've been seeing meteorologists' reports that are basically saying that there is a 75%, 80% chance of a strong La Nina forming basically now or over the next couple of months. And if I just look at past La Nina episodes, they've had a significant impact in the sense that they have had very heavy monsoons in India.

Also I think the South Asian crop production has increased high single digits. And on the other side of the coin, North American -- there has been big droughts in North America, and that's impacted the yields, the crop yields. So I'm just trying to understand if you've thought about that at all. I understand it probably won't impact the larger fleet in the dry bulk market, but maybe what your market research guys or your experience tells you the effect of maybe a strong La Nina could have on -- particularly related to global grain flows.

Well, we have seen it more in terms of the coal trade, to be honest, because a cold winter could reduce to an increased transportation of coal. That has been the focus that we have had more than on the grain. So I saw the likelihood have been reduced in the last reports I read, sort of down to the more 60%, but we would view it is positive for the winter period, more related on the coal trade.

So you don't think it's essentially a wash with a relaxation of the El Nino or the ending of El Nino. But you think it could actually be a tailwind on a year-over-year basis? I know it's impossible to tell. Maybe that's the answer. I'm just trying to get a little bit more informed perspective.

Okay. I'm sorry, I don't have a --.

Okay, no, that's fair. All right, guys. I appreciate it. I'm sorry about that question, but thank you very much.

Marius Furuly, Carnegie.

I was positively surprised by the -- on your top line today. Could you give some guidance on your average time charter equivalent for the second quarter?

We normally don't give out specific numbers for that, but it's fair to say that we -- I think on most of the segment, we had a better earning than the average Baltic rate. That of course give a positive signal, and it is also related to some one-off revenue from older claims deferred successfully this quarter. So that also -- it's not very significant, but it's count in a positive direction, put it that way.

All right, all right. Thank you. And then are you using any SSAs to hedge freight rates?

Very limited. We use it on some contracts.

At these levels, it is not -- I wouldn't say not easy, but it's kind of, okay, what should you do? Should you buy? Well, we are long enough; should we sell? Not sure if I want to sell much on these levels. So it's being an owner and trading in the [fall], it's not -- for hedging purposes, I don't really see the good or how we should use it, actually, for trading (inaudible). Well, they can trade whatever, but it's --.

That's understandable. And then over to the longer-term story of Golden Ocean. You know that supply side is slowly correcting itself, should the market prevail at the current levels. Although rates are better now than they were in the first half of 2016, I have only counted one Cape being scrapped since the start of July. And I've also seen that you and your competitors are doing what you can to delay deliveries. And this right now seems like everyone is in a waiting game, and I suspect this could take some time. And actually less than one year after you take delivery of your last newbuilding, or at least your assumed delivery of your last newbuilding, you are facing a quite heavy debt amortization. Is it prudent to ask if you're already working to extend your convertible?

We are not working on that at the moment.

All right, all right. All right, thank you. That was it for me.

(Operator Instructions). Jonathan Staubo, Fearnley Securities.

I know that you guys [at point this] were expecting better volumes out of the US Gulf primarily later this fall. Do you expect to see a normalized seasonal pattern for the smaller vessel sizes? There's been quite good volumes lately and rates improving in those areas, right?

Yes, the Supermaxes keeping up stronger than the other segments.

Thanks. But I just noticed from looking to Brazil and Argentina, it is supposed to be less volumes, but you think still that the overall volumes from the US Gulf will be sufficient to support the continued good outlook for the Supermaxes going forward?

Yes, continued good outlook in relative terms, yes.

Yes, sure, I agree. Well, thanks a lot. That is really it from me this time.

Thank you. There are no more questions in the queue at this time.

Okay, then I would like to thank everyone that has listened in to our call. Should you have any further questions, please feel free to contact us following the call and we will hopefully speak again in three months. Thank you.

Thank you.

Thank you and that will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.