Golden Ocean Group Ltd (GOGL) 2016 Q3 法說會逐字稿

Good day and welcome to the Q3 2016 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 Birgitte Vartdal, CEO. Please go ahead.

Thank you. Good afternoon and good morning and welcome to the Golden Ocean Group Limited earnings call for third-quarter 2016. We will start with a Company update about the recent developments and financial results which will be presented by our CFO, Mr. Per Heiberg. Then we will move on to comments on the macro outlook and strategy before we round up with a Q&A session.

Please go ahead, Per.

Thank you, Birgitte. I will first go through the highlights for the quarter. The Company reports a net loss in the quarter of $6.7 million which is a loss of $0.25 per share in the third quarter. This is an improvement of $[12.5] million compared to a net loss of $39.2 million for the second quarter 2016.

In August, the Company effected a reverse share split of one to five shares in order to comply with NASDAQ regulations. In September, the Company took delivery of the Ultramax Golden Leo and paid a final installment of $15.7 million on delivery. In October subsequent to the end of the quarter, the Company took delivery of the Capesize Front Mediterranean, which is one of the vessels that previously had been announced as sold and we delivered the vessel to the new owner according to this sale.

Just to run through the P&L. The increase in the revenue is mainly related to a slightly higher market, but also a strong performance of the ice class Panamaxes during this quarter. We have also, if you look at the net TCE, you will also see that the result is improved by lower positive change in the loss-making contract that need to make provisions for. This led to a $7 million increase in net revenue, after which expenses and sharper higher expenses. It's worth noting here that the favorable TCE contract that we have following the merger back in 2015 amounted to $8.1 million in this quarter which is a part of the net operating revenue.

In this quarter, the OpEx is a bit higher than previous quarter. This is mainly due to dry docking of two vessels, the Golden Enterprise and Golden Suek, but also due to third quarter for the vessel Golden (inaudible) delivered in May and also Golden Leo. The ending OpEx is at the same level as earlier. Also a small comment on depreciation is followed by the third quarter for Golden Fulham and also Golden Leo. Under other financial it's worth noting that the improvement is a result of a better mark to market on derivatives compared to Q2.

Turning to the balance sheet. The Company had total cash $245.9 million at the end of the quarter. That includes restricted cash and this is $34.7 million lower than end of Q2.

The cash burn is mainly related to the delivery installment for Golden Leo of $15.7 million and we also paid the pre-delivery installment on Front Mediterranean of $7 million. The purchase and immediate sale of Golden Lyderhorn also had a negative cash effective $6 million in the quarter. The rest of the difference relates to operations.

Under vessel net that increased by the delivery of Golden Leo less of ordinary depreciation. On the newbuildings it's worth mentioning that we have included $5.2 million in accrued but not paid installments in Q3. And also I would like to mention that short-term lease obligation has changed due to delivery or purchase and then sale of Golden Lyderhorn. Also in this quarter we have not classified any of the bank debt as short-term debt, as the cash-free mechanism put in place during the restructuring will not come into effect at Q3 2016.

Moving on to the developments in the fleet. As mentioned also in earlier calls, the owner of Golden Lyderhorn exercised their put option to sell the vessel to us and we immediately turned around and sold it to an unrelated third party. This was successfully delivered on August 22.

In the beginning of September, we decided to take delivery of Golden Leo from Chengxi and paid $15.7 million in cash at delivery. No mortgage on the vessel and it's expected to have a positive cash flow going forward. As mentioned after the quarter end in October, we took delivery of Front Mediterranean and delivered her to the new owner according to the original face agreement and received a net cash of $12.7 million following that sale.

At the end of the quarter, outstanding not paid CapEx was $349.9 million. And following the quarter, as mentioned earlier, we paid $33.5 million in related to the delivery of Front Mediterranean and the remaining CapEx is $316.4 million. We have not paid any other installment to any arts in Q4, other than the $33.5 million related to Front Mediterranean.

The newbuilding program then consists of two Ultramaxes and eight Capesize vessels. We are in continuous discussions with the arts for further postponement of the vessels scheduled for delivery in 2016.

Following this, the current fleet consists of 69 vessels, of which 59 is currently on the water and trading. We are not, during the quarter, done any significant changes on the long-term chartered out rotation, but it's fair to say that we had taken some cover for the winter period and for the front months. Although we expect that earnings for the fourth quarter will improve compared to the third quarter, we would like to point out that many trading vessels in the spot market, we see a certain lagging effect on the revenue side, when we see the -- I guess we can comment on that later. We have seen a rapid improve in the markets over the last weeks which represents that follow-on lagging effect.

Some comments on the operating expenses on the vessels. They are fairly stable. We operate the vessels on around $5,000 a day excluding drydock costs.

This is slightly higher on the Panamax ice class vessels. You see that they are a bit more expensive but then slightly below $5,000 for both the Capes and the Supramax vessels. This OpEx includes management fees to third parties for technical management, but all other administrative costs are included in the G&A and that's amount approximately $550 per day.

So far in 2016 we have drydocked three vessels and we do not plan for any drydockings in Q4. Going into 2017, we expect that seven vessels will be drydocked during that quarter.

Following that, I will hand over the rest of the presentation to Birgitte.

Thank you. The developments since our last earnings release have been positive relative to our expectations, and fair to say as well as the expectation to most of the market participants. In particular, Capesize rates started to improve during September and even with some volatility during October, they reached new heights this month, with TS4 TC peaking at $20,000 last week.

Rates for the smaller vessels have been lagging a bit during the last few weeks, although the Panamax market has also improved and lately we've seen some strength on the Supra. Coming from a low utilization of around 7% to 8% in the first quarter, we are now well above 80%. I would guess the third quarter on average was slightly in the range of 82% and that we currently see even higher utilization. Increased utilization has been driven by demand growth across all major commodities for the second half of this year and that all commodities move in the same direction is quite unique as you see it right now.

During the first quarter of this year commodity prices were at historically low levels and below cash breakeven for many producers. Following supply adjustments, we will comment a bit more on that later on. Prices have increased and transported volumes have remained strong.

In particular you can see these on the met coal prices which have spiked from below $100 per ton at the start of the year until $300 or even above $300 a ton lately. The good thing though is that steel prices have held up and supported positive steel margins, although the raw material prices have increased. This trend has been going on for the year but recently the steel margin is narrowing and on the marginal production probably negative.

Looking at the world steel production. Global production has been relatively flat over the last few years with seasonal fluctuations. What is interesting to observe for the last few months is that there has been a growth not only on the Chinese steel production but also in steel outputs from the rest of the world. We view this as a positive development as diversified demand may add to the sustainability of trend in global production. However, I think it's too early to conclude on this being sustainable.

As Chinese steel production has increased, imported volumes of iron ore have also gained market share versus domestically produced iron ore. We have commented on this in many presentations and it has continued to drop off during the last month. It's still estimated to be around 150 million tons to 200 million tons of 62% FE constant equivalent iron ore produced domestically and there is potential for some further replacements. Also, with the high cost of domestic coal that is used in the blast furnaces, this has led to buying higher FE content iron ore to more efficiently use the costly met coal.

As you can see from the chart, both Australia and Brazil are increasing their market share with lower-cost production and increases in exports. They have both been replacing domestically-produced iron ore but also production from other countries.

Going forward, it seems that the Australian producers plan to keep their volumes relatively stable, while volumes from Brazil should increase on the new S11D project and possibly if and when San Marco comes back on stream. And this should lead to an increase in long-haul trades going forward.

Demands for seaborne coal have continued to improve during the quarter. Demand from India has moved up slightly and European demand, which was dropping at the beginning of the year, has stabilized. Still, the demand from China as the main driver in the coal transportation -- seaborne transportation.

As discussed previously, the Chinese domestically-produced coal has been reduced through regulations by the government, aimed at improving the pricing as well as reducing the number of inefficient domestic mines. At the same time, there has been less hydropower available due to a warmer and drier summer. And as electricity consumption began to increase during the autumn, the electricity generated from thermal coal increased and this has supported stronger imports.

More recently though, the government has opened up for the mines to increase their production over the winter period. The effect of this was not seen in October. It takes some time before the production comes back on the transport and it's also the winter season, but we expect to see some increase in domestic production of coal. However, combined with what this seems to be a cold winter, we think that the need for imported thermal coal will continue.

Looking to India, which started the year with high stockpiles, they have come down during the year. Still at decent levels. India has not been importing as much coal year-to-date but we could see, with prices coming slightly up, that they will increase their imports.

Europe, as commented on, has been dropping in terms of import but also their coal stocks are very low currently. Of course, in general there has been a negative trend on the coal production in Europe. But due to power plant outages in France, there has been need for additional thermal coal-fired electricity.

Besides iron ore and coal, other minor bulk commodities have shown favorable transportation trends as well. Grain exports are still strong, and with a good season in the US, large volumes are currently being exported. Brazil and Argentina also had good volumes this year.

For bauxite it's also interesting to note that the trade is shifting from the short-haul in trade to a more long-haul trade, in particular from West Africa. China is increasing its imports and also new aluminum plants are coming on stream in the Middle East. Both these areas will require further volumes exported from West Africa.

Bauxite is also increasingly being transported on Cape. In October alone there for eight listings on Cape and next year a new Cape port will be developed in Guinea, which should further increase the trade for the Capes.

Moving to the supply side. The fleet growth has been modest year to date. Although scrapping has more or less stopped as the rates improved over the summer. Newbuilding deliveries has also lagged behind the original schedule.

Through October, 42 million deadweight tons have been delivered and with only two months left of the year, it is likely that the total delivery will end in the range of 45 million to 47 million deadweight tons, not much more than half of the 84.5 million which was scheduled for delivery at the start of the year. Deliveries in September was strong, with 5 million, but October was back down to 2.7 million deadweight, which has been a relatively stable volume after the strong deliveries in the first quarter. And normally you see limited deliveries towards the end of a year.

Based on the October deliveries and projections for the rest of the year, average fleet growth of around 2% is expected. There are big variations between the sizes. Supra will have the strongest growth and Cape and Panamax will be close to zero on growth. The same applies for 2017 and for 2018 the net fleet growth should be zero to negative.

Based on the freight environment seen financial difficulties facing the shipyards and limited available capital, there have hardly been any new orders this year. In addition, new regulations may compel owners of all the tonnage to consider scrapping. And installation of ballast water treatment system and potential compliance with new matters on sulfur emissions are coming in the future.

Comparing the order book growth of 11%, with the age profile of the fleet, whereby 8.5% of the fleet on a deadweight basis, is above 20 years and 16.5% of the fleet will be above 15 years of age next year. And combining this with the potential investments that are required, this should support a view that there will be limited to negative fleet growth over the next two years.

Another interesting element, if you analyze the order book, which I mentioned is crossing the range of 11%, I think it is likely that the real order book is lower than that. Using data from IHS Sea-web and VMR, combining that with the information that 42 million deadweight tons so far has been delivered of the 84.5 implies a lot of delay or potential cancellation.

If you take the order book by the contractual delivery date, there are still 9.8 million deadweight tons that was due for delivery before October 2016 which is not yet been delivered. Adding to this, the 44 million deadweight tons which is scheduled for delivery until the summer of 2017, more than half of the order book is scheduled for delivery within the next eight months.

Out of these volumes, even 15.3 million deadweight tons has not even started. Around 20 million deadweight tons is launched and it is likely that these vessels will be delivered. And then you have almost 20 million deadweight tons that are in progress, meaning it's either been (inaudible). Of course, many of these orders will be delivered, but there are also questions whether some of them will not be delivered. Bearing in mind financial difficulties, owners' requirements to pay it's therefore realistic to say that the order book is more in the range of 7% to 8% than 11%.

Asset values have been stable since last quarter after they came up from Q1 of this year. There are a lot of vessels being circulated in the market for sale and many transactions are concluded and levels are holding up is seen as a positive in this respect. It's also still a very wide spread between newbuilding prices and resale and also relative to a five-year-old vessel. Therefore, owners that want to increase their exposure may be more inclined to purchase secondhand tonnage than ordering new vessels.

The rate environment that we see at the moment is of course positive, particularly as it comes on the back of stronger commodity prices, increased steel production and also underlying stronger electricity demand. However, the forward curve has not moved a lot and there is still upside in rates if iron ore and coal import trends continue. Particularly if the fleet growth is slow die to less deliveries or higher scrapping.

However, there are clearly some downside risks in terms of China changing policies with effective decrease in coal imports, lowering steel mills or lower levels of steel production. If we see lower scrapping, this will likely be an effect of the rate environment where rates are consistently above OpEx. Thus, in the medium term, regulation should adjust for this.

We also believe that there are manufacturers that will seasonally affect the start of next year, including slow-down in exports due to weather-related issues, coal demand dropping when winter is coming to an end and a lot of vessels delivered at the beginning of the year which is normal. However, in the medium term we are cautiously optimistic on the outlook based on the expectations around the slowing growth on the supply side and the continuing strong demand-driven [white].

We think that the Company is well-positioned for a market recovery, whether it comes this quarter or a year from now. In particular, our cash breakeven levels are competitive as it provides significant leverage to a stronger market and also allows us to remain efficient during periods of market weakness.

It's important not to forget the sensitivity to changes in rate environment. Our large fleet is primarily employed in the spot market and we have significant exposure to a period of market trends. I would also say that the financial strength and scale of our commercial operation is an advantage in the current market, as we see that the charters are increasingly evaluating their counter-party risks, the safety record of the fleet and want to know who they are dealing with, asking more questions and requiring more compliance.

As Per mentioned we are continuing the discussions regarding further postponement of special deliveries following the performance achieved earlier this year for six vessels and also earlier achievements for vessels now delivered. We expect the rate environment to be volatile but the trends will be positive. So, with our strong cash position and no near-term debt repayments, we are confident that we can manage through this volatile market environment and the challenges it represents for all of us.

We would like to open up for Q&A if anyone should have any questions.

(Operator Instructions)

Herman Hildan, Clarksons Platou.

Good afternoon. My first question is on the status of the newbuildings. Has construction of the vessels halted? Or is it still being constructed? Either interesting part being will they be delivered regardless, or is there a standstill on construction and understanding where they are?

You are talking about our newbuildings now?

Yes, the ones that are not guaranteed.

As we have said -- I think we said this earlier as well, but they are more or less ready, all of them. So it doesn't affect as much the construction schedule.

Okay. Then final question, both Navios and Starbrook, any reported numbers there? I know you show significant premium on achieved rates relative to what [voltage] has been reporting. Is it possible to give any color on why you are achieving such a significant premium to the reported benchmark rates?

As we commented in our report, we had some contract on our ice classes that achieved better rates. Then obviously we had some charters, and we also had some index-related contracts whereby we have premium on the index. I can't comment on the other company's performance, obviously. I would say that's the background for our stronger performance.

It is also worth taking note, in particularly in Q4, that there is some lagging when you fix vessels and the market prices strongly. Obviously you have to perform your voyage before you can refit. There will some lagging relative to where the market is observed on the spot.

Okay. Thank you very much.

(Operator Instructions)

Fotis Giannakoulis, Morgan Stanley.

Hello and thank you. Birgitte, you gave us very interesting numbers about the market. I want to ask you about the sentiment across the other ship owners and whether you have any concerns that this increase in rate is going to slow down the scrapping activity. Can you give us your estimate, how much scrapping do you expect for next year, if there's going to be any change from the add-on 4%, 4.5% that we have seen so far?

Well, if the market is too good to scrap, then okay, then we are maybe fine, in a way. I think scrapping is much related to the rate environment you observe on the spot.

Obviously next year you have the addition of the requirements for the ballast water that may add some scrapping. As long as rates are seen to be above OpEx, or stable above OpEx, I think you will see lower scrapping. But once rates drop back down, you may see scrapping accelerating.

Okay, maybe we scrap around 30 million deadweight tons this year. I think it's very much dependent on where the market ends up next year. Maybe we are talking 25 million to 30 million, is based on where the forward market is at the moment.

You mentioned about bauxite and the changes in ton miles. How important is this? Can you tell us what type of vessels this bauxite trade is going to impact? And how much volume do you expect? How much demand do you expect this trade is going to bring to the market?

It's obviously small in terms of numbers relative to iron ore and coal. What I think is interesting is that it moved from being a pure Panamax trade to also moving onto the Capesizes. It's additional commodity being traded on the capes.

We know for sure that there are some new projects coming on stream in the Middle East. There are projects, but still we are talking maybe 5 million to 6 million tons per month currently. It's obviously not competing with some of the bigger commodities. It's a nice addition.

My last question has to do with the demand for coal and iron ore. We have seen a significant increase in commodity prices. I was wondering whether, given this increase in commodity prices, you start seeing a little bit more interest from charterers trying to secure tonnage, given the fact that transporting from Australia to China is still around $7 per ton, which is extremely low compared to the value of the commodity. Have you seen any interest from charterers in locking up contracts and trying to take advantage of this low freight cost at this point?

There has been some more interest on the one-year period. Talking to the various charters, they are pricing their commodities spot for three months, et cetera. For them as well, many of them prefer to play spot on the freight because they also play spot on the commodity. The strategy between the charters varies quite a bit, I would say, on that respect. We haven't seen [reeling to] say, three years or five years. It's more on the shorter term.

Thank you very much, Birgitte.

(Operator Instructions)

Rune Sand, Nordea Markets.

Good afternoon, Birgitte and Per. I just have one quick question. What's the plan with respect to the financing of the Ultramaxes? When do expect to have that in place? Or do you plan to operate them with no leverage?

For the time being, as we said earlier, we have taken Golden Leo for one vessel paid by pure cash. And we find that to be the best solution for that vessel for the time being. It will then run low cash breakeven on the OpEx and then generate a good cash flow going forward. So for the time being, it will maintain the flexibility that gives to have the vessel unfinanced.

Okay, so there are no restrictions in the new bank financing you got in Q1 that puts any limitations for you to draw up new debt on these vessels, or if you like you could draw up debt there.

Yes.

Thank you.

Thank you. There are no further questions in the phone queue at this time. I would like to hand the call back over to the speakers for any additional or closing remarks.

Okay then, we would like to thank you for listening in to our call. We are eager to see how the market develops in the next month or so, and we will hopefully speak again in February.

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.