Golden Ocean Group Ltd (GOGL) 2016 Q4 法說會逐字稿

Good day and welcome to the Q4 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 to those listening in from the US, welcome to the Golden Ocean Group Limited earnings call for the fourth quarter of 2016. We're pleased to have finished off 2016 on a positive note and also that we have managed to continue to deliver on the deferral of our newbuilding program during the quarter. We will start with a Company update, recent developments and financial results to be presented by Per and then move on to comments on the market outlook before we round off with the Q&A.

Thank you, Birgitte. The highlights for the quarter is that we report net income of $6.5 million for the quarter which is an improvement of $33.2 million compared to the net loss of $26.7 million for the third quarter of 2016. Adjusted EBITDA for the fourth quarter was $24.2 million compared with $8.6 million for the third quarter of 2016. In October, the Company took delivery of the Capesize Front Mediterranean, and immediately delivered the vessel to the new owner according to the previously reported sale of the vessel. This resulted in a positive cash flow of $12.7 million in the fourth quarter. During the fourth quarter and early in first quarter this year, we have reached agreements with shipyards to defer delivery of 10 newbuildings and achieved an aggregated price reduction of these 10 newbuildings for $15.3 million. Following those agreements, we took delivery of the two Ultramaxes Golden Virgo and Golden Libra, early in January by paying a total of $31.8 million in final installments. These vessels are, together with Golden Leo, this is the vessels not financed and are fully funded by equity. Further in February, the Company took delivery of the two Capesize newbuildings, Golden Surabaya and Golden Savannah with the final installments paid of $69.2 million. We've drawn in total $50 million in debt on those two vessels.

Moving on to the P&L. As mentioned, the net result was $6.5 million compared to a loss of $36.7 million in third quarter. The operating revenue less voyage expenses are up with $19.4 million compared to previous quarter. This is mainly due to increased freight rates during the quarter, but also related to some higher activity on short-term trading. Following the trading, the charterhire expenses are also up over the quarter. As per end of the fourth quarter, there are no provisions for onerous contracts, this compared to $3.3 million in previous quarter. Ship operating expenses are relatively stable over the quarters, but we see a reduction compared to third quarter of $0.8 million. This is mainly due to no dry dockings in this quarter while we had two drydockings in the third quarter. As most of you should know, we - or the company expense all dry docking costs when the dry docking occur. A significant contribution to the quarterly net results is the increase in mark-to-market value of the Company's interest rate hedges. This follows the upturn in US interest rates during fourth quarter.

Cash increased with $21.1 million during fourth quarter. This is mainly due to delivery and sale of Front Mediterranean that contributed $7.7 million but also a positive cash flow from the underlying operation.

In the balance sheet, we have no new deliveries during fourth quarter. And the reduction in value is due to regular depreciation. Book value on newbuildings is down in the quarter following the delivery of Front Mediterranean, but also offset by installments paid on newbuildings during the quarter. Expected amount to be paid on debt in the second quarter through a cash sweep arrangement with the banks is not included in the current portion, but we expect to be able to pay a significant portion in second quarter. The significance is around three out of four of the first quarterly repayments. A small comment on the reduction in current liabilities, this is mainly due to the increase in forward US interest rates and also reduced liabilities on newbuildings that were paid in fourth quarter.

For the fleet development and newbuilding, as mentioned in the highlights, we are taking delivery of one vessel in fourth quarter and four vessels in the first quarter 2017. The Front Mediterranean was immediately sold and delivered to new owner according to the previously agreed agreement. The four vessels that we have taken delivery of in first quarter were all postponed from the previous quarter. We agreed to these postponements with the yards, and took delivery of two Ultramaxes in January and two Capes in February against certain price reductions. The two Ultramaxes are paid with available cash and are 100% financed with equity. On the two Capes we have drawn down $25 million in debt on each of them on existing loan facility. Remaining CapEx after these deliveries relate to six Capesize vessels where delivery is postponed until January 30, 2018.

As soon as we receive the final consent from the yard's refund bank, we will pay installment of $19.5 million in total during this and next quarter and following those payments the remaining CapEx falls due on delivery of each vessel. Since the restructuring in first quarter of 2016, we have managed to postpone deliveries with 128 months in total, if we incorporate postponement prior to the restructuring, the total number of postponed months are 205. These postponements have saved the Company for significant cash drain during the low market experienced over the last two years.

And on top of that in total, we have reduced to [pay] an expected CapEx with $15.3 million over the last 12 months. Looking at the fleet overview, the total fleet of Golden Ocean consists of 67 vessels, of which 61 is currently on the water and trading and six are newbuildings. During the last months, we have utilized this uptick in the market and fixed out two Capesize vessels on one year time charter contract at an average rate of $14,175 per day. This is the gross rate prior to deduction of commissions. Looking slightly on the first quarter, we expect operational earnings to be a bit lower than for the fourth quarter, due to a somewhat softer market experienced in this quarter, which is mostly related to seasonality.

For vessel operating expenses over the total fleet, this is relatively stable over the quarters and the average cost is approximately $5000 a day independently of vessels classes. As mentioned earlier, we did not dock any vessels in the fourth quarter, so no expense is related to that. And for 2017, we expect six vessels to dry dock during the year, exact timing is not yet set for all of them, but some will be docked prior to the September limit for ballast water treatment.

That ends my part of the presentation and I hand over to Birgitte to update you on the dry bulk market.

Thank you. As can be reflected in our results for the fourth quarter, the utilization clearly improved during the quarter and the rates seen was the best observed for few years, [Still] it is fair to say that we are at historically low levels both in terms of utilization and rate, but the volatility that we have seen in the rate and the sentiment change that happens as rate improves leads to some optimism. It's also fair to say that the first quarter has been more positive than previously anticipated so far. The increase in utilization has continued to be driven by increase in demand and volumes improved year-over-year across the board. This is on the back of strong commodity prices, which is a major change that has occurred during 2016. At the beginning of the year, the commodity prices were at levels, where the producers were not earning any money, while towards the end of the year, the commodity prices were at strong levels and all commodities had strong and high volumes at the same time.

In our last quarterly presentation, we commented on the growth of steel production not only in China but also early signs of increase in steel production in the rest of the world. This trend has continued during the fourth quarter and January also had strong numbers both in China with an increase of 7% year-over-year as well as Russia, Brazil, Middle East and other countries. The fact that also the rest of the world is growing at the moment is positive, as this reduces the dependency on Chinese growth as alone.

Looking at China, however, it's fair to say the consumption has continued at the strong levels also on the back of higher prices. This graph shows the estimated steel consumption in China, which is backed out by older data.

Looking at the margins, even though commodity prices have been rising, steel mills have been able to keep their steel margins profitable except for a period towards the end of 2016 if using imported coking coal. Using Chinese domestic coking coal, there was still a positive steel margin in that period. The fact that steel margins are keeping up on rising input factors and the steel consumption is keeping up at higher steel prices is viewed as a positive sign for the demand - the fundamentals of the demand in the market.

Looking at the exporters of iron ore, Brazil and Australia are still keeping up and increasing their market share. This year, we expect that increase in volume mainly will come from Brazil, which should improve the ton mile. At the current very strong iron ore prices in the range around $90 per ton, all producers are incentivized to put as much volume out as they can.

Looking back at the 2015 and the start of 2016, the miners had a strong cost focus and efficiency focus and they have kept the cash breakeven levels during that period. The fact that they have reduced the cost also means that they should be able to be profitable at lower levels than what we see today and a drop in the iron ore price alone should not necessarily have a significant effect on the volumes. A concern related to iron ore is high stockpiles in China. This means that we can potentially see periods of drawdowns from the stocks that will reduce the volumes of seaborne trade at that time but that are temporary effects.

Coal was the other major commodity that had a strong end to 2016. As is well known, China [cut] in the domestic production combined with a dry summer led to an increase in the imports of coal. But also Europe turned positive in the second half of the year to balance for outages in nuclear power as well as to compensate for a colder winter. As opposed to iron ore, coal is more diversified in terms of importing countries, but China has been a more important swing factor. And we believe that coal will be a swing factor in the dry bulk market in 2017 as well. It's been a strong start of the year, which has proven good for the Panamax rate and we see that due to low stockpiles in China and still need for thermal electricity, we expect the next [month] to be strong, but how the development is after the summer it more dependent on weather related factors and it's also fair to say that policy changes will affect that market.

Another positive sign for healthy growth in the market is stronger than anticipated growth in electricity production. The production as such has been growing as well as, as I mentioned, hydropower output has been lower. So the electricity production based on thermal coal has been higher in 2016. The government managing the coal prices and the supply led to over reactions in terms of prices and volumes and we believe that they will continue to try to manage this by adjusting the domestic production. But based on experience that they have gained, may try to soften the changes a bit more. At the moment, as mentioned there are low stockpiles of coal, it's also a reason ban on imports from North Korea that may add to the import in the short term.

Before moving to the supply side, I would like to say that the [grain] has had a strong start of the year holding Panamax rates up with volumes out of South America and also seems to be a good activity on the minor commodity. Looking at the fleets growth, as expected start of 2017 has been heavy on delivery, January alone there was 9 million deadweight tons delivered, out of a gross order book of 77 million deadweight tons at start of the year. Indications so far in February says 2 million deadweight tons additional volumes being delivered. Due to better rates, scrapping has been lower, year-to-date it's indicated in the range of 3 million to 4 million deadweight tons being scrapped. We have not seen so much new ordering surface yet, although there are some rumors of a few orders here and there, without any new ordering the order book as a percentage of the fleet is dropping very fast. Currently, it's around a 15-year low but assuming the orders that are in the order book this year will be delivered and no new ordering added, the order book would stand at 3% at the end of the year. There will, of course, be some new ordering and I also believe that there will be some reductions or postponements in the delivery. But comparing that with the older part of the fleet whereby 16% is above 15 years and combine that with new regulations coming into force, we should expect to see some more scrapping over time. We also see that the US Coast Guard are getting restricted on [exemptions] in relation to ballast water system. And this may have an effect on the sizes typically a Supramax and Panamax calling those ports.

Looking at the gross order book at the start of the year, as mentioned 77 million deadweight tons at the time around 10% of the fleet. However, it's realistic that actual deliveries will be lower. Looking at the graph for the first half of 2017, you can see the split of vessels that are scheduled for delivery in this period, 48% was launched at the start of the year, 10.6 million deadweight tons was under construction and 10.1 million deadweight tons was not even commenced. The vessels that are under construction but not launched is likely that a lot will be delayed. For the vessels that are not even commenced, it's most likely that they will not be delivered at all, at least a significant part of that. Of the vessels being launched at the year-end, 19.2 million deadweight tons, already approximately 11 of those are delivered and we can expect those vessels to be delivered either now or later.

Therefore, it is likely that the order book is lower than the gross numbers being reported. Another example is if you compare the order book end October and December and adjust for delivery 7 million deadweight tons was taken away from what was reported in the order book. For 2017, the gross order book is 53 million deadweight tons, I think it's more realistic in the range of 30 million deadweight tons to 35 million deadweight tons being delivered. I mentioned the sentiment change and that also ties into asset values, which have continued to increase slightly and we see a positive sentiment among buyers. There has also been more activity in the one-year time charter market in addition to our time charters, other owners have started to fix out a few vessels and that's normally also linked improvement in the time charter rates to improvements in asset values. Modern quality tonnage is of priority, but we also see that the spread between older vessels and the priority to newbuilding are narrowing. If there is something negative about this, it's that the spread particularly on the smaller sizes is narrowing towards newbuildings costs, but there is still some spread on [the gate].

So to summarize, there has been a lot of positive factors lately and we are still cautiously optimistic on the market development. It is the fact, however, that the market is over-supplied and we see that single event impact rates in the short term. We expect to see volatility and we will take advantage of that through the trading of our vessels and utilizing periods of stronger market. There are several potential positive factors, less deliveries than anticipated, stronger global growth and scrapping that may be triggered by regulation. On the risk side, I think it's fair to say that coal is a political [thing] factor and there is a risk for dampened growth and lower steel production. Scrapping, which is low at the moment, we expect to pick up but should it not, that will also sort of increase the fleet growth over time. I think the most important factor at the moment is the limit of new orders, so that we don't get the [new 2013] when new orders are killing an anticipated upturn once again. If that part is under control, we are positive to see improvements in the market [growth]. The market in the fourth quarter and so far in the first quarter has proven the sensitivity Golden Ocean has to a rate upswing and that is significant. This is illustrated by the cash sweep that Per mentioned and that we will expect to pay down after the first quarter. I think this is also fair to say that it's earlier than anticipated also by us and by the lenders and it allows us to start to delever the balance sheet.

As mentioned, we have utilized some opportunities to take some cover on the few vessels at good rate, but we will play this opportunistically and only take additional cover where we think good levels are to be achieved. We want to maintain the majority of our fleet in the spot market at the current level to take advantage of a potential market recovery. And with the presentation is concluded and we would like to open up for Q&A, if there are any questions.

(Operator Instructions) Fotis Giannakoulis, Morgan Stanley.

Birgitte, we saw that the market has been performing much better than we previously expected. You mentioned that you chartered two vessels of about $14,000 for 12 months. I was wondering if you think that was an one-off deal or there is an increased interest from charters to provide contracts at these levels for more vessels. And then how do you explain also the fact that the one year rate is so much higher than what we have seen in the last few days being the spot market?

Yes, we have seen, particularly last week, I think I saw at least eight or 10, one-year time charter contracts being concluded on the Capes and I think it's fair to say that we are now at levels where owners find it interesting to take cover. From the chartering side, the sort of the sentiment shift that we have seen lately I think is one reason why some of them are starting to chartering in vessels. I also think some that have commodity have a smaller fleet than what they've had in the past, but there are also players that hedge with the derivatives and in a way is indifferent to the market level but would like to have the physical vessel to trade with. When you come to pricing, I think when you look at the forward curve and you adjust for vessel specifics and you add the optionality premium at the end period, I think the pricing is fair relative to the forward curve but it's higher than the spot as now.

Thank you. I want to point out, you mentioned all the improvements in steel demand and steel production in China. I want to point out the fact that inventories for iron ore at least at [Force] they have recently increased, how much of a concern this is or you think as steel production has increased and as profitability of the steel mills is higher, you think that these levels of iron ore inventories are appropriate and how do you view the fact that on the one hand, we have seen an improvement in inventories for iron ore - an increase in inventories for iron ore but the coal inventories are still at quite low levels. Is there any diversion between ship from Capesize rates - from rising Capesize rates to rising Panamax rates?

I think, it's more supply differences, domestic supply consumption differences. I think the freight rate, as such, whether it's Panamax or Cape is relatively very low compared to the commodity price. So I don't think that is the reason for the difference in sort of [playing\ stockpiles. When it comes to iron ore, there are different type of speculations why they are so strong. One is that the iron ore on the stockpiles have a lower FE content and with the high met coal prices, it's more advantageous to import cleaner iron ore because you use less met coal and other is if China is willing to sort of start to build strategic stockpile because they don't have as much on their own, whether it's a concern I mean, you could - I think you can see a period where they will draw on the stockpile having the pricing with our expectation that you will see volatility in the rates going forward. but it's a temporary adjustment potentially.

Thank you, Birgitte. And one last question about the fleet supply. You mentioned that the order book is likely drop later this year at around 3%, do you think that -

[Good] calculation though.

I was wondering, do you think that with the increase in prices in the secondhand values and the fact that the shipyards are struggling to keep employment, do you think that there might be a further reduction in newbuilding prices to the level that it can trigger more newbuilding orders or we are still far away from that?

I think the gap is narrowing between second hand newbuildings and I think the yard will push prices as much as they can. On the other hand, steel prices have been increasing as well, which is increasing their cash breakeven and I think they have more control from banks and others to make sure that they don't sell too many orders, which are loss making. But I think you will see some ordering, the question is the magnitude. Then you also have other factors that may influence, which is availability of financing, you have also the regulations coming into force, one thing is ballast water but the other is also in terms of low sulfur requirements and what is the best technical solution, so there may be some owners that would like to see that come into play, but there will always be some orders, the question is the volume in my mind.

And when you're talking about orders, do you think that we can see an increase in activity this year or you are taking about 2018 and when these potential orders if they come, when are we going to reach the market when these vessels will be delivered, is this something that we have to worry for the next couple of years or this is further down the road?

Yes, I think I mean that there will be some orders placed during 2017, yes, normal, I mean, the yards have capacity to start to build today, but you need the engine and the equipment and you also need [to define], et cetera. So you would say at least 1.5 to 2 years, so I would say doing an order today, likely the earliest is fourth quarter 2018, but probably also into 2019.

There are no questions in the queue at this time.

Okay, then we would like to thank you all for listening in and have a nice day.

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