Golden Ocean Group Ltd (GOGL) 2017 Q1 法說會逐字稿

Good day, and welcome to the Q1 2017 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.

Welcome to the Golden Ocean Group Limited earnings call for the first quarter of 2017.

This quarter was relatively strong given weaker expectation that the whole market had at the start of the year.

We have made significant progress in executing on our plan, including steps to delever our balance sheet.

And most notable for the quarter is our large acquisition of 16 vessels in a ship-for-share transaction, enhancing our market-leading position, lowering our cash breakeven levels and increased the leverage to a recovery in the market.

We will run this presentation in the normal mode, start with the company update by Per, summarizing our financial results and the acquisition.

And then I will proceed with the macro outlook and round off with Q&A.

Okay.

Thank you, Birgitte.

Just a short run-through of the highlights for the quarter.

The company reports a net loss of $7.9 million for Q1, which is an improvement of $50.3 million compared to first quarter 2016, but it's a decrease of $24.4 million compared to the previous quarter.

The adjusted EBITDA is $17.5 million for the quarter compared to $14.2 million in negative EBITDA in first quarter 2016 and a $24.2 million positive EBITDA in the previous quarter.

During the first quarter of 2017, Golden Ocean took delivery of the 2 large Supramaxes from Chengxi and the 2 large Capes from Waigaoqiao.

These Supramaxes are unfinanced, while we draw, in total, $50 million in debt on the 2 Capes.

In March, the company entered into agreements to acquire 16 modern dry bulk vessels in a ship-for-share transaction.

In addition to issued shares, the company will assume $285.2 million in debt and completed a $60 million equity offering in order to finance the acquisition.

Due to better market performance, reduced CapEx and postponed newbuilding deliveries over the previous year, the company is in position to repay all deferred bank debt agreed in the refinancing that we did in first quarter 2016.

Following this prepayment, we are in line with our original repayment schedule for all loan facilities.

Moving on to the P&L.

As mentioned, the net loss for the quarter was $17.9 million compared to a profit of $6.5 million in fourth quarter 2016.

The operating revenues less voyage expenses are down with $5 million compared to Q4.

This is mainly due to lower freight rates achieved for the Capesize vessels, while the smaller sizes performed relatively equal to previous quarter.

The regular ship operating expenses are down on a vessel-by-vessel basis if you compare it to Q4.

But during Q1 '17, we expensed $1.5 million in drydock cost for 2 vessels, and we also added $1.2 million in OpEx for the 4 vessels delivered during the quarter.

In previous quarter, we had a significant positive contribution from the -- to the quarterly net profit from mark-to-market changes on the company's interest rate swaps.

This quarter, the rate was fairly stable over the quarter and doesn't impact the P&L in any significant way.

Short -- on the balance sheet, cash including restricted cash is relatively stable over the quarter.

The underlying cash from operation is positive during the quarter, and $112.5 million in installment paid on delivered vessels and installments on newbuildings are offset by net cash of $58.2 million from the equity offering and also the $50 million in new bank debt on the delivered Capesizes.

Vessels, net, increased with the 4 delivered vessels, net of ordinary depreciation, and newbuildings decreased accordingly.

The prepayment of the full amount of deferred debt following the 2016 refinancing is fixed as current portion of long-term debt, $54 million in total.

And this prepayment will be done at the end of this month.

Long-term debt, net of short-term portion, increased by the $50 million in new debt on delivered vessels.

Moving on to OpEx.

We see that in the last quarter, the OpEx is down compared to previous quarter.

And we continue our efforts to reduce OpEx but, at the same time, keep focusing on quality and safety of our fleet.

Two vessels were drydocked in the first quarter 2017 at a total cost of $1.5 million and we expensed the total cost.

We expect 4 more vessels to drydock during 2017.

As it looks now, they are scheduled to dock prior to the September deadline for installing Ballast Water Treatment Systems.

Moving on to the newbuilding program.

The 4 vessels that we took delivery in the first quarter were all postponed from the previous quarter.

We agreed this postponement with the yards and took delivery of 2 Ultramaxes in January and the 2 Capes in February against certain price reductions.

The 2 Ultramaxes that's paid with available free cash are 100% financed with equity.

On the 2 Capes, we have drawn $25 million on each of the vessels under an existing loan facility.

Of the total sailing fleet now, we have 3 unfinanced Ultramaxes, but financing these, we can add extra liquidity to the company if needed.

Remaining CapEx now relates to 6 newbuildings with delivery in first quarter of 2018.

On these vessels, we paid $10 million during first quarter, and additional $10 million has been paid early in second -- this quarter.

Following the payments already made, the remaining CapEx of $174 million falls due on delivery of each vessel.

And also, these 6 vessels are financed with $25 million each, and the net CapEx is then $24 million in total for all 6 newbuildings at the time of delivery.

Then just moving on to a slide where we have summarized the acquisition of the Quintana Fleet and also the Hemen transaction.

Just a summary of that.

This is 2 different fleets.

The 14 vessels from Quintana was -- it has an average age of 4 years and are mainly built in Korea and Japan and are high-quality vessels.

We assumed debt of $262.7 million of existing bank debt on this fleet, and we have negotiated a repayment holiday on that bank debt until Q2 '19 against prepaying, in total, $17.4 million on the -- at the time of delivery.

In addition to the debt, we will issue, in total, 14.5 million shares in Golden Ocean to the owners of Quintana Shipping.

And after all vessels are delivered, Quintana Shipping's shareholders would own approximately 11% of the company.

The Hemen Fleet is 2 modern ice class Panamax, sister vessels to our own vessels built at Pipavav.

And we will assume -- get a seller's credit of $22.5 million on those 2 vessels, and Golden Ocean will issue 3.3 million shares to Hemen Holding in relation to -- when -- on delivery.

Hemen Holding will then, after the fully delivered fleet, own $37.7 million -- or 37.7% of the company.

Just a small status on deliveries.

We are in the process of taking delivery of the Quintana Fleet, and in total, 9 of the 14 vessels are delivered.

The remaining vessels are expected to be delivered during June, with potential small -- or 1 or 2 vessels going into early July.

The 2 vessels from Hemen will be delivered during June 1 sailing, and the other one will come from the yard.

And then just an overview of the assumed debt related to the acquisition and in comparison with the existing debt of Golden Ocean.

The assumed debt in relation to the acquisition of the Quintana Fleet have an amortization holiday until end of June 2019, which is beyond the waiver period for the existing bank debt of Golden Ocean.

There is a cash sweep in relation to this transaction on a running basis, and we will pay down debt on a semiannual basis based on surplus cash from the acquired fleet.

During this waiver period, we have limited financial covenants on the nonrecourse company, and we prepay debt on each vessel following the delivery.

In total, we will pay down $17.4 million on all 14 vessels.

Part of the proceeds from the equity offering will be used for the purpose of paying down debt, and the remaining proceeds will fund working capital for the fleet and also strengthen the financial situation of that subsidiary.

The Hemen facility -- or fleet will be financed through the seller's credit, which has attractive terms and no amortization until it matures in June 2019.

Total debt and CapEx, net of cash, following the transaction is approximately $1.3 billion, of which $400 million is related to the nonrecourse to the stock listed entity.

So the next page show Golden Ocean's total fleet when all the new vessels are taken into account.

And on a fully delivered basis, the company's fleet will consist of 83 vessels.

Of those, 6 are newbuildings to be delivered in first quarter 2018.

In total, 12 of these vessels are currently on time charter at fixed rates as the company has utilized the recent strength in the market to take some additional cover.

And also, a few of the Quintana vessels were already on fixed time charters throughout 2017.

The remaining part of the fleet is still exposed to the spot market on either index-linked charter contracts, trading in the spot market or participate in pools.

As reported earlier, the company has entered into a Supramax pool run by CTM, and currently, we have decided to put all the Supramaxes into this pool.

I think most of them are already in the pool, and 1 or 2 will enter the pool very shortly.

And the company are actively participating in the pool, and we contribute to the pool with chartering capacity.

And by that, I hand over the call to Birgitte for the update of the markets.

Thank you.

Market rates were slightly lower in the first quarter this year compared to the last quarter of '16, and this corresponds with a slightly lower utilization, as can be seen on this graph.

However, comparing year-over-year with first quarter of '16, there was a significant improvement.

Deliveries were seasonally strong in the first quarter, and combined with slightly lower demand than in the fourth quarter.

This reduced the utilization relative to the previous quarter.

Still, we are on an upward-moving trend in utilization that we expect to continue.

Looking at the seaborne demand in the first quarter, it is down but better than what the market expected at the start of the quarter.

The positive surprises on rates in January and March, I would say, was due to strong movements of all commodities, at the same time, also reflected in strong prices on the various commodity.

Transportation of iron ore was particularly strong, but coal was also up year-over-year, and grain and minor bulks continued their improvement.

We have commented on this for 2 quarters now, but the steel growth has continued, both in China and also in rest of the world.

This has been continued year-over-year growth since mid-last year, and numbers for April also indicate good growth.

Chinese production was the highest ever and up year-over-year by 4.9%.

The positive trend on steel production and consumption is also strong here on the apparent steel demand estimated based on other available data sources, which, again, was up in April.

Looking at the steel prices, they dropped after the strong part in the beginning of the year, but seemingly, lately, it has stabilized, maybe turning back up.

Steel exports have been slow from China, and with good increase in production and good steel demand and also pretty low steel inventories; it indicates a strong underlying consumption at the moment.

This is also supported by positive steel margins for the steel mills.

This graph shows estimated steel margin, both based on imported coking coal from Australia and lately, also for domestic coal.

The margin has kept positive even on a drop on steel prices, but this has been combined with a significant drop in the iron ore prices, where iron ore drops from around $90 per ton to the current level at around $60 per ton.

Domestic met coal prices were stable, but the imported met coal has had significant volatility in the price based on the cyclone in Australia and the limited availability in the period.

Positive steel margins and lately, rising steel prices should be a good support for iron ore demand going forward.

Looking at the source of iron ore, Brazil and Australia are still keeping up on their market share.

Going forward, as previously mentioned, we expect to see increases for the remainder of the year, mainly coming from Brazil, which should significantly improve come March.

For April alone, there have been [outages] on some suppliers, which has partly reduced the flow, but we expect that to come back onstream.

Another new element is that export from India has come back, although in relatively smaller volume.

This has not been the case since 2013.

A concern in relation to iron ore is the stockpiles and the level of stockpiles seen in China, currently at around 135 million, which is a significant level and could lead to temporary drop in the seaborne market but will not be sufficient for a long period of time.

Coal is a very important swing factor, and it's fair to say that there are mixed signals on this commodity.

If you look at Q1 '17, volumes are up relative to Q1 '16 but down relative to the fourth quarter in China.

Chinese government are trying to control the price and the volume by adjusting the number of days the mines can operate, by adjusting the quality of the coal.

And this will also, going forward, depend on politics, weather and prices on how the switch between imported volume and domestic-produced volume will be.

As opposed to iron ore, stock price of coal in China is low.

And with a lower-than-normal hydropower situation, there is a potential for short-term need of coal going into the warmer summer months.

South Korea has increased their import volumes lately, while Europe has turned back down following nuclear power plants coming back onstream.

Looking at the total electricity consumption in China, this is still up and 7% year-over-year in April but down relative to the very strong March numbers.

Thermal power is still a very significant part of the mix, although hydropower is increasing seasonally.

And over time, you will see that other renewable sources will increase.

But with the strong increase in electricity consumption, even though the relative part of thermal power may drop, it seems likely that the need for thermal power will increase in nominal terms.

One reason that the market has been strong in the first quarter is that all commodities had strong flows at the same time.

And for grain and soybean, that's related to a strong season in South America, which has taken quite a few Panamax vessels out of the Pacific.

And this, combined with a time period where the coal volumes were also strong, led to Panamax market being strong in the end of the first quarter.

There are still large crops.

The prices are low on the grain, and we expect to see continued flows but probably more stable flows.

Storage capacity has increased, and this will allow the sellers to more control the volumes being exported or the timing of the volume.

Moving from demand to supply.

The first quarter had high deliveries as normal for the start of the year.

18 million deadweight tons were delivered, while around 5 million deadweight ton was scrapped.

There was a net fleet growth of 13 million deadweight tons, which is just about 1.5% of the sailing fleet.

April alone, however, had 2.5 million of deliveries and just above 1 million of scrap.

So the run rate on deliveries after Q1 is expected to go down.

Looking at the remaining order book, we have updated this graph, showing the status of deliveries scheduled in the various periods.

15 million deadweight ton is scheduled for delivery in Q2 alone, but with only 2.5 million in April and, in total, for the quarter 6.3 million being launched, it is likely that the final number for Q2 will be below 15 million tons.

In addition to the delays, you can also see that there are 3.8 million deadweight tons scheduled for delivery in Q2 that has not even commenced.

Looking at 2018, the current order book is approximately 20 million deadweight ton.

This compares to 53 million deadweight ton that we had initially for 2017 and more than 80 million deadweight ton that we had initially for 2016.

So clearly, the current order book for 2018 is much lower than the previous years.

And even though you could potentially add a few orders to the very end of the year, it is not likely to have a big ordering now with delivery into 2018.

There has also been a lot of talk about newbuilding orders and LOI and particularly, on the Supra and the Kamsarmax segment.

Some have materialized, but the drop in rate in April seemed to have calmed down the talks between owners and yards.

And it's really important to see a sustainable and healthy level in the dry bulk market, but we see a cautious approach to newbuilding orders also going forward.

Currently, the order book is at 8.5% of the fleet, which is more or less the same as a quarter ago, described by some additional orders in the order book.

I think all owners are considering their stance around regulation, Ballast Water Treatment System, scrubbers, et cetera, and this should, over time, be beneficial, looking at the older part of the fleet.

Also, as the time goes by, the increasing part of the fleet gets older, and every vintage, so to say, is larger in size relative to the year before.

So the more time, the more significant part of the fleet will come into the older segment.

There was a lot of S&P activities in Q1 on the back of strong prices.

A lot of vessels[changed hands], and prices moved up quite strongly.

During April, we would say that the levels have flattened out and there is less activity, but clearly, still vessels for sale.

This market moves a lot with the index and the sentiment on the 1-year time charter.

And if the market activity picks up on the time charter, we expect to see more activity on S&P again.

And looking in a historic perspective, the current values, although they are up from last year, is still low in historic perspective.

Summarizing our market outlook.

I would say that we continue to be cautiously optimistic.

Our market view has not changed a lot since the last quarter.

It is, though, positive to see that when commodity movements are strong, even combined with deliveries, you see that rates pick up in periods.

The volatility that we have seen was expected, and we think we will continue to see volatility in the markets.

But overall, we believe we are moving on a positive track.

As always, there are many factors that can impact our markets.

And at the moment, we believe that the most important one to monitor is, of course, the import to China, the steel demand, the latest downgrade of the Chinese economy and debt levels, and the combination between imported volumes of iron ore and domestically produced.

Also, as mentioned previously, that the growth is not only in China, but you have seen more positive global growth is positive for the market.

And obviously, the supply side and how that will play out is important.

In this market, it's extremely important to focus on low cash breakeven levels to weather the volatility that we continue to expect to see.

Following the transactions we have done in the first quarter, we have further lowered our cash breakeven levels to $9,000 per day on a fleet-wide basis before ordinary debt repayment.

Thus, even in the current market environment, we see rates above the average levels for our fleet, and we are positive generating cash to pay down on our debt.

That, combined with the significant leverage we have on the upside within --on the water fleet of 77 vessels and 6 newbuildings to come, $1,000 per day movement in rate should yield $28 million in additional cash flow to the company.

An improved market will, therefore, quickly yield significant cash flow, and we should be well positioned even in a volatile market.

And with that, we conclude the presentation and open up for Q&A if anyone has questions.

(Operator Instructions) There are no questions on the line at this time.

Okay.

Apparently, everything was crystal clear then.

Thank you for the time, and we will speak again in 1 quarter.

Thank you.

That concludes today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.