Golden Ocean Group Ltd (GOGL) 2017 Q4 法說會逐字稿

Good day, and welcome to the Q4 2017 Golden Ocean Group Limited Earnings Conference Call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mrs.

Birgitte Vartdal, CEO.

Please go ahead.

Thank you.

Good morning and good afternoon.

Welcome to the Fourth Quarter 2017 Earnings Release for Golden Ocean Group Limited.

My name is Birgitte Vartdal, CEO of Golden Ocean Management; and together with me, I have Per Heiberg, CFO of Golden Ocean Management.

We have now finished an eventful year for the company.

Following various transactions previously announced, our fleet has grown by over 30% and currently stands at 78 modern vessels with a major exposure to segments that have the most leverage through market strength.

We have also significantly strengthened our balance sheet through this period and delivered improved operating results.

Per will take you through the company update, and then I will follow up with some comments on the macro environment and our outlook.

Thank you, Birgitte.

The highlights for the quarter is that Golden Ocean reports a net income of $27.1 million and earnings per share of $0.19 for the fourth quarter of 2017, an improvement of $20.7 million compared to third quarter.

Adjusted EBITDA ended at $65.3 million, which is up from $40.4 million in the third quarter.

During January and February of this year, the company took delivery of the 5 remaining Capesize vessels in the current newbuilding program.

In October, the company raised $100 million in capital through a combination of an equity offering of $66 million and $34 million in equity in kind related to acquisition of 2, 2006 built Capesize vessels.

One of these vessels was delivered to the company in November 2017, and the second in January 2018.

Following the last equity offering, the company terminated the covenant waivers on the recourse debt and resumed ordinary debt amortization with no outstanding deferred debt at the quarter-end.

Following a fourth quarter that produced strong cash flow, the company is pleased to announce a cash dividend of $0.10 per share for the quarter.

Looking at the profit and loss.

The company reports a net profit of $27.1 million for the quarter.

The time charter equivalent, or TCE, revenue increased by $28.2 million compared to the previous quarter.

All vessels classes contributed to the increase due to a stronger market across all fleet sizes, but the Capesize vessels contributed the most.

Ship operating expenses decreased by $0.8 million compared to last quarter.

The main reason for the decrease was that no vessels were drydocked during the quarter, while we docked 2 vessels in third quarter.

Running OpEx was stable quarter-over-quarter.

Depreciation decreased by $1.4 million compared to last quarter, as the 6 Ultramax vessels sold in third quarter and delivered in December, were held to sale at the end of third quarter and not depreciated during fourth quarter prior to delivery.

The company booked $2.4 million in gain on derivatives and other financial items for the quarter.

Most of this relates to gains on U.S. interest rate swaps and bunker hedges, which is somewhat offset by losses on hedge shifts in the FFA markets.

The company achieved a TCE per day of $16,444 for the quarter, which is up from $12,928 in the previous quarter.

This is significantly above the company's long-term cash breakeven level, including debt service.

Adjusted EBITDA was $65.3 million for the quarter.

Then I will look a bit on the various cash elements over the quarter.

The company generated strong cash flow during the quarter, and cash from operations contributed with $56.9 million, and we drew down $25 million in debt on Golden Nimbus.

This vessel was delivered and paid for at the end of third quarter.

Further, the company received $64.3 million net from the equity offering in October, and $134.2 million in cash proceeds related to the 6 Ultramax vessels delivered in December.

The company also received 910,000 shares in the acquiring company as a partial payment for one of the vessels.

The value of those shares is not included in this graph.

The company paid down $92.3 million in debt during the quarter.

$40 million related to debt on sold vessels; $32 million was for deferred debt following the termination of the covenant waivers, and the remainder relates to regular amortization of debt in the quarter; and buyback on 94 -- $9.4 million nominal value of the company's convertible bond.

In addition, the company paid $4.9 million related to purchase of 1 vessel delivered to the company in November, and had some minor additional cash outlets.

Moving on to the balance sheet.

The company had $372 million in cash, including cash booked as restricted at the end of the quarter, an increase of $181.7 million compared to the end of third quarter.

The book value of the company's vessels decreased by $120.3 million following the delivery of the 6 Ultramax vessels to their new owner and ordinary depreciation.

This was somewhat offset by delivery of 1 other acquired Capesize vessel called Behike in November.

The current portion of long-term debt increased by $81 million over the third quarter as 2 facilities with approximately $60 million outstanding matured in the fourth quarter of 2018 and became current in the fourth quarter of 2017.

This comes in addition to ordinary amortization of debt during the year.

The increase of equity includes $64.7 million from the equity offering and issuance of new shares related to vessel purchases, which adds to the quarter's ordinary results.

At the end of the quarter, the company's book equity was approximately 52%.

Looking at the fleets.

The graph for OpEx shows the full year average OpEx for each of our vessel classes.

That includes fully burdened costs for drydocks.

During 2017, the company drydocked 6 vessels and the same number of vessels are expected to be drydocked in 2018.

Going forward, investment in Ballast Water Treatment System will add to the cost for drydocking to the extent, drydocked vessels don't currently have such systems installed.

The graph to the right shows an overview of our vessels with and without Ballast Water Treatment Systems installed.

And as we can see, more than 50% of the company's vessels have this system installed already.

The cost for installing Ballast Water Treatment Systems on the remaining vessels in the fleet are spread out from 2018 until 2023 with an estimated total cost of $41 million.

These costs are only estimates and are subject to change.

The company has an average young and fuel-efficient fleet with an average age of approximately 5 years.

This makes our fleet well positioned in advance on new environmental regulations and also helps to keep the operating expenses competitive.

Following the delivery and completion of the current newbuilding program and delivery of all vessel transactions reported last year, the company's fleet consists of 78 sailing vessels, of which 46 are capes, 17 are regular Panamax and Kamsarmaxes; and 12 are ice class Panamaxes; and 3 are Ultramaxes.

Looking at the current cover for the fleet, we have added cover for 3 more Capesize vessels since last report and have fixed rates for an equivalent of 10 Capesize vessels at an average rate of approximately $7,400 per day, which is up from $16,805 per day in our previous report.

5 Panamax vessels are on fixed-rate [period] charter contracts, one of which expires at the end of 2018, and 4 of which expire between January 2020 and December 2021, at an average rate of approximately $22,100 per day.

Our remaining fleet is trading in the spots -- in the spot pools or on index-linked contracts, or are on short-term charters expiring within 6 to 9 months.

In the next slide, we have updated recourse and nonrecourse debt following the recent deliveries.

Since year-end, we have drawn down $171.5 million in debt related to 6 vessels delivered, and paid $149.5 million in cash proceeds for the same vessels.

In addition, we issued 2 million shares as part payment for one of these vessels.

Following this, recourse debt amounts to $974 million in addition to the $191 million nominal outstanding and convertible bond expiring in January 2019.

Nonrecourse debt amounts to $311 million related to the fleet acquired during 2017.

This includes $65.5 million in the seller's credit on vessels bought from affiliates of Hemen Holding.

Adjusted for CapEx paid and debt drawn so far in 2018, our cash position is stable at $371 million, and the company has no further CapEx related to new buildings or acquired vessels.

Moving forward, the regular quarterly amortization of recourse debt is $16.5 million.

Two of the recourse debt facilities matured in fourth quarter of this year and are booked under short-term debt.

The total amount outstanding on these 2 facilities is approximately $60 million.

The company-amended covenant on the nonrecourse debt remained in effect with no regular amortization, although we expect to make payment on these facilities under the prevailing cash fleet mechanism.

The initial cash fleet amount will be determined at the end of first quarter 2018, with payment in second quarter 2018.

The maximum amount to be paid under this cash fleet is $11.6 million.

And by this, I hand over the word to Birgitte to take you through the market section.

Thank you.

Starting out with the utilization, this continued to improve during the fourth quarter and averaged 86.6%.

This was on the back of supply constraints, congestions and low fleet growth, as well as increased sailing distances.

As you can see from the graph, there was slightly lower demand numbers for the quarter, but this was compensated by reduction in available supply.

The rate spike that we observed in the fourth quarter was primarily related to the number of vessels held up in ports and waiting to discharge.

Producers then had to replace vessels in the program with spot vessels, leading to higher rates for the few vessels that were available.

Transported volumes were slightly down in Q4 relative to Q3, but it followed the same seasonal pattern as was seen in 2016.

Encouragingly, seaborne transportation was still up in the fourth quarter of '17 versus the fourth quarter of '16.

Congestion also impacted the import numbers as export numbers were seen as relatively higher.

This was confirmed by good import numbers in January this year, compensating for the delay seen at the end of last year.

Moving on to steel production.

The trend of positive global growth continues and this is also reflected in these numbers.

The graph shows that year-over-year, there was a continued improvement in steel production volumes, both in China and in the rest of the world, although the Chinese growth has been slower in the last few months of 2017.

I believe this is attributable to the production constraints over the winter period and actions to curb pollution.

China removed the export tax on steel as of January '18, and this can support further strong production in China, and potentially see Chinese production compensating partly for production in the rest of the world going forward.

With the capacity cuts on the production as previously mentioned, steel margins have remained strong, and we are at the highest levels observed over the past several years towards the end of 2017.

The spread between the various grades of iron ore have also expanded due to the flight to quality.

And with new policies that additional tons of steel capacity that is going to be added in China need to be replaced by 1.25 million or 25 [tons] of [oil] capacity being taken out, mean productivity and quality of raw materials will continue to be in focus going forward.

Looking at the major exporters, this is positive for the seaborne transportation of iron ore.

Australia and Brazil continue to be the major exporters, and this is also where the best quality iron ore comes from, in particular, from Brazil and from certain Australian producers.

As mentioned in previous presentations, guidance for 2018 from the various producers indicates that increased volumes will come out from Brazil, which should be supported for the tonne-mile demand.

Moving to coal.

Transportation of coal remained steady in the fourth quarter.

We are in the high season for coal demand at the moment.

There are low stockpiles, both in India and China, and we have seen some strong import numbers and also increasing longer haul trades.

The arbitrage window for Colombian and U.S. coal export is also open, and with lower imports to Europe and low gas prices in the U.S., this coal may find its way to the Pacific markets.

Electricity consumption in China continues to grow, and still, majority of the electricity is generated from thermal coal.

With low stockpiles and some time still before hydropower production ramps up, we are positive for coal imports in the coming months.

Previously, China tried to control and limit import of coal in some ports, but seemingly, based on the low stockpiles and the need for coal imports, they have changed the strategy to try to cap the price as they are currently not in a position to constrain volumes.

Moving on to grain.

Total transportation of agri bulk were up in 2017 versus 2016.

In particular, soybean exports have been stronger and the volume increase comes from export from Brazil mainly.

There are currently good expectations for the South America grain season.

Although it is a bit delayed, a good crop and decent volumes are expected this year.

Moving on to deliveries.

As normal, fleet growth in the fourth quarter was low.

Deliveries were below 4 million deadweight tonnes, which is around 20% of what was delivered in the first quarter of the year.

There was some slippage in the order book towards the end of the year and the net fleet growth was practically 0 in the fourth quarter.

The remaining part of deliveries that was scheduled for the fourth quarter of '17 were pushed into 2018, and the order book for 2018, thereby increased by more than 6 million deadweight tonnes from the forecast provided in prior reports.

In January alone, 4.6 million deadweight tonnes were delivered and there are reports that a further batch of deliveries has occurred first half of February prior to Chinese New Year, which is typical before the yards close for the holidays.

Most of these vessels should ever be included in this chart as the blue bar, which is the vessels that have been launched after year-end 2017, and we believe that these have been likely delivered for now.

Although with the current order book, there should be less slippage than earlier.

Still, there is 15 million deadweight tonnes that have a potential for a delay relative to the scheduled delivery time.

And this means that we expect the pace of deliveries will slow down from where we are now for the rest of the year.

Looking at the fleet growth.

Gross fleet growth is expected to be around 4% now for both 2018 and 2019.

In addition to the orders that have been pushed from '17, new orders have been added in 2019 in particular, and also started to add to the 2020 order book.

The total order book is still below 10% of the total fleet, and new orders that are going to be placed now is expected to be placed into 2020 and 2021.

However, this is something that we monitor carefully going forward.

Given the current rates environment, we expect scrapping to remain relatively low.

Combined with a small portion of either delays and cancellations in the order book, this net fleet growth for '18 should be in the area of 2%.

Moving on to asset prices.

Both have been fairly stable over the last few quarters, and there was a bit less activity in the S&P markets in the fourth quarter.

Following some orders, newbuilding prices have started to increase, which can support a further lift in second-hand values.

Higher earnings for vessels on the water have the potential to do the same going forward.

Uncertainty around new regulations and investment cuts may lead to slower S&P markets over the coming period, more than we normally would expect in a rising environment.

In particular, for older, less-efficient vessels and those without Ballast Water Treatment System, the market may be more subdued.

Moving on to the outlook.

We continue to support the view that we have communicated in earlier releases.

We expect the market to improve, but with inherent volatility that is common in the dry bulk market.

A lot of deliveries have already been absorbed and Q1 is seasonally the weaker quarter.

Looking at the month, it will be interesting to see the development in rates from where we are now.

With control of the supply growth, demand is the dominant factor that will impact the rate development.

If the global economy continues the growth trend, the quality and location of the better iron ore should provide support to the markets.

Coal can also have the same effect, with increased consumption, restocking and also the potential for arbitrage opportunities.

Downside risk to the market relates to policy implementations in China that may affect coal import and seed production more negatively than what we anticipate and leading to lower requirements for steel based on lower activity, as well as a general drop in the macro environment that will also cool the demand for dry bulk goods.

To conclude, following the delivery of all our new builds, Golden Ocean is in a strong position to generate significant earnings in a strong [spot] market environment due to our competitive cash breakeven levels, including ordinary debt repayments.

We expect the market environment to be supportive assuming that the demand trends remain intact, although we also expect volatility and seasonality that will affect individual quarterly results.

We are pleased that the board has declared a dividend for the fourth quarter of $0.10 per share.

This is a reflection of our strong operating results for this quarter.

We remain committed to return value to our shareholders, and the company will carefully consider all uses of cash and the underlying market backdrop in future as Golden Ocean seeks to maintain the financial strength and flexibility in various market environments.

This ends our presentation for today, and we are open for any questions that you may have.

(Operator Instructions) We will take our first question today from Magnus Fyhr from Seaport Global.

Just two questions.

First on the chartering strategy.

You've fixed 10 of your 46 capes at currently above market rates.

Capesize rate has been all over the map in the fourth quarter.

How should we think about your chartering strategy going forward?

Is that room for more vessels to be fixed at current levels?

Or would you wait for market to improve?

I think what we have done over the last year is to gradually add cover as we have seen rates increase.

And also try to opportunistically time it when we have seen a push in the market.

So I think we will continue that strategy to gradually add cover, but not significantly change the cover at the current rate environment.

Okay.

And just as a follow-up on the dividend strategy.

A $0.10 dividend you made about $0.19 in the quarter.

How should we think about that as well going forward?

Rates are a little bit lower in the second quarter.

Is that kind of a -- is that a payout of earnings?

Or how do you think about the dividend?

We try to keep our options open and not give too strict guidance on that.

The board would like to have the flexibility to decide from quarter-to-quarter based on how we see actual earnings projections than any other [needs].

You have a good cash position.

You have a convert during the year.

What's the main priorities here as far as capital allocation going forward?

I think when you look at the convert, our base case is that we can pay that back with cash unless there are some very good opportunities combined with some new financing.

So the base case is at least that we have cash available to pay that out.

That will, in combination with ordinary debt repayments, sort of continue to deleverage the balance sheet.

And we would like to do that as well as try to return value to shareholders if there is room for that.

And potentially, if there are accretive transactions.

Okay.

And just one last question, if I may.

The -- any thoughts on asset values now.

You've been extremely active over the last couple of years.

Can we say that you guys have moved in more to the harvest mode?

Or you are still looking at potential acquisition opportunities?

I think -- I mean, asset values have come up to close to newbuilding priorities.

I think there is room for some movement and we have a good equity.

If there are good transactions one way or another, we will look at that.

But I think we are sort of -- we are off from the bottom, but we are not at the top.

So we will still look at new deals, but selectively.

We'll now go to our next question today from Fotis Giannakoulis from Morgan Stanley.

I just want to follow up on Magnus' question about your capital allocation and ask you about your target capital structure.

I calculate your loan-to-value at just 50% at this point overall.

And you just mentioned that you are planning to pay down your convert from cash, which will obviously, going to bring your leverage even lower.

How do you think that the capital structure should be in terms of loan-to-value going forward?

I think with what we plan to do, we are getting to an acceptable leverage.

What we try to focus on as well is to keep the cash breakeven at low levels because the asset values are fluctuating over time as we have seen.

So it's about also managing the cash flow through the cycle.

To be in the range shy below 50%, I think we're not far from where we want to be.

So but -- yes.

Given the new regulations, Ballast Water Treatment and low sulfur.

Can you first tell us how are you planning to deal with these requirements?

If you have budgeted any amount for the upgrade of the vessels and the installation of the Ballast Water or potential scrubbers, how many vessels, or how much -- what percentage of your fleet do you expect, if any, you will install scrubbers?

Yes...

We'll take the Ballast Water first.

We have a slide showing that in our presentation, which is where you we will see how many vessels that have this already installed, which is more than 50% of the vessels.

And for the remaining fleet, we will install Ballast Water Treatment Systems when the docking comes through so that we are compliant with the rules when they come in to effect.

For the scrubbers, that's I will leave that to Birgitte to elaborate on.

Yes.

So for the Ballast Water Systems, the cash numbers are pretty limited.

As you can see, it varies from $4 million to $9 million per year.

So it's nothing that we are particularly concerned about covering with our existing cash flow.

On the low sulfur, first of all, we have a very modern and fuel-efficient fleet.

So regardless of which strategy we do, I think that will be positive in the market going forward.

We are still considering our options and haven't decided which strategy to take.

If we decide to install some scrubbers, there are also possible financing alternatives around.

So I -- that will be able to be covered by cash flow plus financing.

One last question about the market.

If you can give us your estimate of where the market is right now for period contracts.

If there is any increase in availability of period charters from your customers.

And how do you view the rates developing in the next 2, 3 months, even that we are coming out of the seasonal weakness?

And if you have seen any impact, or if you see any impact from the U.S. sanction 232 regarding the Chinese exports of steel?

So since we are not very active in the super segment, which is typical where the export is, nothing we have noticed as such on the sanction part.

When it comes to the market, the latest period charter that we did was equivalent to $21,000 gross for a year on a cape, on a modern cape.

The spot rate, obviously, is lower, but we believe that coming out of Chinese New Year and out of sort of the weather-related issues and the maintenance issues that you normally see in Q1, that we should see an improvement in the spot rates from where we are today.

And what we are...

(Operator Instructions)

Okay.

Then we would like to thank you all for listening in to our presentation today.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.