Golden Ocean Group Ltd (GOGL) 2018 Q2 法說會逐字稿

Good day, and welcome to the Q2 2018 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 Birgitte Vartdal, CEO.

Please go ahead.

Thank you.

Good afternoon or good morning, and welcome to the second quarter of 2018 earnings release for Golden Ocean Group Limited.

My name is Birgitte Vartdal, I'm the CEO of Golden Ocean Management.

And together with me today, I have Per Heiberg, the CFO of Golden Ocean.

With the current strength in the Capesize market, we are enjoying the benefit of having focused our fleet on larger vessel types.

With the competitive cash breakeven levels, we are generating good cash flow, enabling us to continue our strategy of deleveraging the balance sheet, and at the same time, returning value to shareholders.

I will comment on the macro environment and our outlook after Per take you through the company updates.

Thank you, Birgitte.

I'll go straight to the highlights.

And we see that Golden Ocean reports a net income of $9 million and earnings per share of $0.06 for the second quarter of 2018 compared to $16.7 million in the first quarter.

Adjusted EBITDA ended at $54 million, up from $53.3 million in the previous quarter.

In May, the company entered into a new $120 million loan facility, refinancing 10 vessels, and this transaction was completed in early July.

We entered into an agreement to sell Golden Eminence in April for $14.7 million to an unrelated third party.

And the vessel was delivered to its new holder on August 8. As alluded to previous quarter, the company announced a dividend of $0.10 per share for the second quarter of 2018.

Looking at the details for the net profit of $9 million, we see that time charter equivalents or TCE revenue decreased by $5.7 million compared to the previous quarter.

At market rates, they're relatively stable compared to last quarter.

The main reason for the decrease relates to fewer vessels chartered in of short-term trading.

This is also reflected in a lower charter hire expense for the second quarter.

Next, our longer charter hire, the underlying earnings from the core fleet was up over the quarter.

Ship operating expenses increased by $1.9 million compared to last quarter.

During the quarter, 3 vessels that dry docked compared to only 1 vessel in the first quarter, and as the company expensed all cost related to regular dry dockings, this explained the majority of the increase.

The company booked an impairment of $1.1 million in the quarter related to the sale of Golden Eminence, and the remainder of the increased depreciation relates to full quarter depreciation of newbuildings that we took delivery of in the first quarter.

Next, financial expenses increased compared to previous quarter.

This is explained by a full quarter of debt on vessels delivered to us in the first quarter and the recent increase in the underlying floating LIBOR rates.

The company booked $1.3 million gain on derivatives and other financial items for the quarter.

Most of this relates to gain on U.S. interest rate swaps and bunker hedges, somewhat offset by losses on FFA hedges and other financial items.

The company reports its EBITDA of $15,215 for the quarter, slightly down from $15,593 in the previous quarter.

The TCE continues to be above the company's long-term cash breakeven levels, including full debt service on both recourse and nonrecourse debts.

Adjusted EBITDA was $54 million for the quarter.

On the cash, during the quarter, we see that we started the quarter with $358 million in cash and generated $33.6 million in positive cash from operations.

In total, the company paid down $156.2 million in debt in the quarter, of this $124 million relate to refinancing of the 10 vessels and $32.5 million relate to ordinary repayments, buyback of the company's convertible bond and through repayment under the cash sweep mechanism set in place for the fleet acquired from Quintana last year.

Draw on new debt during the quarter was $103 million related to 8 of the 10 refinanced vessels.

An additional $17 million was drawn in July for the remaining 2 refinanced vessels.

In addition, the company paid $14.4 million in dividend for the quarter, the same amount that will be paid out for this quarter.

Moving on to the balance sheet.

The company ended the quarter with $322 million in cash, including restricted cash.

The book value of the company's vessels is close to $2.5 billion, which excludes $14.7 million related to the vessel held for sale.

The decrease of value mainly relates to ordinary depreciation.

The current portion of the company's long-term debt decreased by $69.7 million over the quarter, as the new loan facility replaced 2 existing facilities booked as short term in the first quarter.

In addition, we rolled back $9.6 million in nominal value of the convertible bond maturing in January 2019, and the remainder of the convertible bond is booked as short term.

At the end of the quarter, the company's book equity was slightly above 50% and value adjusted equity is around 45%.

The graph for OpEx shows year-to-date average daily OpEx growth remaining 2 vessels classes, and Supramax immersed with Panamax as they are only 2 left in the fleet.

The cost include fully burdened cost of dry docking and show that OpEx is stable at around $5,300 a day on average for all vessels regardless of size.

During second quarter, the company, as mentioned, dry docked 3 Panamax vessels, none of which had to install ballast water treatment system.

We expect 2 more vessels to be dry docked during the year, 1 in each remaining quarter.

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

As you can see, more than 50% of the company's vessels already have these systems installed, and the cost of the remaining installations is spread out from this year until 2023, with a total estimated cost of around $40 million.

Additionally, the company today announced that it has entered into a fixed contract to install exhaust gas scrubbers on 16 of the Capesize vessels and reserved auctions to buy 9 more units.

The plan is to install scrubbers on vessels due for dry dock in 2019 and early 2020, both as the installations coincide with the regular dry dock scheduled for those vessels.

Following the sale and delivery of Golden Eminence, the company's fleet consists of 77 sailing vessels, of which 46 are Capes, 16 are Panamax/Kamsarmaxes, 12 are ice class Panamaxes and 3 Ultramaxes.

Golden Eminence was sold and delivered to an unrelated third party for $14.7 million.

And upon delivery, the sale generated $5.7 million in positive cash flow for the company.

Current cover for our Capesize fleet is the same as it was in the previous report 3 months ago, and we have fixed rate for the equivalent of 12 vessels at an average rate of approximately $7,960 per day for the remainder of the year.

7 Panamax vessels are on fixed rate time charters, of which 2 expire during first half of 2019 and the remaining 5 expires between January 2020 and December 2021.

The current average rate for the Panamax vessels on time charter is approximately $19,550 per day.

The company is heavily exposed to the spot market for the years to come.

Most of our fleets are trading spot -- in spot pools on indexing contracts or on short-term time charters.

And the revenue will, by that, follow development in the underlying markets.

In the next slide we have updated the debt profile to include the company's new $120 million loan facility and the recourse debt.

The facility was fully drawn in July this year, and the last $17 million is not reflected in the numbers, as this is referring to the end of quarter.

The facility financed 10 vessels in total, has a 7-year tenure based on a 20-year age-adjusted profile and bears interest of LIBOR with a margin of 2.25.

Following the refinancing, recourse debt amounts to $987 million in addition to the $172 million nominal outstanding under our convertible bond at quarter-end.

Subsequent to the quarter, we have bought back an additional $1.4 million of the convertible bond.

And nonrecourse debt is reduced to $234 million as we have repaid the seller's credit originally given by Hemen for 4 vessels and further paid down $11.6 million under the cash sweep arrangements on the debt related to the fleet acquired from Quintana in 2017.

Nonrecourse debt now only consist of debt on those 14 vessels.

Our cash position at the end of the first quarter was $322 million.

And in addition, we had $70 million in undrawn debt at quarter-end, which is now fully drawn.

The size of cost related to scrubber investments, Ballast Water Treatment's installation and regular dry dockings, the company has no further CapEx commitments.

Going forward, the regular quarterly amortization of the recourse debt is $16.8 million.

And by that, this ends my presentation.

And I hand over the word to Birgitte to take you through the market updates.

Thank you.

The (inaudible) station turned back up in the second quarter of 2018 after declining slightly in the first quarter.

The average for the second quarter was just above 85%.

This follows a normal seasonal pattern with an improvement from the first quarter.

And if you look on the longer trend, you can see that there has been improvement in utilizations from start of '16 all through today.

However, there is still intra-quarter volatility.

The second quarter started weak and ended with strength that has now continued into the third quarter.

Looking at the demand side.

The total demand continues to improve.

However, there are some variation between the commodities, as import of iron ore was slightly down quarter-over-quarter and flat to slightly down first half of the year compared to the same period last year.

Coal increased year-over-year, but also slightly down from the first quarter.

However, agribulks and minor bulks had a good upward trend for the quarter.

Bearing in mind these numbers are the import numbers, so it shows the time of discharge, hence, the weak market early in the quarter may reflect weaker exports in the first quarter, and stronger numbers later in the quarter and going into the third quarter should show improvements in these numbers when they come to the third quarter.

As always, steel production is a very important parameter for the dry bulk market.

It continued to increase during the second quarter as well as the updated numbers from July, showing strong year-over-year growth, both in China and in the rest of the world.

This growth has continued for more than 2 years now.

And currently, there is no sign of slowdown in the steel production.

Specifically, in the Chinese market, steel margins are still very positive.

Older, more inefficient mills have been closed down, improving the utilization on the margins of more modern mills that are currently running.

This combined with continued spread between the various grades of iron ore indicates a strong incentive to spend money on quality ore to get most efficient production and to optimize the margin.

It is interesting to note, though, that the domestic iron ore production in China is down almost 40% year-to-date.

However, as I pointed out earlier, there has not been growth in volume of import, but rather this has been compensated by some drawdown on inventory, increased use of scrap steel, and as there is higher-content iron ore being transported, you get more ore out of each tonne being transported.

Going into the third and fourth quarter, though, we expect that the sourcing have come mainly or the increase this year have come from Australia.

Now we expect to see growth from Brazil towards the end of the year.

As is well known and reiterated several times, Vale has guided for $390 million tonnes for the year.

This is something we see now in the spot market where we have a lot of volumes going out from Brazil.

In addition, Anglo's Rio-Minas is expected to come back on track.

And if you look at where the capacity growth is expected to be in 2019, this should also mainly be volumes coming from Brazil.

Per mile demand should, therefore, increase going forward.

Moving on to coal.

Coal volumes went down from the first quarter but still remains at healthy levels.

And if you look at Chinese imports, it's clearly up year-over-year.

India is also keeping their import up, as the domestic production is not able to keep up with demand.

Combining these with relatively low stock price and also that Coal India has announced that they're not able to meet their 1 billion tonnes production targets by 2020, this should bode well for further imports into India as well as to China.

The strong activity is also reflected in the electricity production where we have seen very strong growth in electricity production in both countries.

This graph shows -- the top graph shows the electricity production in China.

In the shorter term, growth in electricity production has to be compensated by more thermal coal production -- electricity production, as hydropower is more or less flat year-over-year and renewable is not able to compensate.

Thus, the growth in coal-fired electricity production is more or less in line with the growth in electricity production in total.

Moving on to grain.

There has been a lot of focus regarding trade wars and tariffs for the agreed products, and in particular, the U.S. to China soybean trade.

This is also seen where there has been a normal seasonal upswing in the soybean export observed with Brazil on opaquing a bigger share than the U.S. Going forward, there is a lot of uncertainties and this is partly reflected in where we see the Panamax market today.

There are news on tariffs every day, but we would expect new trading patterns to emerge in response to tariffs.

However, whether it will compensate for any shortfall that may come from the U.S. is more questionable.

The grain exports out of U.S. should start almost as we speak, and this will be something that is very key to observe through the next week and months.

Moving to the supply side.

A bit surprisingly, maybe, but deliveries in the second quarter were almost the same as in the first quarter, as normally, you would expect the first quarter to be seasonally stronger and then reductions going forward.

Also, combined with hardly no scrapping in the second quarter of the year, we had a fleet growth of 6 million deadweight tonne, which is almost in line with what we saw in the first quarter.

For the year, as such, the growth or the book is estimated to be 4%, including what has been delivered.

However, as we will see at the next slide, there are some delays and some uncertainties in those numbers.

Also going forward, deliveries of spread between '19 and '20 mainly, but there is a big variation between providers of data of how fast the order book will materialize.

Looking at the VMR numbers.

The expected deliveries for the remainder of the year is lower.

And I think it's slightly that we, in the second half of the year in total, we would see less than or around 10 million deadweight tonne.

Looking at this graph, you can see there is still a 30%, almost, of what is scheduled for delivery for the rest of the year, which has not even commenced.

And there is also a part of the vessels scheduled for delivery in the first half of '19 that has not commenced construction, and that should happen relatively quickly if those vessels are going to be delivered within the due date.

Looking at the sales and purchase market.

Capesize's vessel prices improved during the second quarter, places some firm transactions that have listed valuations and seller's expectations.

In the smaller side vessel classes, valuations have been more sideways in the quarter.

There have been frequent transactions observed on the smaller vessel segments, but this hasn't been accompanied by improvement in the values, and (inaudible) seems to be a bit more muted, tied in with the right environment for those segments.

And based on upcoming regular authority changes to focus on the [SCPM] market is on modern tonnage.

So to summarize, looking at our overall market outlook, we remain of the view that we are on an improving trend.

The upside scenario here relates to increased exports from Brazil, continued strong coal imports by China and India, and less efficiency in trading patterns combined with more congestion.

With bunker prices at the levels we see now, it will still take some time before rates reach a level where this fleet will speed up.

On the downside, the risk of less activity is, of course, always there.

Also, given that we are currently in a high-activity environment.

Uncertainties related to tariffs is currently hampering the Panamax trade, but it can also be a positive factor, ironically, it's supportive by that the Chinese have announced further stimuli and infrastructure investments to boost their economy.

We should not forget the order book and development vessels schedules to come, which would take away some base load from Brazil and may continue to add some volatility in the Capes market.

However, all in all, we believe that the demand will outpace the supply.

And we are very positive for the remainder of the year, where we should continue to see strong rates as we observe today.

Regulations related to sulphur emissions are widely expected to have a positive impact on the markets over some time as older, less fuel-efficient vessels are disadvantaged and may ultimately be phased out.

We believe we as a company are very well positioned in this regard.

We are able to live with the current risks in markets and believe the upside potential is higher than the downside risk when all factors are considered.

With the positive sentiments that we see in the markets today, we feel there is support for vessel valuations, particularly for newer vessels.

And we are well positioned with our modern and fuel-efficient fleet.

To further increase our competitive position, Golden Ocean has decided to install scrubbers on part of the fleet, mainly timed with the dry docking schedules.

This should make the valuation of the vessels even more attractive for truckers when we potentially can use cheaper fuel than some of our competitors.

We continue to pay dividends.

And for the third consecutive quarter, the board has declared a dividend for $0.10 per share.

Going forward, we aim to find the right balance between returning value to our shareholders and other use of cash flow, including further deleveraging, potential investments if we find the right modern tonnage.

As we believe it's a key to keep that profile towards an ever-changing regulatory environment.

This ends our presentation for today.

We are open to answer any questions that you may have.

Thank you.

(Operator Instructions) We will now take our first question from Espen Landmark from Fearnley.

I wanted to just start on the closing remarks.

I mean, you've done 3 quarters, I think, of $0.10 of dividends, which is 4% or 5% of a yield.

And as you say, Capes is averaging more than $25,000 in third quarter, which is, at least, in our numbers suggesting earnings potential well above what you currently are paying.

I mean, the question is, given the balance sheet now, how do you kind of determine the right payout model in the quarters to come?

Yes, right.

Decision that we take quarter-by-quarter, obviously, if we see our earnings improve strongly, we expect that we will do some adjustments to the dividend.

But we will also balance that towards investments and deleveraging.

So I think we are in a comfortable position.

And we should have the flexibility to deploy our cash, both through dividend but also deleveraging in -- and potential investments.

So we are not guiding on a very fixed dividend policy.

That's how we plan to do.

Fair enough.

Yes, of course.

And then, I guess, on values.

I mean, as you said a couple of or a handful, I guess, of transactions for modern Capesizes well above, I guess, last tonne levels, close to $50 million for 2016 vintage.

I mean, curious to hear your thoughts on your current secondhand values.

No, I think clearly there has been some good transactions.

I think it's very linked to sort of the market, this spot is very strong.

If you look at the FSA curve, it's still below 20 for -- $20,000 per day for 2019.

I think if you see a push on the period market, you can see another push on the right.

But clearly, there has to be some willing buyers.

And I think going forward, there may be a wider spread between modern and older tonnage.

So I think part of the value drive that you've seen on those transactions is linked to the modern assets.

Our next question comes from Petter Haugen from Kepler Cheuvreux.

I was wondering if you could talk a little bit about why you over performed in terms of earnings this quarter?

Does that sort of -- is it about timing positioning?

Is it the trading department taking in and out vessels?

Or is it simply the quality of your vessels being superior to what the benchmark is in market?

And then, of course, the intention here is to understand to what extent one can expect you to continue to outperform the markets here?

Well, I think it's a combination of the factors you have mentioned, Petter.

I mean, we had -- as you've seen, we had some long-term charters, which has a bit higher time charter equivalents than the spot market for the second quarter.

We had some winter charters for our ice class.

We had good performance relative to the index, which is the combination of, obviously, great work from the chartering team and then good-quality fleet.

Okay.

So we'll just assume that you'll do the same next time then and then not be disappointed, of course.

Another question, in terms of market outlook.

I mean, you sound rather optimistic.

I read your comments as optimistic.

I don't disagree to that.

But as you also mentioned, the FFA curve is flat at below $20k a day throughout 2020, are you going to buy up that curve to buy FFAs now?

We are loaning 77 vessels.

So I think we have a decent position in that market.

I think if you look last year as well, it took time during the year before you saw the FFA lifting for this year.

So for a long time, (inaudible) trading at 15 and below.

And first, when you got closer to the year, it actually lifted then.

I think it's interesting to see now that if you take the spot year-to-dates plus the forward curve for the remainder of the year, you are flat with the FFA for next year.

So yes.

And I guess, the final question for me then in terms of the vessel prices, assets prices here.

In narrow modeling, we would say that compared to the current earnings in the markets, values are still on the low side.

But if you were to make one investment now, you've been talking about larger vessels compared to the smaller vessels and also the new or modern tonnage as more compelling than older tonnage.

But if we are very optimistic on the market as such, the relative performance of older tonnage tends often to be better than on newer vessels.

So I was just wondering, sort of, if you were to -- had to make one investment today, what would that be in terms of age and vessel type?

I think in old vessel, yes, in the short term.

But you have to look on the duration of the life of the asset and sort of also what you get back on earnings.

I mean, there is an earnings difference between modern and older vessels.

We are installing scrubbers on our 2009, 2010 builds, maybe that is the best at the moment.

Our next question comes from Fotis Giannakoulis from Morgan Stanley.

I want to ask about the scrubbers.

It seems that all the big Capesize owners are keen on installing scrubbers similar with VLC owners.

How long do you view this opportunity to last of the available high sulfur fuel oil?

And based on your estimates, when you made the decision to install scrubbers on your Capesizes, what is the breakeven spread and the duration of the spread that has to last in order to make your investment profitable?

Yes, I think as you point out there are many of both Capesize owners and VLC owners that are installing scrubbers.

Hence, I think the availability of fuel will be there.

It may be more favorable on some trade routes than others.

And then as well, I mean, the profitability is likely to be best in the beginning, but you may end up in a situation where over time you have to have a scrubber installed to actually be competitive.

But that's a bit early and -- to speculate in that.

But I think it's well worth to do the investments on part of the fleet.

We are estimating around $250 per tonne for a year plus/minus as a required (inaudible).

But that, of course, assumes that you have availability in all the ports and on all trades and that you get the full benefit of it as an owner.

So in reality, it may be a bit longer, but -- or a bit higher spread.

But I understand that in the routes that your Capesize vessels are trading from Australia and Brazil towards China.

You feel pretty confident that there's going to be availability.

Is that the case?

Yes, at least in Singapore, some ports in China.

The question is if you will have it available all places in China or if you need to do some deviations.

But I think if you look at the Capes, 70% is bunkering in Singapore, or something like that.

So it's a big part of the volumes.

There are some of the critics over the scrubbers investments.

The way you talk about open-loop, close-loop scrubbers.

Could you give us a little bit of a clarity on this debate?

And if there is any push from -- potential push from regulators towards close-loop scrubbers or any restrictions that will make more difficult the use of scrubbers as they are being invested right now by the majority of the shipowners?

It's my impression that the majority has gone -- decided for open-loop scrubber.

I mean, if you go for a close-loop scrubber, you also have to get rid of the residual, which it's, first of all, big in volume and you are dependent on the possibility to get rid of that at various ports around the world.

I think that's a solution that fits more type of A to B liner type of business where you know which ports you are going to.

So far, okay, there are -- at least what I have been reading, there are, of course, some skepticism to -- from sort of the ones that are negative to scrubbers, but I haven't seen that from regulators as such.

This is, in any event, probably not the long-term solution for shipping.

But for the near term, this is a way to solve the regulatory issues around sulfur content.

There is also research saying that -- and the main problem is the particles, and with the scrubber, you take it out of the air and put it directly into the sea.

And as part of the sea level, on an average basis, this is not an extremely high sulfur content.

But you may end up, in some ports, maybe you have to have cleaner fuel in addition.

I want to shift a little bit on the demand side.

And if -- you mentioned about the infrastructure spending and the stimulus that China is considering of putting in place.

If you can give us a little bit more color on your views of how much impact it can have on Capesize or dry bulk demand?

And on the other hand, if -- what you think it -- would be the impact on the seasonal production cuts that China is putting in place for the winter, potentially, when -- starting in fall?

If you think that can have any short-term negative effect on charter rates?

Yes.

I mean, the government has not been very specific in terms of the amount of stimuli, yes.

But they are reducing their lending rates.

And there has also been announced some train -- rail infrastructure projects.

I mean, this is early days.

And I guess the government is also looking at what's happening on the trade war in the long term and adding to that.

So it's more a potential marginally positive factor, which should be positive for iron ore trade and, potentially, also for coal if they need additional electricity and energy.

So it's positive on the margin.

When it comes to the winter production cut, that may add some volatility on the stockpiles, that may add on the quality of the iron ore demand.

But they'll -- the modern mills may keep up with the -- but it can -- this is one of the factors of many that may add volatility.

But over time, if the underlying demand is there, then the average rates and the average improvements should not be impacted that much.

Okay, thank you.

I think we have one more on the call to ask questions.

The next question comes from Magnus Fyhr from Seaport Global.

Just a follow-up on the scrubbers.

You mentioned you're installing them on some of the 2010 builds and over the next dry dockings.

Where'd you put -- can you be a little more specific, where'd you put the cutoff point as far as would you consider some of the more modern 2014 builds when they come in for dry docking, I guess, next year?

Well, basically, we are installing on most of our 2014 and 2009.

There are some vessels that are on charter that we are excluding, et cetera.

But we do the majority of the vessels.

And with the -- sort of the agreement we have signed plus the auctions, if you exclude vessels that are on charter for a longer period, we should cover most of our '19 and '20, which, basically, is early 2020 dry docks.

So I'm not sure if that answers your question, Magnus.

Yes, yes.

No, that's good.

And I guess it's only Capesize, right, that would put scrubbers on?

Or some of the other options that you have, would you consider smaller assets classes?

Or just to Capes sizes?

We have currently prioritized our Capesize vessels, both as the economic is a factor there.

We are less concerned about fuel availability due to the tradings happen as well as our dry dock schedule is more favored, so to say, on the Capes where we have a lot of early dry docks.

While on the Panamaxes it's more later.

So...

All right.

And just one last question.

On the stock price performance here, stock is still up this year, but with asset values moving up and we actually have you guys trading at a discount to NAV, which has been kind of unusual for Golden Ocean.

So with that said, would be -- would there be some potential buybacks here?

What's your thought there to add that to your toolbox?

That's a possibility.

But I think we would in the short term prioritize dividend, unless we should see a very high discounts on our share price, but -- over some time.

But...

There are no further questions.

(Operator Instructions) As there are no further questions, I'll now turn the call back to your host for any additional or closing remarks.

Okay, then I would like to thank you all for listening in today.

And we look forward to present our third quarter results in 3 months from now.

Thank you.

That will conclude today's call.

Thank you for your participation.

Ladies and gentlemen, you may now disconnect.