Golden Ocean Group Ltd (GOGL) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2018 Golden Ocean Group Limited Earnings Conference Call.

(Operator Instructions) I must advise you all that today's conference is being recorded on Tuesday, 19 of February 2019.

And now I shall now hand it to your first for today, Birgitte Vartdal.

Please go ahead.

Good morning, and good afternoon.

I'm sorry for the slight delay in start time.

Welcome to the fourth quarter 2018 earnings call for Golden Ocean Group Limited.

My name is Birgitte Vartdal.

I'm the CEO of Golden Ocean Management.

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

We are pleased with our results for the fourth quarter and full year of 2018, despite a drop in the Capesize rate in the end of the quarter.

As most of you know, the market has weakened dramatically since the start of the year, in particularly, following the tragic dam disaster in Brazil.

We will comment on the markets after Per has taken you through the company updates.

Please go ahead, Per.

Okay.

Thank you, Birgitte.

Golden Ocean reports a net income of $23.6 million and earnings per share of $0.16 for the fourth quarter of 2018 compared to $35.3 million and $0.24 in the third quarter.

Adjusted EBITDA ended at $70.4 million, down from $78.8 million in the previous quarter.

The company announced a share buyback program in December 2018 to purchase up to an aggregate of 6 million shares at a maximum price per share of $9.

So far the company has bought 570,000 shares at a total cost of $3.4 million under the program.

We have also secured financing for up to 11 scrubber installations through one of our existing loan facilities.

The facility has been extended by 3 years until June 2023 and increased with an extra charge of up to $33 million for the scrubber installations.

The company's only long-term corporate debt, the $200 million convertible bond, was repaid with cash at maturity in late January this year.

The company announces a dividend of $0.05 per share for the fourth quarter of 2018.

For the full year, total announced dividends amount to $0.40 per share.

Moving onto the P&L.

The time charter equivalent, or TCE, revenue decreased by $2.4 million compared to the previous quarter.

The decrease is mainly due to weaker rates on Capesize vessel offset by higher activity on short-term trading with third-party vessels and good performance from the smaller-sized vessels.

The increased trading activity is also reflected in the $4 million higher -- charter higher expenses compared to the previous quarter.

Ship operating expenses increased by $1.8 million compared to last quarter.

The increase is primarily a result of slightly higher operating costs across the fleet and higher cost for docking in the quarter compared to the previous one.

Depreciation was stable at $23.3 million since we did not have any changes to the fleet

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adjusted EBITDA came in at $70.4 million for the quarter and the company achieved a TCE per day of $17,525, a slight decrease from the previous quarter.

The TCE was significantly above the company's long-term cash breakeven levels including full debt service resulting in a strong operational cash flow in the quarter.

Moving on to the cash flow statement showing the cash flow, we ended the quarter at $368.4 million and generated a positive cash flow from operations of $60.7 million.

$30.2 million of debt was paid during the quarter and the amount consists of $11.6 million paid under the cash-sweep mechanism of the company's non-recourse debt, $2 million repurchase of the company's convertible bond and the rest is ordinary amortization of long-term debts.

The company paid $21.6 million or $0.15 per share in dividend in fourth quarter.

Other cash outflow relate mainly to the purchase of own shares and installments in the company's scrubber purchases.

In the balance sheet, you see that cash including short- and long-term restricted cash amounted $372.6 million at the end of the quarter.

Other current assets went down by $26.7 million partly in conjunction with an $18.4 million decrease in other current liabilities with the difference relating to the decrease in value of other financial assets.

The book value of the company's assets decreased with ordinary depreciation of $23 million in the quarter.

The current portion of the company's long-term debt increased by $227 million over the quarter, and this increase mainly relates to one loan facility that matures late December 2019 and some charges of other facilities that mature in the fourth quarter of 2019.

This comes in addition to the maturity of the convertible bond that was repaid at -- that has been repaid already.

We expect to be able to refinance the facilities that mature prior to maturity at attractive terms for the company.

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

On the graph showing the OpEx, you see that the yearly average daily OpEx for the 2 vessel classes remain in the fleet.

These costs include fully burdened costs on dry dock and management fee and show that OpEx is stable at around $5,200 per day on average for all vessels regardless of size.

Cost for dry dock expenses is expense that's incurred and adds to the running OpEx in our P&L.

During third quarter, the company dry docked only 1 Panamax vessel but for the entire year, we dry docked 6 vessels in total.

In 2019, 19 vessels consisting of 16 Cape and 3 Panamaxes are expected to be dry docked.

The graph to the right of slide shows an overview of older vessels with and without ballast water treatment systems installed.

As you can see, more than 50% of the company's vessels already have these systems installed and the cost of the remaining installments is spread from this year until 2023 with a total estimated cost of around $33 million.

The company did not enter into any further commitments with respect to scrubber program in the fourth quarter.

The program currently consists of 20 firm and 5 optional scrubber installation projects.

The scrubber installation schedule is shown on the graph to the right and all committed scrubber installations will coincide with scheduled vessel dry docks in 2019 and into first half of 2020.

Looking at the coverage and the fleet.

The company's core fleet was unchanged over the quarter and consists of 77 sailing vessels, of which 46 are capes, 16 are Panamaxes-Kamsarmaxes, 12 are ice class Panamaxes and 3 Ultramaxes.

Since the last earning report, the company has entered into 1 long-term contract for one of the Panamax vessels.

Current fixed rate cover for our Capesize suite in 2019 is the equivalent of 3 vessels at a gross rate of $20,965.

This has been achieved by converting one of the index-linked vessels to fixed rate and selling some FFA contracts.

In addition, we have entered into 5 floor and ceiling contracts for 2019 and 2 for 2020, securing the [downside] at approximately $15,000 per day by giving a [rate] upside about $29,500.

The settlement on these options are based on monthly averages.

And today's weak market demonstrates the effectiveness of the structure as we secure the floor on these contracts of approximately $15,000 in an $8,000 market.

On the Panamax fleet, 14 vessels are chartered out on fixed-term contracts for the winter, securing the majority of first half of 2019 at an average rate of $16,900.

Seven of these contracts last for a longer period and expire during 2020 and 2021 at an average rate of $19,400.

That ends the presentation, and I hand over the word to Birgitte who will take you through the market development section.

Thank you, Per.

Since the late summer of '18, a number of events happened that put markets under pressure.

The trade war between U.S. and China, which began as a war of words, altered the seasonal dynamics of the grain trade.

More importantly, it negatively impacted the sentiments, and it created a significant uncertainty at the time when the market had begun to show good strength.

Recent headlines offer little in the way of concrete [plans] and the market continues to wait for a resolution.

Towards the end of January '19, a devastating tragedy occurred when a Vale tailings dam in Brumadinho, Brazil failed causing significant loss of life.

Following this event, Vale announced that it would decommission all of its upstream tailing dams.

Together with Brumadinho, this had the effect of decreasing iron ore deposits by 70 million tonnes.

As iron ore is primarily transported on Cape, the immediate impact was severe.

This also occurred around the start of Chinese New Year celebration and during this period, which lasts for up to 3 weeks, economic activity is practically shut down in China.

Suffice it to say that the dry bulk markets has been put under pressure by a confluence of events at the time when underlying sentiment for the short-term was not very strong.

As mentioned in the previous call, the fourth quarter was weaker than expected following a strong third quarter.

This also reflects in drop of the utilization, which dropped to approximately 86% in the quarter, mainly due to a drop in demand, as fleet capacity was flat quarter-over-quarter.

Although demand decreased in the fourth quarter of '18, it was still up year-over-year and followed the seasonal trend seen over the last few years.

The drop in coal transportation was the main reason for decrease in transport demand and a consequence of implementations of import restrictions into China.

Transport of iron ore and [agribulks], those were also a bit down while other commodities were up.

Despite the drop in demand of iron ore, steel production in China continues its good growth path in the fourth quarter of '18.

This was in contrast to the unchanged year-over-year production levels in the rest of the world.

As mentioned on many calls before, stockpiles of steel continue to be at modest levels in China, which is an indication that steel is being -- that is being produced is also being consumed.

Following the drop in steel margins going into the fourth quarter, the margins stabilized towards the end of the year and into '19.

After the tragic accident in Brazil, iron ore prices started to rise sharply again on the fear of lack of iron ore available.

This has had a natural effect of compressing steel margins in the short term, although we anticipate iron ore prices will stabilize as lost production is being replaced.

Looking at the fourth quarter, iron ore export volumes from Australia and Brazil decreased.

There was, of course, a high expectation going into 2019 that additional iron ore volume to the market would come on scene from Brazil based on previous guidance.

Vale was estimated to increase the production by 25 million to 30 million tonnes from 2018 levels.

The tragic accident puts a short-term lid on that optimism.

Beyond the production caps that have already been announced by Vale, there is uncertainty about what the Brazilian government will require from Vale to improve safety in response to the accident and what other measures Vale will take on their own.

This has created uncertainty around the export volumes expected for '19 and it looks like no one has a totally clear picture and lots of numbers are circulating around.

Starting with the 2018 production levels and the estimated improved guidance that was in place earlier for 2019, the deduction of up to 70 million tonnes from Brumadinho and other sources lead to a 40 million tonnes reduction compared to '18.

There are assumptions that Vale will be able to replace part of that from their northern systems and as a potential indication, you can see 20 million tonnes being recouped in other areas.

In addition, Anglo's Rio-Minas were out of the market during most of 2018.

It is now back on stream and should add another 15 million tonnes compared to last year.

Adding that together, you should be more or less underlining again that these are very uncertain estimates.

But you should be more or less back on the 2018 volumes in total, if this is the final scenario.

Any shortfall will then have to be compensated from other areas.

Australia should have a capacity of 10 to 20 million tonnes, but obviously it's a fraction of the distance to China compared to Brazil.

And the replacement from that -- from Australia will have a negative [tonne mileage.] Bearing in mind the higher iron ore prices, as mentioned earlier, we expect to see also other suppliers being able to potentially add some volumes to the market.

While this has clearly had a significant short-term effects on demand, it's not -- it's too early to conclude on the potential impact for the rate outlook for the whole of 2019.

Moving on to coal, while total coal volumes transported have been healthy, there was a sharp drop as illustrated on the graph to the left in the fourth quarter following Chinese import restrictions that

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imports to 2017 levels.

Possibly

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a measure to support domestic production and prices and in view of higher coal inventories in China.

January volumes, however, surged back 33.5 million tonnes, up 23.3 million tonnes from December and also up year-over-year.

Part of this increase is the result of lifting the import restrictions at the start of the year and must be seen in relation to low volumes at the end of last year and cargo being off -- on vessels waiting to discharge.

Volumes into India continued to grow in 2018 as the energy requirements expanded.

And as you can see from the graph, India also has lower coal inventory.

Despite what we read about more cautious economic activity in China, electricity production continues to grow and had a strong 7% growth year-over-year in the fourth quarter.

Thermal coal was 73% of the electricity production and therefore continues to be the most important part of China's energy making.

As coal imports slowed in the fourth quarter, we saw domestic production increase and compensated for the shortfall in imported volumes in that period.

Moving on to grains, unfortunately the recent shutdown of the U.S. federal government has [essentially] limited export availabilities for the fourth quarter.

But as we know, the U.S. China trade war had significant effects on the quarter, which is normally a high season for U.S. grain exports.

Volumes were down 2.4% year-over-year on agri in general, leading to less activity in the Panamax sector.

At the start of the first quarter this year, there have been some reports of Chinese buyers of U.S. soybeans to support the discussions on the trade war, but in total these volumes are far less than volumes last year.

Looking ahead, we are waiting for East Coast [of] America harvest season to start towards the end of the quarter, which should be supportive to Panamax rates.

Moving on to the supplier side.

Fleet growth was somewhat lower in the fourth quarter of 2018 than in the earlier quarters.

For 2018, as a whole, the fleet grew by 28 million deadweight tonnes, which is around 3.5% of the feet.

Scrapping was almost nonexistent in the year with only -- with less than 5 million deadweight tonnes or 0.6% of the fleet being taken out of the markets based on the optimistic outlook and improvement in rates having been seen.

Looking ahead, the order book represents around 11.5% of the fleet on the water.

This is low in historic terms.

For 2019, various sources on the order book have different estimates.

The highest one is 5.9% gross delivery, as seen here.

We expect to see lower deliveries, which I will come back to in the next slide, but we should also see up higher in relation to dry docking on scrubber installation as well as an expectation of higher scrapping due to the current market environment combined with high docking costs due to regulations.

As an example, we have so far this year seen 7 Capes being scrap -- or sold for scrap compared to 18 scraps -- 18 vessels for the full year of 2018.

This graph, as we have had before, shows the distribution between orders not commenced, vessels under construction and vessels launched.

As you can see from the number, 36% of the vessels marked as scheduled for delivery in 2019 have not even commenced construction.

And obviously for vessels scheduled in the first half of '19, which have not commenced construction, you will at least see a delay if not the cancellation.

In the order book, there are several old orders.

A number of vessels representing around 13 million deadweight tonnes were ordered in 2015 or earlier.

And these -- maybe some of these vessels that are in the order book that have not commenced and some of them have been placed at yards that have since gone bankrupt.

Based on the current market, you may also expect to see some owners trying to push deliveries out in time.

Prices in the S&P markets have been slightly lower but very few transactions have taken place to reflect the latest development in the market.

We would expect to see a drop in asset values.

But at the moment both the buyers and sellers are signing off and not a lot is transacted or being circulated for sale.

Moving into 2020, we maintain our view that modern assets are the most attractive to buyers, and we expect to continue to see a widening of the price spread between modern and older tonnage.

So looking back at last year, rates were up compared to 2017.

However, towards the end of the year, as discussed, the fourth quarter disappointed compared to expectation.

The impact of the trade war and coal import restriction into China

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the markets in the fourth quarter.

And going into 2019, we observe good volumes and [Cape rates] were actually stable around $15,000 per day during January.

Panamax and smaller vessels [dropped] back due to a lack of grain out of the U.S. and also restrictions on coal imports.

There was uncertainties looming around the trade war but also optimism in relation to future similar packages.

The estimates in Brazil quickly changed in sentiments.

And at this stage, we believe many negative factors listed here are priced into the stock market and to the forward curve.

Setting aside the market volatility and the current market weakness, we believe that our continued focus on low cash breakeven levels and the strong balance sheet provides us with a very strong footing and our modern fleet improves our earnings potential, which will be particularly important as we approach 2020 and an environment where higher fuel prices are virtually certain.

Despite the short-term volatility and uncertainty, with all factors considered, we believe the upside potential outweighs the downside risk.

We will continue to focus on returning value to shareholders through dividends and potential share repurchases.

And for this quarter, the board has declared a dividend of $0.05 per share.

A reflection on the strong fourth quarter results but also an acknowledgment of the current weaker markets.

And we will continue to aim at finding the right balance between returning value to shareholders and other uses of cash flow, including deleveraging and also always considering potential investments.

This ends the presentation for today, and we are open to answer questions you may have.

(Operator Instructions) Our first question today is from Espen Landmark from Fearnley.

I don't think you included a graph of the iron ore inventories today.

But we know that the drawing of those had quite a meaningful impact last year on Chinese imports.

Some of these sources on Chinese steel mill inventories are suggesting a draw as much as 200 million tonnes throughout '18, which is a -- obviously, a lot bigger number than the official statistics from the ports.

I mean, do you think these estimates, which are essentially sample tests from the various mills, do you think they have some merit?

I absolutely think that there is a merit to say that the stocks also at the mills have been drawn during the year.

Various analysis.

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That we buy and people we discuss with both have observations on that and also in order to get quality iron ore balance to match the missing piece in the puzzle.

The 200 million tonnes [like is a high] number as such, but I don't have any specific estimates.

But I think combining sort of the growth in steel production, the flat to slightly down iron ore imports, the drop in domestic iron ore production for the year despite an increase in scrap steel, drawdown of inventories is definitely part of it.

And then you say in market utilization around 86% then doesn't look to have changed much throughout '18 despite the rates coming down.

I mean, there is typically some flexibility on the ballast like to reduce the speed.

I guess the question is on your Capes, for instance.

Are they running at full design speed?

Or do you think there is a certain degree of kind of slow steaming in the market at the moment?

The speed is sort of adjusted by voyage and going slightly down, but it has not been running at full speed during the year at all.

It is marginal adjustment in each direction.

When it comes to the utilization, it averages over the quarter.

So I guess, you will see some smoothing of numbers and also potentially -- I mean, I expect utilization to be obviously lower in the first quarter when we get there.

Right.

And finally, switching gears a bit.

You have pro forma cash of roughly $200 million after the convertible repayment in January.

Just thinking about kind of a worst case rate environment similar to say 2016, your balance sheet will maybe provide a year or so of runway.

I guess your leverage ratios are a lot better now than back then.

So what kind of additional liquidity measures would you have at hand if kind of these rates were to occur again?

You're right.

If we take the worst case, if you go back to '16 results it's [an end to everything] when you run below cash breakeven.

But I think -- as you said, we do have a relatively low leverage at the moment.

So yes, at the moment we are very comfortable.

But we don't have any revolvers to draw on or anything.

But the good thing now compared to last time is that we have close to no CapEx.

It's -- we don't have any new buildings, no unfinanced commitments as such.

So the balance sheet and the company is certainly robust for a long period.

And then, despite sort of market weakness at the moment, remember at the start of '16, the utilization were probably 75% on the Capes and it is a better balance in the market even though you should lose -- you lose some demand now you start from a much, much stronger balance in the fleet.

Yes.

And a longer [pre-existing] order book compared to that back then as well.

So it's a different situation now.

(Operator Instructions) The next is from the line of Fotis Giannakoulis from Morgan Stanley.

Birgitte, you mentioned that there is an increase in the scrapping activity after the sharp decline in charter rates.

In your discussions with your fellow shipowners, where do they -- where do you think that they view long-term demand for the sector?

And what is your forecast for the supply growth the next couple of years?

We don't have very much discussions on numbers for demand growth.

But obviously the Vale incident has uncovered -- has a downward revision on that.

On fleet growth, I think with increased scrapping and also taking into account off-hire, I think, effective growth in the range of 3% plus/minus for this year, but higher in a better market environment and lower in a weak environment.

And you think that with -- 3% is level the level that the industry is balanced or is there -- you're talking only for this year?

If we try to see beyond 2019 and obviously, with the Vale accident at some point or its impact will be smoothened out.

What about -- where do you see Chinese demand affecting the overall market?

You mentioned about the decline in the coal market, but also the iron ore imports were weaker this year, whether they were from Brazil or from -- or last year whether they were from Brazil or from Australia.

Do you think that this market will be a growing market or -- I'm trying to understand, which commodity will be the main driver to absorb this increase in the fleet?

I think, with both the drawdown of stocks that was discussed on the previous question, iron ores can well be supporting the demand side, but of course, volumes have to be available.

And I think at least for the first half of the year there is a lot of uncertainties around the supply side.

Grains and other minor bulks as well will be supportive.

Should the [themely] announcements that the Chinese have indicated that can, of course, support should the trade war be concluded in a positive manner, that will support.

But it's fair to say that there is a lot of elements factoring in right now as we tried to highlight previously.

And you mentioned that you -- there is very limited activity in Brazil on purchase market.

But you forecasted or you predicted that the asset prices will be going down.

Usually in these kinds of turmoils there are opportunities for stronger players, like your company, to expand and take advantage of the fear that might exist.

Are there any discussions -- more active discussions right now versus 3 months ago?

Any fleets that you could potentially acquire?

Is this something that would be of interest over the next couple of quarters?

I would say I think it's too early that it has been reflected in any S&P prices.

I think things will have to settle a bit before -- both for buyers and sellers before there is any active transaction.

(Operator Instructions)

Okay, then we would like to thank all of you for listening in today and wish you a nice morning or afternoon wherever you are.

Thank you very much.

Ladies and gentlemen, that does conclude the conference for today.

Thank you all for your participation.

You may now disconnect your lines.