Golden Ocean Group Ltd (GOGL) 2019 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by.

Welcome to the Quarter 1 2019 Golden Ocean Group Limited Earnings Conference Call.

(Operator Instructions) I must advise you that this conference is being recorded today on Wednesday, 22nd of May 2019.

I would now like to hand the conference over to your speaker and CEO, Birgitte Vartdal.

Please go ahead.

Thank you.

Good morning, and good afternoon, and welcome to the First Quarter of 2019 Earnings Call for Golden Ocean Group Limited.

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

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

As usual, Per will take you through the company updates.

And I will revert after with some market comments and strategy and outlook.

Thank you, Birgitte.

I go straight to the highlights for the quarter.

Golden Ocean reports a net loss of $7.5 million, and a loss per share of $0.05 for the first quarter of 2019 compared to a net income of $23.6 million and earnings per share of the $0.16 in the fourth quarter of 2018.

Adjusted EBITDA ended up $36 million, down from $70.4 million in the previous quarter.

In April and May, we refinanced all nonrecourse debts assumed through 14 vessel purchases in 2017.

This, reducing the interest expense, extending repayment profiles and reducing our cash breakeven levels going forward.

In April 2019, we made an investment in Singapore Marine, a newly-established dry bulk operator that will seek to generate returns in all markets' conditions by employing an asset-light business model.

And the company announced a dividend of $0.025 per share for the first quarter of 2019.

Moving onto the P&L.

Time charter equivalent, or TCE, revenue decreased by $31.2 million compared to the previous quarter.

The decrease is a reflection of the weak market experienced in the first quarter, particularly for the Capesize vessels.

Lower short-term trading activity with third-party vessels compared to previous quarter also contributed to the decrease.

This was somewhat offset by a good performance on the smaller vessels through short-term coverage taken prior to this downturn.

The adoption of the new lease standard changed how we account for the cost of vessels chartered in on short-term time charters as we now need to account for the estimated operating expense on the leases under ship operating expenses.

This, reducing charter hire expenses by the same amount.

In first quarter, this change caused our operating expenses to increase by $3 million, which would have otherwise been classified as charter hire expenses under the old lease standards.

The additional $600,000 increase in ship operating expenses compared to last quarter relate to somewhat higher docking costs and also some higher cost on sailing vessels in the quarter.

The other thing, expenses will increase going forward in 2019 as we had 19 vessels in total that are scheduled for dry dock this year.

G&A and depreciation was stable over the quarter with no significant changes to the fleet or on staff costs.

Net financial expenses are down by $1.6 million compared to prior quarter.

This is mainly due to reduced interest cost on the convertible bond that we repaid in January.

It built a loss of $0.6 million related to marketable securities and derivatives in the first quarter.

This is mainly related to a loss on third-party shareholdings and on U.S. dollars interest rate swaps.

Some -- but this was offset by profits on FFA and bunker hedges.

Adjusted EBITDA came in at $36 million for the quarter.

And we achieved a TCE per day of $13,131.

It is well above the benchmark rates in the quarter.

Commenting a bit on the cash flow in the quarter, it's not any big surprises.

We ended the quarter with $373 million in cash and generated positive cash flow from operation of $25 million.

Ordinary repayment of debt amounted to $16.6 million.

And this come on top of the full repayment of the convertible bond of $168.2 million, which was paid in January.

The company paid $7.2 million or $0.05 per share in dividend in the fourth quarter -- or in the first quarter for the fourth quarter of last year.

And following some other cash outflow related amongst other 2 investments in ballast water treatment systems and upcoming scrubber units, the cash ended the quarter with close to $200 million.

In the balance sheet.

The most notable change this quarter is the impact from the new lease standard.

Most significantly, Golden Ocean has 9 vessels leased in on long-term charters, which are classified as operational leases.

These include 8 Capes chartered in from [ship finance] and 1 Supramax from Cape -- from a Japanese leasing house.

As of March 31, relating to these operating leases, we had recognized right to use of assets of $201.1 million, and a total lease obligation of $193 million, of which $22.1 million was classified as credits.

The liability from the operational leases will be reflected in the balance sheet going forward under liabilities.

And $171 million is long-term liability at the end of this quarter.

The change on the lease accounting standard also resulted in a $12.6 million reduction in other long-term assets related to these operational leases.

Worth noting is that both the amortization of the operating right to use of the assets and the interest on the corresponding lease liability are presented as charter hire expense in our income statement as it was before and does not affect the P&L or the EBITDA in any material way going forward.

As illustrated on the previous cash -- or previous slide as well, including short and long-term restricted cash, we ended up the quarter with $199.2 million in the quarter.

The book value of the company's vessels decreased with ordinary depreciation of $22 million.

The current portion of the company's long-term debt decreased by $166 million over the quarter, mainly related to repayment of the convertible bond in January.

A large portion of the current short-term debts, which is shown in the balance sheet is refinanced so far in this quarter.

The remainder of short-term debt relates to regularly quarter repayments and 1 loan facility that matures late in December 2019.

And we expect to refinance that facility during the second half of the year.

At the end of the quarter, the company's book equity was around 51%.

And if you take the value of adjusted equity, it was around $45 million -- 45%.

Just mention a bit more on the credit facilities, which illustrates a bit in more detail, the changes we have achieved on them since the start of the year.

We have during first quarter and so far in second quarter, repaid an entire outstanding amount in the convertible bond.

We refinanced all debts related to 14 vessels acquired from Quintana in 2017 and extended 1 facility covering 14 Capes by 3 years.

On top of this, we have added a scrubber charge on the facility to finance up to 11 scrubbers on these 14 vessels mentioned earlier with a -- on the charges as of nominal value up to $33 million.

As we can see from the graph to the right-hand side of the slides, we have extended the maturity for a large amount of the company's bank debt by several years and reduced the near-term refinance risk significantly.

We have also been able to secure more attractive terms on our new debt facilities, reducing the margin from 310 basis points to 213 on average on the Quintana facilities.

And the amortization period, it's prolonged from 15 to 19 years.

This reduces the running financing cost and lower the cash breakeven for these vessels by approximately $1,300 per day, and on average for the entire fleet by $200 per day going forward.

Looking at the OpEx in first quarter, we had $3,500 -- no, $5,350 and $5,500 for the Panamaxes and Capes, respectively.

And on top of this, we beared the fully cost of any dry docks during the quarter when as secured.

We also had some costs in the quarter related to ballast water treatment system and some preparation costs for upcoming dry dockings.

As mentioned in the start, the full year scheduled for dry docking is for 19 vessels, 16 Capes and 3 Panamaxes, and 8 of these will also install ballast water treatment system.

The latter incur approximately $8 million in incremental CapEx for the year.

In May, the company completed its first scrubber installation on the Capesize vessel, the Golden Feng.

And going forward, the remaining commitment for 19 firm and 4 optional scrubbers installation projects will be carried out throughout this year and into early 2020.

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

Looking at the employment of the fleet.

The fleet has been consistent over the quarter.

We have not done any changes with respect to vessels.

Since last earnings report, the company has fixed out 1 Capesize vessel until first half of 2020 at a gross rate of $7,220 per day.

We have converted 2 Capesize vessels at floating rates into fixed rate for the remainder of 2019.

One at $15,720 and one at $18,800.

And we have fixed our one Panamax vessel until the end of 2019 at the gross rate of $12,950 per day.

This take the current cover for Capes up to equivalent of 6 vessels at an average rate of $19,420 for the remainder of 2019 and the equivalent of 8 Panamax vessels that expires between the end of 2019 and the end of 2021 at an average rate of $18,555 per day.

In addition to this, we have, as reported earlier, 5 floor ceiling Capesize contracts for 2019 and 2 for 2020, securing the downside at approximately $15,000 by giving away the upside of about $19,500.

These contracts have proven to be highly effective or profitable in 2019.

That ends my presentation.

And I hand over the word to Birgitte, who will take you through the market section.

Thank you, Per.

If you look at historic utilization, the utilization drops by around 4% in the first quarter this year compared to fourth quarter last year.

This was a combination of fleet supply that increased due to new deliveries in the quarter.

Coal kept congestion eased up as coal cargoes were discharged in China in January after imports were kept towards the end of the last year.

Transportation demand dropped as well.

Although, the total volume transported were stable quarter-over-quarter, the trading distances were shorter.

Moving on to demand.

As I mentioned, volumes measured at the time it has been imported were actually stable quarter-over-quarter.

Despite a drop in iron ore trade, other commodities improved to compensate.

Coal was relative to the fourth quarter, compensating for the drop-down as volumes were cleared into China.

Agri product were flat quarter-over-quarter, and order bulks continued the positive trend.

And for instance, as mentioned in earlier calls, bulk freight is a commodity with a positive trend and also add a longer sailing distances as well.

But the key component at the moment has been the iron ore trade.

Going into 2019, there was a strong conviction in the market.

Additional tonnes of iron ore was to come from Brazil.

And while we had guided on the production increase of between 25 million and 30 million tonnes from the year before, due to the tragic accident in Brazil at the end of January, this situation changed completely.

In addition to the disruption due to the accident, heavy rain also caused a drop in production and exports in the northern systems.

In February, Vale was still exporting volumes from the port stockpiles.

Vale volumes dropped back in March and into April.

Currently, we see no volumes for spot fixtures out of Brazil.

However, the volumes have picked up lately.

First half of May has almost exported the same volume as the full month of April.

And the queue of vessels that has been waiting outside Brazil is dropping.

And it's down from around 70 vessels last week to 58 vessels this week.

Australian miners also had disruption with cyclones and other issues in the first quarter.

We have now approved for higher volumes to get back up in the second quarter.

Second quarter is the final quarter of the financial year in Australia.

And with the current iron ore price, the Australian miners try to push out as much volume as they can.

We see a steady flow of cargoes coming from the Australian market.

While volumes are expected to come back and exceed the year's initial guidance over time.

As confirmed by Vale earlier, this can take time.

And as we have seen through various releases, Vale's operation is under great deal of scrutiny in Brazil.

For a few weeks, the Brucutu mine had licenses to produce iron ore from a lower level court, but the higher level court stopped the production again.

This mining complex can contribute up to 30 million tonnes.

And if that comes back on stream, this will improve the sentiment quickly.

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

And we believe this is part of the reason for increased destocking imports and through the value chain in China as the purchase cost of the iron ore in stocks is lower than the price that you have to pay today.

More iron ore volumes coming back into the markets should push iron ore prices down.

And this can change the iron ore from consumption from destocking and back to imports.

Despite higher iron ore prices that have been observed, steel margins has more or less kept up and has been stable most of 2019.

The steel margins have kept up as the steel production in China, once again, held an impressive growth rate.

Stockpiles of steel continue also to be at modest levels, which is an indication that the steel that is being produced is being consumed.

While the Chinese growth was quite impressive, the growth in the rest of the world were flat for the quarter, however, with a slight improving trend towards the end of the quarter.

Moving on to coal.

As mentioned earlier, coal imports to China picked up again after the import restrictions in the fourth quarter of last year.

And if you look back to the third quarter of 2018, the volumes were almost back up in the first quarter this year.

India continued its positive trend in the quarter, while Japan, South Korea and Europe were down compared to the previous quarter.

In this quarter, we also added a new group of countries with the redline, Other Asia.

And it's worth noting the trend there.

This includes among others, Vietnam, Thailand and Indonesia and have strong positive growth over the period.

In the future, we expect this group of countries to continue on the growth path given the construction of new coal-fired power plants that we see in these countries.

Looking at inventories, inventories have increased in India, but it's still at relatively low levels compared to consumption and Chinese inventories are at more normal levels.

Electricity production continues to grow in China and show 6% growth year-over-year in the first quarter of 2019.

In the quarter, thermal coal made up of 75% of the energy for electricity production.

And this is consistent with past quarters.

Looking at April numbers, it indicates an increase in hydropower production, as is normal for this time of the year.

And we expect the second quarter numbers will see a small seasonal shift towards hydropower.

Moving onto agri products.

The Europe-China trade war had a significant effect on the last 6 months, which is normally the high season for U.S. grain exports.

Despite some buying of soybeans from the U.S. to smoothen the trade talks earlier this year, volumes from the U.S. are significantly down year-over-year.

This is shown clearly on the lower chart on the slide where the seasonal spike in U.S. soybean and soybean meal exports is often.

Total exported volumes, however, are not a lot lower than last year.

Brazil has compensated most of the shortfall in U.S. exports.

We are now entering into the strong season for East Coast, South America.

Although the season is extended, we feel that there is a pickup at this time of the year.

However, aside from the tariffs, there is a growing concern about an epidemic of swine flu that has spread across China, and it's reducing the demand for feedstock.

This has -- may impact the trade and estimates are around 15 million tonnes for this year.

Lately, however, gross margins have started to improve again in China, which may indicate that the worst is over and the trend has started to turn positive again.

Moving to the supply side.

First quarter of the year is normally where the highest fleet growth of the year is due to a lot of deliveries scheduled in this period.

This was true also in 2019 for Panamax in smaller sizes.

But for the Capesizes, net fleet growth was actually down from the previous quarter.

Delivery was not much higher than in the fourth quarter of last year.

And we have observed (inaudible) higher scrapping, which I will discuss further later on.

Looking ahead, the order book represents around 11% of the fleet, down from 11.5% in the last quarterly presentation.

And in the last month, there has not been many new orders reported.

This (inaudible) data represents an estimated gross fleet growth for 2019 of 6%, which we believe is in the high end.

We expect some 2019 deliveries will slip into 2020.

And also, a part of the order book have old orders that were placed before 2015 of around 13 million deadweight tonnes.

Some of these vessels may never be delivered, and some have been placed at yards that have since gone bankrupt.

We expect, therefore, the final delivery numbers to be slightly lower.

If you look at net fleet growth, in addition to demolition, which I will come to after, the effects of the IMO 2020 disruption including off-hire for scrubber installations, cleaning of tanks and timely availability of new types of fuel will impact the efficiency of the fleet.

Also offsetting the fleet growth is that scrapping activity has picked up this year.

It's been driven by various factors.

Of course, weaker spot markets is always helping when the decision has to be taken.

The relationship between scrap prices and second-hand values have narrowed and the upcoming investments required for ballast water treatment regulations in addition to the requirements of IMO 2020 and the fuel economics of older assets.

Scrapping indicates 5 segments, and so far this year, exceeded all the vessels scrapped last year and has resulted in a negative fleet growth year-to-date for the Capes if you look at the number of vessels delivered versus the number of vessels scrapped.

If the market should remain weak, there is greater likelihood that vessels above 15 years of age will be scrapped as they approach the next special survey, and further investments are required in ballast water treatment systems.

Prices in the S&P market have been trended slightly down, but there has been remarkably few transactions that has taken place.

In particular, in the Cape market, there has not been any transactions for modern assets reported over the last 5 months.

And only a few older Capesize vessels have been sold in the last week.

In the smaller segments, there has been more activity, but mainly on older tonnage with less investments required.

In the resale market, there is a clear preference for modern ECO tonnage.

Clarkson began to publish these data last March.

And since then, 5-year-old vessels, both ECO and non-ECO have declined in value.

But the decline has been much more pronounced for the non-ECO vessels.

Following the implementation of IMO 2020 sulfur regulations, one should expect that less fuel-efficient vessels (inaudible) retrofitted with scrubbers will fall further out of fashion.

To summarize, this year started with a number of unexpected events that caused a rapid decline in (inaudible) rates.

While in January, prior to the disaster in Brazil, rates were stable at around $15,000 per day on Capes.

The market was (inaudible) but is excellent, but also other factors impacting exports from Australia.

But despite the relative limited spot exports from Brazil after Australian export has picked up, we have seen a decent improvement in rates during April and into May.

And rates are now back at around $12,000 for a standard Cape.

Headlines from Vale have quickly changed to short-term sentiment, both positively and negatively.

And iron ore from Brazil should eventually normalize as Vale continues to improve its operations to recover lost production.

And factors that are currently working against us can soon turn to be in our favor as weaker market rate affects the behaviors in the market.

First of all, the weaker market has called the pick up in scrapping.

And there has been limited new ordering since the start of the year.

Newbuilding prices are still at reasonably high levels as there are activity in other shipping segments.

And this should keep supply growth moderate as the spread between newbuilding prices and second-hand values are increasing.

Current destocking of iron ore can suddenly turn to a restocking.

There are plenty of risks in this market, but which also now the flip side of the [upside] potential.

And most of the risk seem to be priced into the markets currently.

Setting aside the market volatility, we believe that our continued focus on low cash breakeven levels and a strong balance sheet provide us with a very strong footing.

Our recent refinancing of the credit facilities for the 14 vessels is an example of the steps we have proactively taken to manage our cash flow and our good relationship to our [banks]

As Per pointed out, the recent financing has reduced our cash breakeven for $200 for the entire fleet.

And we have extended maturity of debt facilities.

The balance sheet is strong, and we have a significant liquidity position.

As a reflection of this, the board has declared a dividend of $0.025 per share despite a small loss in the quarter.

The competitive advantage of our fleet is already reflected in the way asset prices fall and vessels have (inaudible) And should, together with the scrubber installations, significantly impact our earnings potential as we approach 2020 and an environment where higher fuel prices are very likely.

Despite the short-term volatility and uncertainty created by the political climates, we have a conservative market outlook and believe the current aspects are temporary in nature and will eventually give way to a better market environment.

And this ends the presentation for today.

We are open to answer any questions you may have.

(Operator Instructions) The first question comes from the line of Greg Lewis from BTIG.

I guess my first question is -- and I mean just because it's topical and on everybody's mind, and you touched on it in your prepared remarks.

But as we think about the impact of the loss of iron ore volumes out of Brazil and what we've seen in the market, do you think at this point -- realizing it's still a fluid situation, do you think we've managed through the worst of the loss of the impacts from the Vale disaster?

I mean you mentioned that rates have stabilized a little bit here.

Do you think we've kind of are now trying to -- yes, we've kind of hit an inflection point that things are getting a little better there?

Yes.

I think so.

I mean, it may, of course -- it's very volatile in terms of when the various mine fleets go back on stream.

We hope that Brucutu will be the first one.

But also, part of the lack of volumes from Brazil was not related to the accident but more Vale-related issues.

And that, we expect to have normalized now.

And we believe with what we've seen with vessels leaving Brazil loaded, vessels that were sort of piling up and waiting for cargo, at least, gives an indication of a positive trend.

Okay.

And then you mentioned the completion of the first scrubber installation.

Obviously, there's still a lot more to go.

Has the conversations with potential charters increased?

Are you seeing an increased demand from charters for vessels that have scrubbers?

And is there any kind of premium that maybe that you're seeing in the market that you could point to for vessels that have scrubbers versus vessels that do not?

There is -- mainly the discussions that we have seen is where there is a profit placed on actual earnings, where maybe the owner sit with at least 50%, maybe up to 75% of the profits while the charter (inaudible) with their (inaudible) And if you go for such a scheme, it's actually important that the charter have some upside because if not there, they do not have any incentives to earn the money.

The other element is more of the, call it, the fixed-rate premium, whether the charter take on the upside or downside of the actual savings.

There are also those discussions that I would say that they are more linked to the cost of the installation than the savings relative to the fuel curve at the moment.

Okay.

And then just one more for me.

You mentioned that you made the -- you made this investment in this dry bulk.

I guess, it's nearly asset-light model.

Can you talk a little bit about the thought process in making this investment in the bulker space outside of Golden Ocean?

Yes.

I think, first of all, this company has the opportunity to take both a short and long position and try it around the market in a different way than what is easy for a shipowner that has a default long position.

That can also provide markets information on a general level because they would be able to see other type of deals and the shipowner would maybe see.

Mr. (inaudible) kept a good track record and finally, we find it to be a potentially profitable special investment.

So it's a combination.

It's obviously not a very large amount we have invested compared to our balance sheet, but it's sufficient to get involved and to get information and discussions in the market that we think will benefit also the on-fleet.

Your next question comes from the line of Marius Furuly from Carnegie.

Two questions for me.

First of all, how many extra days over the scheduled dry-docking did you use for retrofitting the Golden Feng with a scrubber?

What we have guided previously is that we expect in total around 25 to 30 days.

And then you have 15 days for an ordinary dry dock.

For these vessels, we also did the ballast water, and it's the first installation.

So I think we added between 30 and 35 days.

Okay.

That's clear.

Secondly, you sought repurchasing shares during the first quarter but now you announced a dividend.

Would you consider now that you really have proved that you have a constructive view on the market to maybe restocking those repurchases?

We're -- the mandate is still there.

It's an ongoing discussion, and we will -- if we decide, we will report, as you know.

Your next question comes from the line of Lukas Daul from ABG.

Sticking to that question on distributing of capital.

You reported a net loss, you decided to pay $0.025 in dividend.

Second quarter is probably going to be below the first as you indicate.

What is your thoughts on the dividend level?

Have you sort of set a floor?

Or how are you thinking about that?

We think based on the cash position we have and balance sheet we have, we can manage with the level we have at the moment.

We hope that the market will improve and we are able to increase that dividend.

And we should be able to maintain it for a while.

Obviously, we have to adjust to the market situation.

But as we see today, it's a comfortable level.

There are currently no further questions.

(Operator Instructions) A further question has been entered.

This is from the line of [Jay Mayer] from [Golden Nation].

I was just wondering, I read an article about John Fredrikson that he's going to have 10 Newcastlemax that are going to be taken care of by Golden Ocean.

And I was just wondering if there is going to be 2 delivered at the end of this year.

Can you add some more information on that or if it's a true story?

I cannot comment on Mr. Fredrikson's private investments.

But in general, we manage the commercial -- commercially we manage the fleet of the dry bulk here in vessels.

Okay.

And one more question.

The investment you've made with that (inaudible) the new company in Singapore.

I don't know, I read an article on that, that this young man is not going to be buying any ships for a couple of years.

I don't know if that's true or not.

Can you comment on that?

I don't have a comment to that.

I'm sorry.

Okay.

There are no further questions.

Thank you for listening in today.

And I wish you a nice rest of the day.

Thank you, ladies and gentlemen.

That does conclude our conference for today.

Thank you for participating.

You may all now disconnect.