Golden Ocean Group Ltd (GOGL) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Golden Ocean Q3 Earnings Conference Call.

(Operator Instructions) I must advise you that this conference is been recorded today.

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

Please go ahead.

Thank you.

Good morning, and good afternoon, and welcome to the third quarter 2019 earnings call for Golden Ocean Group Limited.

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

I'm very pleased that Golden Ocean has reported the best quarter the company has had for a very long time.

As usual, Per will take you through the company update, and I will revert on some comments about the market and why we believe that the company is well positioned for the future.

Thank you, Birgitte.

Go to the highlights.

Golden Ocean reported a net profit of $36.7 million and a profit per share of $0.26 for the third quarter of 2019.

This compared to a net loss of $33.1 million and a loss per share of $0.23 in the second quarter.

Adjusted EBITDA ended at $81.1 million, significantly up from the $21.5 million in the previous quarter.

We have recently taken delivery of 2 103,000 deadweight tonne ice class post Panamax vessels on index-linked time charter contracts.

In November, we completed the refinancing of 15 vessels at attractive terms and agreed to amend existing charter agreements with SFL to fund 7 of the scrubber investments previously announced by the company.

Further, we have finalized the joint venture agreement with Trafigura and Frontline to establish a leading global supplier of marine fuels, and we have made further investments in Singapore Marine related to the acquisition of SwissMarine.

Towards the end of third quarter and so far in fourth quarter, we have acquired an additional 505,000 shares under our own buyback program, increased the total shares bought to 1.3 million.

And at least, we announced a cash dividend of $0.15 for the quarter on the back of the strong results.

Moving on to the P&L.

As I said, the net P&L for the quarter ended at $36.7 million, which is an increase of almost $70 million from the previous quarter.

The strengthening of the market experienced from the end of second quarter and continuing into the third quarter led to an increase in our time charter equivalent, or TCE revenue of $56.9 million compared to the previous quarter.

Ship operating expenses, including dry dock and estimated OpEx on short-term leased-in vessels ended at $45.8 million for the quarter.

Of this amount, $1.6 million relate to dry docking compared to $6.7 million in the second quarter, $6.3 million relates to the estimated OpEx on leased vessels, $4.7 million in the second quarter.

Effectively, the running OpEx on our owned fleet is marginally down compared to the previous quarter.

G&A was stable compared to second quarter at approximately $3.3 million, while depreciation was down slightly due to a one-off that we did in second quarter.

Net financial expenses were down by $0.9 million compared to prior quarter.

This is mainly due to lower LIBOR rates and the impact of a full quarter with lower margin on the debt refinanced earlier in the year.

Loss on our derivatives decreased by $8.4 million in the third quarter compared to second quarter, but we lost $2.4 million on U.S. interest rate hedges due to falling rates and lost a further $3.7 million on FFAs, bunker and FX hedges.

These losses were partly offset by an unrealized profit of $3.2 million related to our shareholding in Scorpio Bulkers.

Adjusted EBITDA came in at $81.1 million for the quarter, and the achieved TCE per day was $19,727 compared to $11,629 for the previous quarter.

Looking at the cash flow.

The company ended the quarter with $163.3 million in cash and generated a positive cash flow from operations of $45.8 million.

Due to an increased number of vessels on voyage charter and the higher market rate environment, approximately $20 million in additional cash was tied up as working capital at the end of this quarter compared to the previous quarter.

We also paid down ordinary debt with $21.2 million in the quarter.

And the company used $32.2 million on investing activities, of this $10.7 million relates to a shareholder loan provided to Singapore Marine, on top of the additional $9.5 million equity investment in the company.

And $12 million relate to investments in scrubbers and ballast water treatment systems of our vessels.

The company paid $14.4 million or $0.10 per share in dividend for second quarter, payable in third quarter.

Following other minor cash outflows, cash at the end of the quarter amounted to $139.3 million, which is down $24 million from the start of the quarter.

Looking at the balance sheet, the most notable change this quarter in addition to the cash flow effects relate to the refinancing of the $284 million facility that we did in November.

The debt related to the vessels that are financed under this facility was booked as long term at the quarter end, which reduces the current portion of long-term debt by $150 million.

Net of ordinary repayments, long-term debt increased correspondingly.

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

As said in November, we signed a new $153.3 million loan facility with 6 banks, refinancing the 15 vessels that were financed through the $284 million facility.

The new facility has a 5-year tenor with an interest of LIBOR plus 210 basis points and has the same 20 years age-adjusted profile as the previous facility.

This financing, on top of the refinancing we have done earlier in 2019, significantly extend our debt maturity profile, and our next refinancing isn't until March 2021 and then from 2023 and onwards.

This development is shown on the graph to the right on the Slide 8.

In addition to this refinancing, we have agreed with Ship Finance to amend the charter rate for 7 of the vessels leased from them against the $7.5 million financing of the scrubbers installed on those vessels.

The company maintains the same covenants for the refinancing than they have for the other facility and has a very clean covenant structure.

Moving on to CapEx and OpEx.

In the P&L, the company shows fully burdened OpEx cost, which includes dry docking and fees to external managers.

The running OpEx is relatively stable at $5,100 per day for the Panamaxes and $5,300 per day for the Capes, which excludes the dry dock cost.

Scheduled dry dockings were low during third quarter, but this will pick up during fourth quarter and into early 2020.

The graph on the right side of Slide 9 shows our scheduled scrubber installation program that will take place while the vessels are in dock for regular dry dock.

And as you can see, 15 of the 23 planned installations are expected to be completed or will be in process when the new regulation comes to force in January 1, 2020.

The remaining installations are scheduled to start during the first quarter of 2020, and we expect them to be completed in the beginning of the following quarter.

The company recently added 2 post Panamax ice class vessels taken in on long-term index-linked time charter to the fleet.

The charter periods are for 3 fixed years with 4 individual optional years, and the rate is a weighted combination of the Panamax and Cape indexes.

This brings the operating fleet to 79 vessels, of which 46 are Capes; 16 are Panamaxes or Kamsarmaxes; 14 are ice class Panamaxes or post Panamaxes, this number then includes the 2 new vessels; and 3 Ultramaxes.

The company has taken some more cover since last report, specifically for the winter season on the ice class Panamax fleet.

But entering 2020, we have a relatively low coverage, and our earnings are, as shown on the graph, very sensitive to the spot market going forward.

And by that, that ends my presentation, and I hand the word over to Birgitte to take us through the most recent market developments.

Thank you, Per.

Moving on to -- starting with utilization.

The utilization in the third quarter was measured to be above 90%, a level that we have not seen since 2013.

The corresponding rates, if you use the BDI as a measurement, were actually the highest quarter since 2010 in the third quarter of 2019.

Why did that happen?

Seaborne trade of dry bulk goods had a strong uptick in the quarter, led by a rebound in iron ore volume from the weak first half of the year.

Available fleet supply dropped from the previous quarter despite a few new deliveries.

Reduction is explained by off-hire and scrubber installations.

Around 1% of the global fleet has been under retrofit at any given time since June, and the majority of these are understood to be in the larger vessel classes, thus the off-hire percentage in that segment has been even higher.

Volumes, measured at the time it has been imported, increased significantly in the quarter and was the highest quarterly import volumes recorded ever.

The quarter saw a 2.9% year-over-year improvement after experiencing annual declines in each of the last 2 quarters.

Looking at the graph, iron ore clearly had the strongest rebound from the previous quarter, with volumes increasing by nearly 10%, but all commodity groups have decent increase in volumes in the quarter.

Iron ore exports rebounded strongly from both Australia, up 15% versus Q2; and Brazil, up 45% versus Q2 in the third quarter.

Australian export levels are close to max capacity in the short term, while Brazil still has a good deal of capacity to bring back online in addition to planned growth.

Brazil picked up and export numbers looked promising in quarter, but the start of the fourth quarter has showed some decline in export.

And it seems like Vale is struggling a bit with their production system as well as there has been a lot of early rain in Brazil this late autumn.

Vale has reduced their guidance on sales volume for 2019 and guided to a moderate level of production in the first quarter of next year, but stated that they intend to increase production by around 30% between 2020 and 2021.

Australia has increased exports, and we continue to see strong volumes into the fourth quarter.

These observations are also consistent with what we see in the spot market, where the route C5, Australia to China, is fixed constantly every day, while right now, it's the lack of volumes on the route of C3, [China], Brazil, China.

In the last week, the Australia route has been priced higher than the Brazil route, which should reduce the number of vessels that are willing to ballast towards Brazil.

Looking a bit further ahead, there is room for an increase from Brazil, which would be supportive for tonne miles in the longer term.

Moving on to steel production.

After more than 3 years of consistent growth in steel production, both in China and in the rest of the world, we have in the last months observed a contraction in the rest of the world and lower growth rates in China.

It is difficult to maintain a 10% year-over-year growth for many years in a row, but steel production is still consumed, and we see dropping steel stockpiles in China.

Also during the first half of the year, there was a significant drawdown of iron ore stockpiles.

So with stable steel production, which we expect to increase again if further similar measures are put in place and lower stockpiles of finished steel products and iron ore, we still expect iron ore imports to keep up.

This is also favored by closure of some steel mills, which are less efficient, ahead of the winter curbs to improve the air quality.

And the effect of this is higher steel margins, which again will favor imported, higher-quality iron ore as input factors into the steel mills.

Looking at coal.

Coal imports to China was extremely strong during the third quarter, where a buildup of stocks were apparent before the import restrictions that was expected -- that was put in place towards the end of the year.

This has happened in the last few years, and it now looks like the government is trying to cap imports for 2019 at around 300 million tonne, which makes traders reluctant to buy more coal at the moment, expecting issues and delays with port clearance.

However, one could potentially see a rebound in December for coal.

If you load the coal in December, you don't expect to be discharging in China before January 2020, and in the new calendar year, imports will open up again.

The last 2 years have seen declines in Chinese import in the fourth quarter, followed by increase in the first quarter as imports resume, and we may see this trend being repeated for this year.

Looking at the other countries.

India had a strong decline in import in this quarter and also saw a drop in electricity production, while Japan and South Korea had a rebound of coal imports following earlier drops in their numbers.

Electricity production continues to grow in China and showed a 4.6% growth year-over-year in the third quarter of 2019.

In September alone, production grew by 8% year-over-year.

As hydropower production begins its seasonal decline, autumn and winter is coming, and thermal coal demand will increase.

So the final slide on the demand side, looking at the grand trade.

The U.S.-China trade war continues to have a significant impact on the U.S. grain export, and it seems that the second U.S. harvest season will be negatively impacted.

Total volumes are more or less stable, however, as South America is gaining market share.

There has been some sales reported from the U.S. during the last few months, supporting the ongoing dialogue on resolving the trade war, [but far] by the volumes reported as being agreed upon between the U.S. and China and not enough volumes to support any growth in exports from the U.S. at all.

Moving on to the supply side and looking at deliveries.

Deliveries increased slightly in the third quarter of this year, quite contrary to a normal trend.

In the very strong market we observed in the third quarter, there has hardly been any scrapping at all.

So the fleet actually increased more in the third quarter than earlier in the year.

Other factors, though, have impacted the availability of supply, as I mentioned earlier, and in particular, scrubber installations and related off-hire, plus imbalances of the positioning of the fleet has been supportive factors to the market this quarter.

As we are now less than 2 months away from the implementation of IMO 2020, fuel efficiency should come into focus even more and have an impact on vessel supply.

While there have been quite few deliveries this year, and the order book also indicates further deliveries towards the end of the year and into next year, the total order book is around 14 -- 10% compared with 14% of the vessels being older than 15 years of age.

Another 12% of the fleet was built at the second-tier yards in the early years of Chinese newbuilding and is of lower specification.

This contrast with a fleet of modern ECO vessels, including all of the existing order book.

It all makes up 30% of the total tonnage.

Setting aside CapEx decisions related to dry docks and ballast water systems that may cause owners to scrap vessels, market rates, at least in the short term, will be heavily influenced by the economics of older, less fuel-efficient vessels as these vessels compromise about 20% of the fleet.

This creates a significant competitive advantage for owners of modern vessels and will be supportive to scrapping in markets -- weaker periods in the market.

Activity in the S&P market follows activity in the freight market and the activity picked up a bit during the third quarter, but this has slowed again now as we speak.

There are limited transactions in the Cape market and a bit more activity in the Panamax and Supramax market.

Newbuilding prices are slightly sliding as the yard order books are getting smaller, but it has, as of yet, not resulted in any massive ordering as owners seem to be reluctant to decide on engine type and which fuel to choose.

As we discussed in the last call, in the resale market there is a preference for modern ECO tonnage.

Looking at the data that has been published since March, after remaining constant since December of last year, the value spread between a 5-year old ECO and non-ECO vessel increased again lately, and ECO vessels are commanding a significant premium.

Following the implementation of IMO 2020, one should expect that less fuel-efficient vessels, unless they're retrofitted with scrubbers, will fall further out of favor.

The current spread between high sulfur fuel oil and MGO has widened considerably since the start of the third quarter and prices are highly volatile.

We expect the fuel prices to remain volatile until the market is able to balance the supply and demand requirements, and we expect the fuel spreads to remain wide enough to support our decision to install scrubbers on a certain part of our fleet.

Our results for the third quarter clearly demonstrates the efficiency of our platform as well as our competitive financing base.

Combined with outsized performance by an asset base of modern fuel-efficient vessels, weighted towards the larger asset classes, Golden Ocean produced its strongest quarterly results since well before our merger with Knightsbridge in 2015.

With our low cash breakeven levels, we have been able to return a significant portion of our cash flow in the good market to our shareholders, and this is the eighth consecutive quarter the company is paying dividends.

And including the dividend that has been declared today, we have returned more than $110 million to shareholders over the last 2 years directly in dividends, and we have bought back shares for around $8 million.

We intend to continue the share repurchase in the market, and the company has announced that the current program will be renewed on expiry later this year.

At the same time, combining these cash breakeven levels with a solid balance sheet and a strong cash position, we have been able to protect the downside in periods of market weakness.

We have invested quite a lot in various projects, ranging from investing in trading companies to investing in upgrading our assets with scrubbers, and the company believes these strategic initiatives will pay off in the near future.

We believe that the company is well positioned as IMO 2020 gets closer.

Our modern fleet will command a larger premium compared to older vessels in a higher fuel price environment.

We expect to have scrubbers installed on 23 of the Capes by the end of the first quarter.

These 23 vessels represent around 50% of our Cape fleet and 2/3 of the part of the fleet where we have economic interest and exposure to fuel prices.

We have decided to install scrubbers in line with the dry dock schedule, although a few of the 2020 dockings have been moved ahead into the first quarter.

Finally, from an operational point of view, having access to a wide variety of marine fuels, competitive prices is important as the industry prepares for the logistical issues that may limit availability in certain ports.

We feel confident that the company's ability to source competitively priced fuel through our new joint venture with Trafigura group and Frontline will be a big benefit to the company and the wider group of shipping companies within the Hemen stack.

Our fleet is weighted heavily towards Capes and Panamax segments, the vessel segment that performed the best in the strong market.

This, of course, creates volatility relative to other vessel classes, but the returns can be significant, and I believe that the third quarter result demonstrates the value of having this exposure.

In 2020, the majority of our fleet will be trading in the spot market, which gives us a strong leverage to the market.

As Per stated earlier, every $2,500 increase in average TCE rates above our cash breakeven results in $0.44 per share in cash flow on an annualized basis.

Before I conclude my remarks, I would like to thank my colleagues as well as the Board of Directors of Golden Ocean for 10 fantastic years with the company.

As you may have seen, I have decided to resign from the company effective at the end of this month.

This was a personal decision and in no way reflects my views on Golden Ocean businesses or the company's prospects.

To the contrary, I strongly believe in the company's strategy, and I believe that the company is well positioned going forward.

I have enjoyed interacting with many of the analysts and investors who joins us on our conference calls, and I look forward to remaining in touch.

With that, we will open the call for any questions you may have.

Thank you.

(Operator Instructions) The first question is coming from the line of Greg Lewis.

Birgitte, it's been a pleasure and good luck.

I guess my first question I wanted to touch on is around the dividend policy.

And just in thinking about it, it looked like last quarter, it was -- Q2 was a challenge, but rates were good that there was a dividend, probably exceeded our expectations.

How should we think about the dividend going forward over the next few quarters?

Just thinking about as we could be entering maybe a softer period of the year, before maybe then we start to see some of the benefits from IMO 2020 as 2020 plays out.

Yes, Greg.

I think the answer to that is, as we have said earlier, the company doesn't have a fixed dividend policy.

We take the decision of the Board, take the decision on a quarterly basis on the basis of how the reporting quarter ended, how the current state of the market is and how we look at the future.

So it's no fixed dividend policy, so -- and it will fluctuate going forward.

That being said, we are in a position where we have very limited CapEx program, so -- and we have a good cash position.

So we have the flexibility to make that decision on a quarterly basis.

So yes, what to say.

If the market perform and then -- and the cash from the scrubber investments start to filter in, then we will be able to maintain dividends.

Okay.

And then just -- I mean, looking ahead to next year, obviously, the company is going to be very levered to the spot market.

You're installing a bunch of scrubbers on your vessels.

It seems like the demand for time charters, at least on the Cape size or larger, is generally going to vessels that have scrubbers.

As we think about where Golden Ocean is -- how Golden Ocean is positioned.

As we look out over the next few quarters, should we expect Golden Ocean to start opportunistically, maybe layering on some charter coverage on some of their larger vessels?

Is that how we should be thinking about it?

Or is it -- or just really want to position this company to be a spot vehicle?

I think, as in the past, this is also market dependent.

If the rates are low compared to where we think they should be and are low relative to our cash breakeven levels, we prefer to keep a higher portion in the spot market.

If the market picks up, and we feel that we get a good premium, then we will add some cover.

I'm not sure if you have seen it but we wrote in our report, we fixed one vessel a bit earlier in this quarter with a scrubber at $25,000 per day for 15 to 19 months, which is a very good rate.

I would say, however, that there is -- I'm not sure that you could say that the demand goes to vessels with scrubbers, et cetera.

My impression is that charterers and operators are reluctant to take a position at the moment.

I think there has been little activity on the time charter markets now because of the preparation for 2020.

So I think once you are through January and tanks are cleaned and fuel is shifted, et cetera, you will see more activity coming back in the period market.

But also with where the forward curve is, I think, owners are reluctant to fix out too much on fixed rates and rather prefer to play it in the spot market.

It was a long answer, but...

Yes.

No, and actually, I wouldn't mind digging in a little bit into that.

And is that partially because as we think about a time charter versus a spot voyage today, if there is because of the fuel regulation changing, is it that owners could be exposed to -- on a charter -- I guess, really being penalized for fuel exposure by chartering ahead of the potential -- not ahead of the potential, but ahead of the fuel change.

Is that partially why we think this is some owner hesitation?

No, I think that the charterers are not chartering in vessels at the moment because then they have to take, as you say, the exposure on the fuel.

And they have to be -- I mean, the -- on the time charter, it would be the charterers that have to fuel the vessel.

And in this time period where all owners are cleaning tanks and changing fuels, I think the charterers prefer just to wait and do spot voyages.

So as Per mentioned earlier, we have had more voyages than normal over the quarter end.

And I believe it's the same reason is that we would like to have control of the actual change of fuel and the charterers are not willing to take that risk.

So I believe that when we are in 2020, and you either you have a scrubber onboard or you change fuel, then you will see more activity back in the charter market.

The next question is coming from the line of Anders Karlsen.

Thank you, Birgitte, and good luck on your endeavors.

I see that you chartered in 2 ice class vessels, is there any particular reason for chartering in this size and type of vessel?

And is this part of the new strategy of chartering in long term?

Or what should we put into this?

It's a good fit to -- I mean, we have 12 ice class 1C Panamax vessels that we are trading and which we own and trade in the ice.

And these vessels is a good fit, it's a good addition to that strategy.

We have had a long and good dialogue with the owner and found a structure, which we found to be mutually beneficial.

So it's not a change of strategy, it's more building on the activity that we have.

(Operator Instructions)

Okay.

If there are no further questions, I would like to thank you for listening in today.

And stay tuned for the next quarterly results for Golden Ocean in Q1.

Thank you.

That does conclude our conference for today.

Thank you for participating.

You may all disconnect.