Golden Ocean Group Ltd (GOGL) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to today's Quarter 1 2020 Golden Ocean Group Ltd. Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

And I would now like to hand the conference over to your first speaker today, Mr. Ulrik Andersen. Thank you. Please go ahead, sir.

Thank you very much. Good morning, and good afternoon, ladies and gentlemen. Welcome to Golden Ocean's Q1 release presentation. My name is Ulrik Andersen, and I'm the CEO of Golden Ocean. I'm here today together with CFO, Per Heiberg; and CCO, Thomas Semino, to talk you through the company's Q1 results.

You cannot say Q1 without saying COVID. Shipping is certainly no stranger to rapid changes, but few would disagree that the COVID pandemic changed the world and shipping rapidly and perhaps, forever. In the past months, we have been witness to an unprecedented crisis, which has hit us with tremendous force. It's against this background that we present our results today.

Needless to say, the welfare and safety of our employees and seafarers are always the top priority. As soon as the implication of the virus became apparent, we took all possible precautions to protect our employees and to ensure business as usual to the extent possible. In this connection, we want to thank everybody in the organization, shore-based, as well as seafarers, for their tremendous efforts in pulling us through these difficult times. We're not out of the woods yet, but we hope the worst is behind us.

With that, I will, in a short moment, hand the word to Per, who will present the Q1 financials. Hereafter, I will discuss the market and outlooks, and I will round today's presentation off with an introduction to the ESG report we published earlier today. We aim to keep the presentation short and focused on the main points and drivers. And after the presentation, we welcome any questions that you may have.

Per, the word is yours.

Thank you, Ulrik. I'll go straight to this quarter's highlights. Golden Ocean report a net loss of $160.8 million. This includes a negative noncash adjustments of $125.6 million for the first quarter of 2020. Net of these unrealized losses, the underlying loss from operations was $35.2 million for the quarter. Adjusted EBITDA was $12.3 million.

In January, we completed the joint venture agreement with Frontline and Trafigura to establish TFG Marine, a leading supplier of marine fuels, in which Golden Ocean owns 10%. In early May, we finished our final planned scrubber installations and now have scrubbers on 23 of our Capesize vessels, and we experienced limited delays during the installations. And finally, as Ulrik said, we, earlier today, published our 2019 ESG report, which can be found on our web page.

Moving on to the P&L. As I said, the net P&L for the quarter was a loss of 168 -- $160.8 million, and this is mainly driven by noncash elements that I will come back to later. Operating revenue fell by $98.7 million, mainly due to lower market rates achieved in our vessel trading spot and on index-linked time charters, but also due to lower short-term trading activity. This decrease in activity led to -- contributed to the $32.7 million reduction in charter hire compared to previous quarter. Voyage expenses were stable over the quarter, which partly reflects the higher cost for IMO 2020-compliant fuel compared to HFO.

Ship operating expenses, including dry dock and estimated OpEx on short-term leased in vessels was $55.5 million for the quarter. Of this amount, $10.6 million relates to dry docking compared to $9 million in the previous quarter and $4.9 million relates to estimated OpEx on leased in vessel, which is down from 6.2% in the previous quarter. Effectively, the running OpEx on our own fleet decreased by $1.3 million compared to the previous quarter. This is despite operational challenges related to the COVID-19 pandemic.

G&A was $3.2 million for the quarter, which is a decrease of $0.8 million compared to previous quarter. Depreciation increased by $5.4 million, mainly due to reclassification made at the end of 2019 from operational to financial lease of 7 other vessels leased from Ship Finance. This reclassification moved lease expenses from charter hire to depreciation and into financial expenses, and the reclassification is then the main driver for the increase in financial expenses of $2.2 million.

Due to the severe market conditions experienced during the quarter, we have taken an impairment loss on leased vessels, where $70 million relate to 7 of the vessels on financial lease from SFL and $24.2 million relates to long-term operational leases. Worth noting is that under U.S. GAAP, only the asset side of an operational lease is tested for impairment, and 2 of the operating leases are taken in on index-linked charter rates and the benefit from lower payable rate is not reflected in this impairment calculation.

As U.S. interest rates dropped significantly during first quarter, the company booked unrealized losses of $23 million related to our portfolio of interest-rate hedges. And further, we booked gains on FFAs for $3.1 million, which is offset by a loss on bunker hedges of $3.1 million. We also booked an unrealized loss of $8.4 million related to our shareholding in Scorpio Bulkers.

Adjusted EBITDA came in positive at $12.3 million for the quarter, and we achieved a TCE per day on the entire fleet of $11,076 per day compared to $21,668 per day for the previous quarter.

Moving on to the cash flow. The company entered the quarter with $163.2 million in cash, and during the quarter, we drew down $35.5 million on scrubber-related financing. This is partly from banks and partly from ship -- SFL. Cash flow from operations was negative with $4.8 million, due to the weak market and as well, a negative change in working capital. The company made regular principal payments on debt of $21.9 million and paid additional $18.8 million in -- under financial leases. Investments during the quarter mainly relates to the scrubber installations and amounted to $16.6 million. And during the quarter, we paid $7.2 million or $0.05 per share for the dividend of fourth quarter.

Following other minor cash outflow. Cash at the end of the quarter amounted to $128.4 million, which includes restricted cash and is a decrease of $34.8 million from the start of the quarter. Going forward, the company has no significant capital commitments. But that being said, we have a high focus on preserving our cash in this challenging market and a focus on increasing our cash position, should the weak market conditions persist.

Looking at the balance sheet. The most notable change this quarter is a $94.2 million impairment that I mentioned earlier, that reduced the right of use of assets significantly. In addition, short-term debt increased by $308.8 million as one of our loan facilities for 14 Capesize vessels matured on March 31, 2021. This means that it gets classified as short term. But the company expects to refinance this facility well ahead of maturity. At the end of the quarter, the company's book equity was 48%.

Under credit facilities, as I mentioned, the company has 1 facility that matures within the next 12 months, and we expect to refinance this facility prior to maturity. The remaining facilities, all of which are term loans with reputable shipping banks, mature in 2023 and onwards. I should also mention that we are in compliance with all covenants on our debt facilities.

In the P&L, the company shows fully burdened OpEx costs, including dry dockings, costs for not scheduled nonrecurring incidents and fee to external managers. The running OpEx was slightly down compared to previous quarter despite operational challenges related to the COVID-19. Daily running OpEx ended at $5,300 per day for the Panamaxes and $5,900 per day for our Capes.

Like the previous quarter, dry docking activity was high in the first quarter. And despite challenges related to the pandemic, we managed to complete all scheduled stocking with limited delays and limited extra costs. We did look at the possibility to postpone some scrubber installations due to the prevailing market conditions, both for the freight, but also the fact that the spread between HFO and compliant fuel has narrowed. But equipment was already bought and the installation was planned, along with regular class related drydock, and by that, we decided to complete the installations as scheduled. And by now, all scheduled scrubber installations are completed and the company has not made any decisions for further installations. Scheduled dry docking activity going forward will be significantly lower than in the previous periods, as only 5 vessels remain to be docked during rest of this year.

That ends my presentation, and I hand over the word to Ulrik to take you through the markets.

Thank you, Per. So looking at the market and the near-term market outlook, as mentioned in the introduction, the quarter was heavily impacted by the COVID pandemic. The emergence of the virus coincided with what is seasonally the weaker period of the year, creating a near-to-perfect storm.

As it appears on the graph, the fleet utilization fell dramatically to around 80%, putting the freight under pressure. There were a number of reasons for the drop. The Brazilian iron ore export, to begin with, the client saw the lowest level seen since 2013. The decline was attributed to a combination of heavy rainfall beyond what is normal for the season and maintenance. But of course, as the COVID spread this also impacted negatively.

With demand across the world disappearing almost overnight, the steel producing countries were forced to reduce their output, too. Particularly, the European steel producers were hit hard, but also the Japanese and Korean producers had to lower their production, naturally reduced deal output means reduced demand for vessels. The last driver on the demand side I want to point to for Q1 is the demand for coal, which also suffered due to the economic slowdown. As China gradually locked down during the quarter, the power consumption reduced as well, causing the demand for vessels to drop.

Finally, if we look at the supply side, the delivery of 31 Capes during the quarter also did exert some downward pressure on freight. So all in all, the quarter was a quarter of headwind. And we are, of course, happy to put this behind us, but it's also a quarter in which we are satisfied with having managed to deliver a positive EBITDA, as Per just outlined.

If we turn the page to the next slide and we look at the outlooks for the dry cargo shipping market, then of course, we're already well into Q2. And thus, we can conclude that we are not entirely out of the woods yet. The negative trend that began in Q1 and that I just described, is not completely over with, and we are yet to see sustainable earnings in Q2 up until now. However, that said, we are beginning to see signs that are indicating we are on the road to recovery, not only because we're entering what has become the strongest part of the year, second year where our Cape rates, for instance, have been strong in the last 8 out of 10 years.

There are also a number of other reasons for us to have a certain optimism. First and foremost, the COVID-19 has begun to release its grip, and we expect a gradual return of GDP growth and this is, of course, being aided by increased activity and fiscal stimulus packages. Last week, China announced a large infrastructure-focused stimulus package, standing at $667 billion. It's almost 20% larger than the package Beijing unleashed in 2008, in the wake of the collapse of the Lehman Brothers. Undoubtedly, this will have a positive effect on steel demand. And as and when the -- as and when, sorry, the infrastructure projects are sanctioned. It's also worth noticing that Vale's updated production figures for the remainder of the year is about 40% above what was exported in Q1.

As the rain season ended in April, we have seen an increase in export volumes. And we saw also almost an immediate positive reaction for the Cape rates, which of course, historically have enjoyed a high correlation with the Brazilian iron ore exports. We expect that the positive development in iron ore exports from Brazil to continue, and we see it as an important driver for potential recovery. With iron ore stock price in China relatively low and steel prices high, the Brazilians have a lot of incentive to get the export moving.

If we look at the outlooks for the supply side, and we turn the page, then it also looks relatively positive. The influx for the remainder of the year is assessed to be around 6%. However, the net growth in the fleet would be less, given Vale's commitment to scrap 25 VLOCs, but also because of a general acceleration of scrapping as the traditional scrapping countries are opening up again, having been closed down during the COVID. Finally, we do expect to see slippages in the deliveries due to COVID, so we don't see the net growth in 2020 as alarming.

If we look into 2021, we are right now looking at a very modest order book of just around 3.2%. It's important in this connection to underline that if you order a vessel today, it will not be delivered before 2022. So there would be no more additions to the fleet supply for next year. With an aging fleet and bunker prices increasing, making older tonnage less competitive, we see a fair scrapping potential next year, and we expect to see demand growth outstrip supply growth.

From 2022 and onwards -- well, for 2022, specifically, the order book stands at 0.9% of the fleet. And of course, yes, bulk orders will be placed. But given the uncertain situation we have right now, and more importantly, the question marks that are hanging over what would be the future technology, we do not expect the order book to swell. So all in all, the short one, let's call it, until the end of the year, we are seeing signs that we have bottomed up. For the longer run, 1 to 2 years, we see the market improving further as the world normalizes and the supply side growing at a slower pace.

Turning the page to the last slide. On ESG, then I think it's important to remember and underline that Golden Ocean's desire to combat climate changes has not changed despite the challenging markets. Although shipping is the most efficient form of transportation of goods and dry cargo vessels belong to the best-in-class, when it comes to CO2 emissions, we cannot use that an excuse for not acting. In Golden Ocean, we believe sustainability would be one of the main drivers of return in the years to come. We are convinced that improving energy efficiency and reducing emissions will provide us with both environmental, economic and competitive advantages.

We've therefore published an ESG report, actually for the second year running, to provide investors, banks and other stakeholders with easy access to this very important nonfinancial information. The report is based on internationally recognized standards and methodologies, and it allows everyone to follow our efforts in reducing our carbon footprint. It's important to remember that ESG is not just about battling climate change, and as a part of addressing sustainability in a broader perspective, we have identified 4 sustainability goals where we believe UN -- sorry, UN sustainability goals, where we believe Golden Ocean can contribute. These are climate action; peace, justice and strong institutions; life below water; and industry innovation and infrastructure. These goals are closely tied to the industry we are part of and the goals represent material (inaudible), which we monitor. As mentioned earlier by Per, the full report can be found on our website, and we encourage everyone to download it and read it.

This concludes today's presentation. We thank you for listening. We will now go to the Q&A session, and I will hand the word back to the mediator.

(Operator Instructions) Your first question today comes from the line of Gregory Lewis.

So going through the -- you kind of -- the cash flow through the quarter, you highlighted the scrubber funding. Now a lot of your competitors have been financing their scrubbers with debt. It didn't look like you did that during the quarter with that -- with the scrubber installations. Now that those are in, is that an option where you'd be able to borrow against those scrubbers, just as we think about -- as we look at Q2, based on where rates are, we're looking at another -- clearly, another challenging quarter and maybe a challenging back half of the year. So just trying to understand what levers the company has to kind of increase cash and/or liquidity?

Yes. Greg, as you can see from the cash flow, we have actually financed, out of the 23 scrubber installations we have done, we have financed, in total, 9 from the bank facilities, of which we draw $18 million in this year and the remaining $9 million in previous quarter. And we have also financed, through Ship Finance, out of the leases, $17.5 million for the 7 scrubber installations. So we have actually financed 16 out of the 23. But the rest is taken by equity. So we have actually leveraged on that during the quarter.

Okay. So that's new. So then -- okay. So then as we think about the market that we're in right now, I mean, clearly, you slashed the dividend. We're kind of in a hunkering down position. What other -- are there other -- how else should we be thinking about, as -- like I said, I mean, rates are challenging, it looks like we're going to be facing another cash outflow. Cash is going to continue to trickle lower here through the summer. Just kind of curious what else the company can do. Like are we -- is there the potential for asset sales? I know you have the debt refinancing. You kind of alluded to the fact that you want to do that in advance. Is there the potential to -- when this roof financing, whenever it starts to expand upon that, i.e. borrow more than you'll be paying down? Just kind of trying to understand what the company can do to kind of inject some more liquidity into the balance sheet?

And just to start with it. What (inaudible) is probably, is that they have very limited CapEx going forward. So it is kind of running CapEx. But as you say, in -- we will turn every stone that we can in order to increase and preserve our cash position. And obviously, cutting the dividend, this is one of them. And then we will also look into the various financing and other means to preserve it out, being able to be too specific on that as of today, of course.

Okay, okay. Great. And then just on the macro. Clearly, you alluded, hey, this is part of the -- this is a little bit counter seasonal. It's been very public that Vale has not been -- for various issues, have been underproducing relative to their expectations. We'll see when Vale is able to come back online and really increase production. But barring their ability because of whether it's COVID issues or other issues, where could we see other pockets of additional seaborne iron ore coming into the market? Is that something that -- where can we see those pockets? And just given where iron ore prices are, are you hearing about the acceleration of production from maybe facilities that were shuttered or other? Just trying to understand where we could maybe see some incremental demand for iron ore, just given the fact that Vale really has been underperforming its production targets at least through the first, I guess, 5 months of 2020.

Yes. Thank you for that. I think to see a meaningful recovery of the market, we really need to have Vale exporting. And whether there are pockets elsewhere that could aid us, I'd like to maybe have Thomas have a comment on that.

Yes. Sure. Thank you. Thank you for the question. I think that Canada is obviously a place where we can see already more cargoes than usual, and there is potential there for an increase on export of iron ore that would be compromised as well, quite important for our markets since they are quite long frontal or you source your tonnage from the Atlantic market. West Africa potentially, there could be some upside from there, although we haven't seen that in the market. But of course, with those -- at today's price, as you said, some of the operations that have been shut down, I heard they are in talks to start up again. But yes, as Ulrik correctly said, I think Vale is clearly -- we need Vale back and seasonality on the weather should be over. Coronavirus is an issue, of course. We don't know really what is going to happen, but there are all the cards for them to come back and normally, they are coming back over the summer. So that's the situation right now.

Your next question comes from the line of J. Mintzmyer, Value Investor's Edge.

So the first thing I wanted to address is we're in a very challenging Capesize market. Hopefully, the rates will start to come up a little bit. As we're looking at modeling your cash flows going forward, I know you normally don't give guidance on a percent fixed going forward for the quarter, but I also know you have ECO vessels, and you've completed your scrubber program, so you're likely to outperform the benchmark rates. How can we think about the current spread for the scrubbers in this environment and also for those ECO vessels? Is that like $2,000, $3,000, $4,000? What's the sort of spread that you hope to achieve this quarter?

Yes, that's a good question. As you say, normally, we don't give guidance, and we would also like to avoid that today. However, as you correctly pointed out, our vessels are, generally speaking, modern and many of them have scrubbers on board. So what we see at the moment is that, of course, the forward curves, we can outperform them because of our vessels. But the spread to talk about that, we would probably take at around $3,000 to $5,000. But of course, it's a very moving target, and it depends on actually achieved bunkering. It depends on many factors. So to put a fixed number on that, I cannot do, but this is a range that at least we are operating with at the moment.

Definitely makes sense. So will pencil in $3,000 to $5,000 and see how that turns out. Greg already addressed this question a little bit, but looking at your credit facility that matures in March of 2021. I know you can't speak with certainty at this point, but is the primary plan to replace that with a similar facility? Or do you think you'll need to tap into a lease or sort of alternative financing for that one?

Yes. You basically answered that yourself. It's a bit too early to talk about that. And we actually also think it's too early to start. Given the -- we haven't really started to look at it. It's close to a year ahead of us. And given all the other uncertainty in the world we are facing, both in our market, but also in other markets and the banks, I think they have enough on their plates. So to start to discuss that in a meaningful way already now or that's a bit too early. So I think we just have to come back to that. And -- but we will, of course, explore various options for how to finance or refinance those vessels.

Next question comes from the line of Lukas Daul of ABG.

The first question I had was on the impairment that you booked in this quarter. I mean you booked it on the leased vessels. Was there any specific reason for that? Or why wasn't it sort of applies to your own vessels, too?

Well, that's -- yes, basically following U.S. GAAP accounting standards for these matters. And then all our own vessels, they -- well, we saw that the indicators -- this is a test that you do based on the indicators and we see that -- saw that down due to the drop in the market and drop in the market cap indicators were there. So they had to do the test through test. And all the owned vessels, they have managed to -- or they passed the test on the book value, but these leased vessels, they didn't pass the test that is kind of quite thorough test. So that's why it ended up on a whole of the leased vessels, but it has mostly to do with its shorter remaining lifetime of the leases than it's on our own vessels.

So it's the same but it's which vessel that falls in and out.

Okay. Okay. Good answer. And then on -- I mean looking at the market going forward, obviously, you know behind the fact that it's challenging. So in terms of maybe adding some coverage at levels that would be around -- or your cash breakeven. What are your thoughts on that? Are you sort of going to stand in there and play the spot market? Or how are you thinking about sort of bridging the weak market?

Yes. Thanks for that. Of course, today, we presented Q1, but we have not been standing still in Q2, and we had a better -- little bit of a recovery in the last couple of weeks. And without saying too much, I can tell that we have taken the opportunity to book in certain coverage at levels above our cash breakeven. And we will continue to do so as and when we feel it is something that makes sense. It's also a way of, of course, securing cash. So we will take an opportunistic approach to that. And we don't have a strategy that is just a spot play. We will try and manage as and when we see there are opportunities.

And on your plans to sort of look at additional liquidity injections, I would assume that you are looking at all the available options. But are there still any vessels in your fleet that are unencumbered?

That are, excuse me?

That don't have a secured debt attached to them?

No. All our vessels are -- have secured debt. It's -- we are financed through -- only through our CIB leases, of course, that we did the impairment on, but the rest is financed through term loans with regular banks.

Okay. So everything is pledged as committer. Okay.

Yes.

We have no further questions, sir, if you wish to continue.

Yes. No, that will then conclude today's session. We thank you for the interest in Avance Gas and -- Golden Ocean, and we look forward to seeing you later. Thank you very much.

Thank you. Ladies and gentlemen, that does conclude your call for today. Thank you all for participating, and you may now disconnect.