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Executives

Herman Billung - Chief Executive Officer

Per Heiberg - Chief Financial Officer

Analysts

Dan Togo - Handelsbanken

Rune Sand - Carnegie

Golden Ocean Group Limited (OTCPK:GDOCF) Q3 2013 Earnings Conference Call November 26, 2013 9:00 AM ET

Operator

Good day. And welcome to the Q3 2013 Golden Ocean Group Limited Earnings Conference Call. Today’s conference is being recorded.

At this time I’d like to turn the conference over to Mr. Herman Billung. Please go ahead sir.

Herman Billung

Yes. Thank you very much. And we are pleased to welcome those who are listening in and watching the webcast. We have the following points on the agenda. Per Heiberg will take you through some highlights, financial operational, and then I will quickly go through our macro update and then any Q&A then. So then I’ll give it to Per.

Per Heiberg

Hello, good afternoon. At start just go through some highlights, Golden Ocean reported an EBITDA of $31.9 million for the quarter. The net profit is $16.1 million, and earnings per share is $0.04. The Board of Golden Ocean has declared a dividend for Q3 of $0.01. And during the quarter, Golden Ocean took delivery of one Capesize and one Handysize both 2009 built. We will come back to that later, but that Handysize is already sold and delivered to new owners.

Then I’ll go to the financials. On operating revenue, it’s down over the quarter, but due to this one-off that we had in Q2 of $30 million, the underlying revenue is actually up by approximately $4 million. On vessel operating expenses, those are a bit high during Q3 and this is mainly related to Golden Opportunity which was in-dock in Q3 and then normally that also implied some extra source, and also due to some higher maintenance on our ice class Panamaxes. The Capsize that are in line with the earlier quarters.

Charter hire expenses is down during the quarter, that’s mainly related to the reversal of some provisions that were taken in earlier quarters on hire-chartered in vessels which are reversed in Q3 and reduces the charter hire expenses.

Other gain was up due to positive mark-to-market on FFA and bunker hedges, and also some positive contribution from our joint ventures. Other financials is also up in the quarter compared to previous quarter, mainly related to sale of some of the shares in Korea Line.

On the balance sheet, the main thing to comment there is that if you look at vessel under construction, the remaining part there is now related to the Supramaxes that are on order. Since all that we have paid on Jinhaiwan vessels are moved into refundable instalment, these older vessels at Jinhaiwan are now [cancelled] (ph). The investment in joint venture is rather high at the moment, but they will be reduced during Q4 due to the sale of Golden Azalea Handysize, and also that we will draw a loan on Golden Opus, the Capesize that we built in September.

And as I said, all the Jinhaiwan vessels are now reclassified to short-term receivables. Further, we have during Q3 been able to refine loan facility that were earlier classified as short-term debt status post maturity in Q1 ‘14, this has now been refinanced at the [balloon] (ph) and classified as long-term debt, and transitioned all debt on cancelled vessels at Jinhaiwan are classified as short-term. The equity ratio of the (inaudible) now 52.2%.

On the operational side, Golden Ocean took delivery of Golden Diamond in October. This is the second of the two vessels that we bought from Pipavav back in May 2013, and in fact the fifth vessel that we have taken delivery of from Pipavav.

During the quarter, the company entered into a seven year time charter with three optional years and purchase option for Japanese built Supramax. This will be delivered to the company in first half of 2015.

And as mentioned earlier in September, Golden Ocean took delivery of one Capesize and one Handysize in joint venture that with a cargo owner. We have already been able to sell the Handysize basically because that’s also not within the scope of our company and we were able to obtain a favorable price for it. We have also obtained the financing, our committed financing on the Capesize which will be drawn in during the next months.

We’ll then move to the open position. For those of you that follow us closely, not much has been changed on this. On the Capesizes, they are gradually coming off charter basically starting from now and into 2014. And at the end of ‘14 and in ’15, we are more or less 100% exposed to the spot market.

On Panamaxes, we have a bit more coverage, but also in the same as long as or when vessels come off charter, we will (inaudible) now to seek some short-term or trade them in the spot market. We are not going to enter in any new long-term deals during the quarter.

Operating expenses, as mentioned in the P&L is quite high in Q3 on the Panamaxes, the Capesizes are in line with what we have seen in previous quarters and this has to do with the docking of Golden Opportunity, also as I said, some of the ice classes are expensive or more expensive than the regular Panamaxes.

On newbuilding, now after that we have cancelled all the vessels at Jinhaiwan, our newbuilding schedule remain only the Supramaxes from JMU in Japan. And we have also declared options, the three options on Chengxi with delivery in first half of 2016. So the total newbuilding program is 8 Supramaxes, normally the vessels are at the moment financed, but the experience due to indication from financial institution and we don’t see any problems if we would like to finance them at this stage to build things, but it’s too earlier.

Just to guide you through the Jinhaiwan situation, as I said all the 9 contracts -- remaining contracts are at the moment cancelled. We have in total paid instalments of $175.3 million and their corresponding debt on these contracts are $43.2 million, this excludes any interest.

In October, the company received a positive award for the two first Kamsarmaxes that were cancelled back in October 2012. This award declared that the Golden Ocean had the right to cancel and we are now in the process of seeking a final award for repayments on those contracts.

For the seven other contracts, they are in various stages of arbitration process, but we see good progress even though with (inaudible) faster, but we are quite, the Board is quite confident that we have a really strong case and that the award will be in the same line as for the two first ones.

Transactions, as I mentioned, we refinanced six of the vessels during Q3, which is Channel Alliance and Channel Navigator together with four Ice-Class Panamaxes from Zhoushan. We were able to refinance through the loan on balloon on the loan, and we have a five-year tenor on the new loan. It needs to be said that on the two cases that are built in 1996 and 1997, the tenor is only three years.

Our situation with Korea Line, we originally had in Q2, we had 20,000 shares in the company, we managed to sell 6,000, a bit more than 6,000 of those shares during Q3. And we have received 156,000 new shares that were released for trading now in November. In October, Korea Line, they utilized an option under the rehabilitation plan to repay all the long-term debt from the bank in cash and we will see that in late October which was $1.1 million and in October Golden Ocean also invested $10 million in Greenship Bulk Trust, which I leave to Herman to comment a bit more on when he starts his macro presentation.

So then I’ll leave the word to Herman.

Herman Billung

Yeah. Thank you very much Per. Yeah on the Greenship Bulk that’s the company that owns, have 16 sailing Supramaxes smaller (inaudible) order and we have done some this acquisition because we like the company and we think they have a fairly similar approach to the way of operating that we have in Golden Ocean so we’ll just see what happens in the future with that firm.

Just also as I mentioned that we are going to drydock, decided to drydock Channel Alliance in Q1 2014 that’s a fairly, it’s a fairly expensive docking that we believe we are relatively bullish on the market and we believe the $3 million we have to spend on that docking is worthy effort and the intention is to then hopefully to sale the vessel some time maybe in late 2014 or ‘15 once we should be in good condition and I think the same will be with Channel Navigator when we get there little bit later on in end of Q1 or early Q2.

On the joint venture Cape, we’re also pleased that the actual price we ended up paying on the Cape after we have sold the (inaudible) is very good and some analysts have been quite accurate to estimate the price based on the inputs they have and I can confirm that the actual price for the last one we acquired was on the low 13.

And we have also peaked out just Per mentioned about on operating expenses that we have slightly higher operating expenses on our ice class Panamaxes than regular Panamax, but we see that on the earnings we achieved we’ll get that back in many times. We have fixed out two early ice class Panamaxes to deliver those recently, over through Q1 leveraged around 16,000 to 17,000 net which is absolute satisfactory.

Then to the macro, and I think there are many reasons to again to focus on a few things, obviously on the delivery things are definitely slowing down. The first nine months of the year, the net fleet growth was about 28 million [deadweight] and I think by the end of the year, I think we'll end up with around say 40 million deadweight net which is below what most competitors anticipated early on in the year.

Having said that, we are also seeing that we have had quite a lot of vessels ordered, but I think there is I see no reasons for the concern I think ‘14 and ‘15 looks quite good. I think all in all, I think net fleet growth should end up at around 4% next two years.

And this slide presentation from our owned ship [focusing] on them you’ve seen this that say in ‘14 and basically through ‘15 I think that we know already at this stage the fleet growth will be low there are not available slots not for Capes maybe one or two very few a little bit on Supra and Panamax still then obviously the jury is still out for 2016, but at this stage we shouldn’t be too worried about the supply side.

And then again then back to China never ending story looking into what is the development you see to the left there iron ore and coal and to the right other commodities. And in eight years over the last eight years I mean we have seen tremendous increase in imports. If you take the monthly imports in October this year and add it up iron ore, coal and other commodities it could be I mean China could import as much as 1.5 billion tons of drybulk commodities. And I think which I will come back to I think it’s still even though many analysts are a little bit more cautious on China, I think I will come back to I think they are, I think we will see this -- always them on board particularly for our (Inorbit) also for coal in the coming two to five years.

The next picture is showing the fleet consumption, it’s still very robust. We have and the interesting thing is it starts with the inventories are -- not going up and are fairly stable.

And turning to the next slide, you will see on the iron ore inventories and if you take that into days of consumptions, the iron ore inventories are fairly low. And I think you will see from September which is kind of -- from September to October and November you will see that most types of inventories have been commonly stocking, but there are no reasons for concern at all.

Next slide is, that is the reason why we are still optimistic when it comes to iron ore imports in spite of a slightly lower steel production in China. And the main reason is obviously that the iron ore content or the [SE] content from the Chinese domestically produced iron ore is on its way down, we see the blue line showing and they are digging out the local iron ore in a way out of the mines, but what they actually get out of it is not increasing at all and that’s why you see that why imports are up and I think they will continue to rise.

And it’s going to be extremely exciting to see what’s happening when new capacity is coming to the market, I think it’s a fairly good chance that prices will be under pressure. A lot of the domestically produced iron ore will not be competitive. If prices should remain robust then the only reason for that is that the Chinese will continue to increase their steel production at a higher speed and the [outflow] costing.

In any effect, if we then just go to next slide you see what is coming in of new capacity that is maybe little bit optimistic in Q1 2014, the common aggregate basis we are talking about maybe as much as 190 million tons of new capacity coming from Rio Tinto, (inaudible) BHP, a little bit extra African iron ore.

Again making a very simple kind of analysis on that one Capesize is carrying around 1 million ton of iron ore per year in normal trading pattern and knowing that 230, 240 Capes from order and maybe as many as 90 more than 20 years old it looks like the balance looks very, very solid in particular for Capsize.

Turning into India, we see that India has continued to increase their coal imports, it’s interesting to know that year-on-year our row estimated are nearly growth from 2012 to 2013 to be around 15 Capsize equivalents, 15 Panamax equivalents and 20 Panamaxes and around 40 (inaudible) while Handys are slightly at a slightly lower pace, but all in all India is also supporting the dry bulk market.

So kind of coming to the conclusion it looks like we are going to see a steady demand growth at around 6% in per month over the next two to three years and which will outpace to drive growth its forecast is correct from (inaudible) and you’ll see that utilization will continue to improve and could reach close to 90% by the end of 2015.

We have seen we believe that there will still be a lot of volatility going forward. The forward curve is in that [direction] which means that the market is expecting lower rates in first quarter next year, but we believe that’s kind of every dip will not be as deep as the previous dip and that we are on the trend both on earnings and also on asset values.

So that’s kind of concludes our presentation and we’ll leave it to you if you have any questions and we will try to answer if possible. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question today from Dan Togo of Handelsbanken. Your line is now open, please go ahead.

Dan Togo - Handelsbanken

Yes, good afternoon gentlemen. A question on your value, the book values as compared to [broker] base values, how are they looking right now? Did you make any impairment test et cetera for this quarter?

Herman Billung

We did not perform any impairment tests this quarter. That's something that we do more or less once a year. But if you let -- I think if you aggregate the book values of the vessels, they are a bit higher than the shorter fleet value of the vessels. But if you do the calculation, I think the shorter coverage and the shorter contract, they support the values quite well.

Dan Togo - Handelsbanken

Okay. And then on your dividend potential because (inaudible) that you are looking into increase the dividend as you receive more cash for instance on the Jinhaiwan that you have there, where do you see dividends potentially go and can you maybe touch sort of give any targets that we can use?

Herman Billung

Dividend strategy we never have that in the Group as such, I mean it’s little bit event driven. So we intend to -- our hope is to increase dividends, but we don’t want to kind of give any promises, but when we say that that’s our intention, I think you -- but this is kind of a balance whether we are going to invest money and/or to pay more dividends. So I mean that’s again we don’t -- we will never kind of give any promises on the dividend.

Dan Togo - Handelsbanken

Okay. And then finally can you maybe give a comment on the cash that you have at Jinhaiwan or the receivables from Jinhaiwan. What is the timeframe here and what sort of milestones can we look forward to?

Herman Billung

There are in total several processes going on at the same time, because each kind of cancellation or maybe there are two vessels and one cancellation and one in another, so each has its own arbitration process. We are just waiting for a final award on -- as Per mentioned, we kind of won the preliminary award. And if we are little bit lucky, this final award should be given to us before Christmas, and then hopefully we are confident that the first money should be on our account at least during Q1.

And then we have had a hearing on the second cancellation which is a senior Capesize that happened last week, I mean it’s the same kind of repeat -- this is repeating itself. We have to go through the motions, and obviously full yard, and the reason banks say they have to try every avenue to avoid paying it out, but this is just a time consuming process. But I will say that most of it what we have should be paid to us by the end of 2014.

Dan Togo - Handelsbanken

Okay. Thank you.

Operator

Thank you. (Operator Instructions) We will take our next question today from [Hans Klaas], Private Investor. Thank you. Your line is now open.

Unidentified Analyst

Good afternoon, gentlemen. I have two questions for you. And number one, there are several favorable charter agreements expiring in early 2014, especially with the Capes. Is it your intention to re-charter these vessels or let them sail at spot going forward?

Herman Billung

I think initially, we intend to sail them spot until we see -- I mean, as Per Said, we are fairly optimistic on the markets. So, at one stage we will take down the exposure somewhat, but initially I think through Q1, the market should behave extraordinarily positive, and then I think we will just keep this exposure for now.

Unidentified Analyst

Thank you. And my second question is, the $92 million refundable instalments, are they secured for financial institutions?

Herman Billung

Now they are – the thing is that they are secured through – it’s obviously , when we make contracts in either China or say in Korea, we would always do that supported by recent guarantees given by strong banks, I mean big Chinese banks in this respect.

Unidentified Analyst

Thank you very much, gentlemen.

Operator

Thank you. We will take our next question today from Rune Sand from Carnegie. Please go ahead, your line is now open.

Rune Sand - Carnegie

Yes. Good afternoon, Herman and Per. I just had three short questions. First, I just wondered if the (inaudible) the Far Eastern Jupiter, if it has been redelivered, I think it was due for redelivery in December?

Herman Billung

I think we still have a little pay left on there.

Rune Sand - Carnegie

Okay, which is due for delivery in short?

Per Heiberg

That's short (inaudible) so it’s in the optional period, so we have -- currency it is trading at a profit, so we won’t redeliver it until we have to.

Rune Sand - Carnegie

Okay. So how long could that potentially be? How long is the optional period?

Per Heiberg

I think it’s April basically ‘14.

Rune Sand - Carnegie

April ‘14, okay. And just to clarify a little bit with respect to the Jinhaiwan vessels that you have cancelled. In the report you say, you have paid $175 million in total and then you have booked a $192 million so that $17 million and this is after capitalized interest or....?

Herman Billung

The difference is up, yes.

Per Heiberg

Yeah. Couple of interest and also supervision cost in our one -- several vessels that have been built already. So that costs someone into or all costs related to the newbuilding per capitalized.

Rune Sand - Carnegie

Okay. But there is also an interest portion included in there that I just thought it, perhaps...?

Per Heiberg

Now it’s interest on over debt, the interest on over debt that what we have had on the vessels, it’s not included -- we have not booked any interest on the repayment as such.

Rune Sand - Carnegie

Okay. So potentially that's bigger curve to grow as time goes by. Do you want to focus....?

Herman Billung

Yeah. It seems like [humiliate] cost of legal fees and everything is still capitalized, it will grow, yeah. But at the same time the interest it’s that the refund guarantees also give us a title of interest on the paid instalments so that’s increase as well. So I think as time goes, we will actually benefit on that it’s more in on interest than out on expenses.

Rune Sand - Carnegie

Yeah that was my point as well. And last question with the Supramaxes options you have declared now, were they declared at roughly the same terms as the original ones, roughly $25 million each?

Herman Billung

Yeah. Exactly the same terms.

Rune Sand - Carnegie

Yeah. And will you be paying any instalments now in Q4?

Herman Billung

Mostly likely yes, we are just waiting for the [refund] guarantees again I think before we pay out. But we are -- it’s a work in process.

Rune Sand - Carnegie

Yeah. So what would typically be then our first instalment, is it 5% to 10% something like that?

Herman Billung

10%.

Rune Sand - Carnegie

10% okay. Thank you. That’s it for me.

Herman Billung

Thank you.

Operator

(Operator Instructions) There are currently no further questions in the queue.

Herman Billung

Okay. Thank you so much everybody for participating and thank you for listening in, so bye, bye everybody.

Operator

That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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