Golden Ocean Group Limited (OTCPK:GDOCF) Q4 2013 Earnings Conference Call February 25, 2014 9:00 AM ET
Herman Billung – Chief Executive Officer
Per Heiberg – Vice President-Finance
Ola Ekern Rugsveen – Carnegie Investment Bank AB
Good day. And welcome to the Q4 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.
Thank you very much, and welcome everybody. We’d like to take you through the highlights and financials and operation, and that will be done by Per Heiberg, and then we quickly go through some macro slides before we leave it for you to ask any questions. So then please Per go ahead.
Yes, hello, some of the highlights. Golden Ocean reported an EBITDA of $32 million in Q4, which has been most the same as we had in Q3. The profits for the quarter is $18.1 million and the earnings per share is $0.04 per share. For the full year of 2013, Golden Ocean reported profit of $84.5 million. The Board of Golden Ocean has declared a dividend for Q4 of $0.025 per share.
Since the last presentation Golden Ocean received $14.1 million in up-front charter payments from one charter, I will come back to that later on. And in early January Golden Ocean issued $200 million Convertible Bond, and in February Golden Ocean bought three 2012-built Kamsarmax vessels and I’ll also come back to those later on.
I will then just go to the P&L. The operating revenue for the Company is down compared to Q3 that is mostly related to lower activity on the trading business, but it’s partly offset by higher revenue on the trading in the spot market due to the higher market rate in Q4. Vessel voyage expenses and charter hire that are related to the short term trading. It’s been also down from previous quarter.
OpEx, on the owned vessel, it’s slightly lower in Q4, but not more than normal variation over quarterly variations, it was also a bit high in Q3. On the other gain we have almost unchanged since last quarter, but behind those numbers we have some profit on FFA and also the profit from the joint ventures. So, included in that number is also the profit from the sale of Golden Azalea in Q4. This takes us to an operating profit of $21.9 million.
During the quarter, the long-term interest rates went up with and our hedges swaps that benefited from that. So, all in all, Golden Ocean report a profit for the period of $18.1 million which is $2 million higher than in Q3.
In the balance sheet, then we move to that. It’s vessel and equipment net is up during the quarter, since we took delivery of Golden Diamond in early October. And vessel under construction is pretty much unchanged since last quarter and its not only consists of what we have paid in under eight Supramaxes under constructions.
Investments in joint venture is down, during the quarter since we sold Golden Azalea and have also financed Golden Opus, and the proceeds from the financing were paid out to the owner of the joint venture.
Under canceled newbuildings, $192.9 million, it’s then paid as short-term receivables as earlier. Under available-for-sale financial assets that consist now of the shares that we own in Korea Line and in Greenship Bulk Trust. And debt on the canceled contracts that’s been long classified as short term debt in the balance sheet. Based on balance sheet an equity ratio of $52.7%.
We then move on to the operation, and we first go through deliveries and charters. As I mentioned briefly in earlier, we took delivery of Golden Diamond, which was the second vessel bought from Pipavav in May, 2013. And that gives us a total of five vessels that have taken from Pipavav in total. In November, we sold Golden Azalea that were bought together with a partner in a joint venture, that was delivered to the new owner in November.
In December 2013, we extended an agreement that we actually made last year in 2012 with one charterer. They pre-paid the hire for the coming year for 2014. And then have a lower rate going forward into 2014. This was done on three vessels, all three 2011 Kamsarmaxes.
In February 2014, Golden Ocean bought three-2012 Korean built Kamsarmaxes together in one transaction. The vessels will be delivered to Golden Ocean when they are discharged, and that’s most like to be during April this year. So, vessels they are unchartered currently; one is on an index linked charterer, 13% above the market with a maximum period of up to Q2 2016. One vessel is on Time Charter Contract until Q4 2014 at 15,900 net and the last vessel is currently on short term time charter, but will redeliver to us from that charter not that many days after we take delivery of the vessel. So, in all practical purposes it’s a swaps vessel.
That leads up to the open positions of the Company. This overview on the content vessels that are we defined as core fleet. This is the owned vessels or vessels on very long term charter or they are both. We see from the table that on Capesize more or less the entire fleet is open and exposed to the market. So, they’re currently trading in the spot market. It’s only one vessel that’s still on charterer.
For Panamaxes we have some more coverage, but still for the remainder of 2014 we have 60% of the fleet exposed to the market and for the next two years it’s 70% open. In this overview we have added the three Kamsarmaxes that give the most of the difference since the reap [ph] of the last quarter.
Moving onto OpEx of the vessels. As I mentioned earlier, we have a bit high OpEx on the Panamaxes in Q3 that has come down to a more normal level, and as we can see from the diagram to the right, we have approximately the same OpEx in 2013 as we had in 2012. All this number are excluding cost of dry-docking.
On the newbuildings side not much has happened since last quarter. We’ll have eight Supramaxes, two to be built in Japan and six in China. Steel cutting have commenced on the Japanese vessels during Q1 and the construction growth have to add. None of the vessels are still financed. We still see a strong interest for financing the vessels. So, it’s by the choice of the company that they are not financed.
Then a little bit about the situation at Jinhaiwan that we have canceled nine – total of nine contracts. These are no changes in the numbers, all nine that they were canceled. We have received and they are in various stages of the arbitration process in London. And we have received a Declaratory Award on three of the vessels and for this we are seeking a final award, and I’m waiting for that. And the six other contracts they are in various stages, but during this quarter of Q1 2014 we will have completed all hearings in London and the process we move from there. The Board is confident that we have a strong case in all these arbitrations.
Then just on small slide on the corporate transactions. The joint venture owning Golden Opus obtained financing of the vessel in Q4 and the proceeds were repaid to shareholders in the quarter. In October, Golden Ocean Board invested $10 million in Greenship Bulk Trust, which is – so far it has proved to be a good investment and the market value approximately $12.5 million.
When it comes to Korea Line, they utilize an option to repay their debt to the creditors earlier than they had to against discounts. So, early in October, Golden Ocean received $1.1 million from this payment, that’s booked under other income in the financial statement. And currently, Golden Ocean holds 170,000 shares in Korea Line, which is only remaining part from the claim. And the current market value of those shares is approximately $4 million. All the shares are freely tradable and can be sold at any time.
And then to the Convertible Bond, Golden Ocean issued in January, issued a bond of $200 million with a five year tenor coupon and with a 3.07%, with a conversion price of $2.86 per share. The owners of the bond they are fully protected when Golden Ocean payout dividends and then the conversion price will be reduced accordingly.
And with that I hand over to Mr. Billung for his presentation on the macro update.
Thank you very much Per. Just to let you know that the sources for the macro update on the slides are either by RS Platou or Nordic China Advisory. In 2013, for the first time was quite sometime the total tonnage demand was higher increase in the – tonnage demand was higher than the supply, slightly low, but that led to a higher utilization. Close to 85% of the fleet was utilized on average in 2013, but there is a big difference between first half and second half and there we saw that market really recovered end of the year, which has made the main reason for that brisk increase in iron ore purchases from China and to say, normal seasonal restocking.
On the deliveries, after three years of very high supply growth we came back to say more normal demand growth than supply growth, because as I stated, I mean, more than 7% supply growth in the other segments should result in lower utilization, but again due to the high demand growth we look more balanced throughout the year.
If you look also on what happened in 2013, about 59 million deadweight ton was actually delivered, again lower than the official order book. Delivery ratio around, say, 75% to 80% of the official order book. Given the fairly high expectations which kind of appeared or materialized throughout 2013, scrapping was little bit higher than expected and all in all, we had a net fleet growth of around 36 million, 37 million deadweight.
Looking ahead, the order book at its official order book as of today is just below 60 million deadweight, for 2014 around 45 million or 60 million for 2015 and just below 50 million for 2016. That’s the official order book. I think it’s fair to say that delivery ratio will be slightly higher compared to the official order book going forward and the main reason for that is that a lot of these private yards are not kind of part of the official order book anymore, which means that it’s most of what has been done over the last year, two years has been from higher quality yards.
Having said that, it’s interesting to note that talking to Japanese yard, they are more or less sold out through 2016, same is the case for the state-owned Chinese yards. While obviously there is always some capacity available at the private Chinese yards, but they are still struggling to get new orders. So all in all, the supply side continue to look fairly bright within same average fleet growth this year and the next two years at around 5%. Then obviously the estimate for scrapping is lower given that expectations for an improved market are definitely there.
Then, as we do in every kind of quarter, we again have to discuss China and in spite of the general slowing economy in China, the impact of global dry bulk trade was higher than any other year except for 2009. And last year China contributed to 83% of the increase in global dry bulk trade. Out of this around 36% was iron ore, 18% coal, minor bulks accounted for closer to 30% and grains about 2%. So, it remains a China story for good and for bad, but it’s been a blessing so far for the dry bulk sector.
If you look at then the iron ore market, to the right we will find the inventories. The blue is in actual millions of tons, but the more interesting part is in number of days. I believe that during January the inventories are slightly higher than they were at end of 2013 because of the high number of cargos, we saw in November and December that arrive at Chinese ports in January, and that’s kind of normal seasonality. We expect now that we will see both February and March to be slightly lower, and then I think it’s a fair chance that we will see a new restocking taking place later in the spring.
To the left you see the iron ore price spread between domestic China versus the world market. And I think it’s fair to say that given the high or the big increase in supply of new iron ore going forward, there is a fair chance that iron ore prices will be under pressure, which is a blessing for owners of dry bulk vessels. And BHP when they release their quarterly results one and a half week ago, they kind of stated the same that they expected iron ore prices to be under pressure.
I just mentioned new capacity coming into the market and you will see in 2014 a total of 80 million tons of new iron ore is expected to be available and more or less the same number in 2015, and those numbers, I would say, from a capacity point of view, those are should be fairly accurate given that they are within a fairly short timeframe. So, it’s not project that are heading in time like 2016 and particularly 2017.
If you look at what the Nordic China Advisory is expecting, they foresee iron ore imports should be strong and growing to a bit around 8.5% in 2014 and 7.5% in 2015, and this is kind of a function of price and quality. And you’d say that most of the big miners in Australia and Brazil respectively have a break-even cost of around $70 to $75, so and with a price in spot market just below $120 per ton. The margins are still definitely in their favor.
IEA have their energy outlook through 2020, I mean, obviously coal is kind of a source of concern now or a topic of concern given more focus on pollution and emission. But given that we expect – most analyst expect that the energy mix have to remain the same at least in the foreseeable future in China even though they are investing heavily into solar energy, alternative energy, but on the other hand the shale gas is not available, within the next few years. So all in all, it’s expected that both India – South East Asia and China will continue to increase coal imports while EU and Korea will decrease slightly.
And again, turning back to the China Advisory, what they expect will happen on coal imports over the next two years. They believe it will reach 375 million tons in 2014 and maybe at highest, 430 million tons then I’m talking of imports into China. So, I mean still it looks like that the two major commodities based on coal imports to India and China plus iron ore imports to China will kind of support the demand growth.
I have briefly mentioned the environmental politics, which could support dry bulk demand, and as one example, a large part of Chinese mining in iron ore and coal are located in the Hebei area, which is not that far from Beijing. And mining of low quality iron ore consume huge amounts of coal for heating in order to refine the ore and that should also from an environmental perspective support imports. But it’s also important to note which, I would say from a social or say from a risk perspective politically in China, I consider the environmental issue to be higher up on the agenda every month going forward.
So they have to do something on environmental issues, but so far it looks like the government is kind of stating that they will do most of – but this is depressing matter, but all in all, the pollution should not be a risk for higher imports rather the other way around.
Apart from that there are a few risk factors. I have kind of again opened this macro presentation by talking about the China story and what are the things to watch. I think are two things, it’s the real estate prices and it was quite interesting to see that the one would say the most notorious “Ghost Town” coal, Ordos in China which has a lot of empty buildings. They still experienced a price rise of more than 12%, so obviously there is a lot of speculation in real estate in China, and it’s important just to follow what’s happening in the real estate market. It looks as we speak that the policy [indiscernible] taking some measures in place to kind of try to cool down what could be say, little bit over heated real estate market.
The other risk factor that are being mentioned for quite sometime and which is also have in mind this is what is called the shadow financing which now accounts for approximately half of new debt in China.
And on the next slide, it is just an overview on the distribution of the shadow debt, I am not going into details on that. It’s just for your reference, but having said all this, the Chinese government, they have a lot of financial resources about $3,800 billion in currency reserves and ownership in 117 state-owned companies which are – and out of that 77 on the Fortune Global 500 index.
What we try to say here is that we believe that the Chinese authorities, the Chinese leadership, they have sufficient ammunition, methods to kind of coupe with these shadow financing or potential bad debt. But I just want to mention that on housing prices that’s the biggest risk factor is at the moment. So that kind of ends our presentation. We then like to leave it to you, if you have any questions and we will try to answer as possible.
Thank you very much. Operator, are you there?
Thank you. (Operator Instructions) We will take our first question from Ola Rugsveen of Carnegie. Please go ahead. Your line is open.
Ola Ekern Rugsveen – Carnegie Investment Bank AB
Good afternoon, gentlemen. Thank for taking my question. You mentioned the up-front payments you have gotten from the extended charter agreement for three vessels earlier on your call. Could you please share some more details about this which vessels is this concerning? Or which vessels, is this deal concerning and how did you book the $14.1 million? Was it booked in both P&L and the cash flow this time around or only in the cash flow? Thank you.
To take the last question first, the cash is obviously in the cash and we book it in the balance sheet as prepaid higher. And then it will be portioned out during 2014 as we complete. It will not affect our P&L in any significant matter actually and it’s related to the Kamsarmax vessel Golden Empress, Golden Endeavour and Golden Endurer.
Ola Ekern Rugsveen - Carnegie Investment Bank AB
We will take our next question from Hans Klaas [ph] who is a private investor. Please go ahead. Your line is open.
Good afternoon, gentlemen. I just had a question with respect to the situation at the Jinhaiwan yard. In the balance sheet it says that Jinhaiwan still owes Golden Ocean about $193 million, but then in the slide on the Jinhaiwan situation that says that the installments to be refunded are $175.3 million. Could you just clarify that for me please?
Yes. The difference there relate to cost that has occurred for the Company. We have been working on this contract since 2008. So, there are supervision fees and there are financing fees, legal fees, and all these kind of cost related, cost to the vessels. So, that amounts to the difference between the two amounts.
Okay. Thank you. Then basically Jinhaiwan yard owes Golden Ocean $175.3 million. Is that correct?
That plus interest. Actually the refund guarantees provide are also for interest that should be calculated on top of that amount. So, yes, it will be, but that’s the interest. So it basically the base amount, but they held lot of time to $175 million, yes.
We have no further questions at this time.
Okay. Then I would like to tell all the participants to, thank you all of you for participating and talk to you next quarter then and thank you. Bye-bye.
Thank you. That will conclude today’s conference call. Thank you for your participation. You may now disconnect.
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