Golden Ocean Group's (GDOCF) Q2 2014 Results - Earnings Call Transcript

| About: Golden Ocean (GDOCF)

Golden Ocean Group Limited (OTCPK:GDOCF) Q2 2014 Earnings Conference Call August 27, 2014 9:00 AM ET

Executives

Birgitte Ringstad Vartdal – Chief Financial Officer

Operator

Good day and welcome to the Q2 2014 Golden Ocean Group’s Limited Earnings Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Birgitte Vartdal. please go ahead.

Birgitte Ringstad Vartdal

Many thanks. Welcome to Golden Ocean Group’s Q2 conference call. Herman Billung is not able to join today as he had to attend a funeral. So I will cover the whole presentation today. We will do as earlier, we have some highlights, we will go through financials and operations and macro, and we will end with the Q&A session.

The Q2 2014 results for Golden Ocean is $1 million, and an EBITDA of $23.2 million. The earnings per share is approximately zero. The board has decided to declare a dividend of $0.025 for the quarter, which will be paid out in September. During the second quarter, Golden Ocean took delivery of four vessels, which have been covered in earlier reports. The company received refund from Jinhaiwan on two contracts in the second quarter and then other contract in July.

If you look at the numbers, the operating profit is down by $7.5 million. The sailing vessels of such are down by $5.5 million, and one-off items are down by $2.5 million – $2 million. If you look at the sailing vessels, we have traded spots at the lower market in the second quarter than in the first quarter, and also in particular, ice class vessels had some good charter contracts during the winter season that has come off.

When we look at one-off items, we have revalued our claim towards Jinhaiwan, and this is now booked with the profit of $10.5 million, then we had negative mark-to-market movements on the FFAs during the quarter of minus $8.5 million. This is a combination of hedge and trade position, then we have booked a gain from a compensation for our old charter on Golden Feng of $5.3 million.

We also had one-off in Q1, which we’ve had a positive effect then, and that’s why there is a reduction in one-offs in the quarter. The operating expenses under depreciation is slightly up due to more of vessels in the fleet and the administrative expenses is as the last quarter.

In the finance, we have a slightly higher cost on interest rates and we have negative mark-to-market on the spot. We have sold Korea Line shares in the quarter that has been booked as a profit, they were previously under other comprehensive income, and that’s the whole value of the shares that’s now taken in.

If you look at our trading portfolio, the activity has been reduced from Q1 to Q2, and we expect that to be reduced more going forward. there is less activity and the market rate is difficult to make margins on the low market that we see today. The board of directors was also stated in the report that we expect as more negative vessels for the third quarter.

If you look at the balance sheet, the main changes is that we took delivery of four vessels in the second quarter, which has increased vessels and equipment, net.. In addition, we have reduced the receivable, the refundable installments for cancelled newbuildings by the amount received in second quarter, then we have increases it with the revaluation of the remaining receivable. On the equity and liabilities side, we have reduced the short-term debt due to down payment of $20 million in relation to the Jinhaiwan contracts.

If you look at the operation of the company during the quarter, as mentioned, we took delivery of three Kamsarmaxes in the second quarter and also one ice class Panamax in the second quarter. These have been covered in previous reports. The company has also decided to redeliver Golden Kiji to its owners in September. this was the start of the optional period on the vessel.

We have three other vessels that was part of what we call the adjacent deal, Sakura that was expanded for one-year back in April, so that will go until mid next year, and then have another optional year. and then we have Heiwa, Golden Heiwa and Ocean Minerva, where there are optional years, but also purchase options that we will have to take into consideration once we are in a position to decide on which if we should extend or redeliver those vessels. There has been no changes to our newbuilding program in Q2 and there has been no payments either. It’s in total eight Supramax vessels, built in Japan and in China.

So far into Q3 one vessel have been delayed and we expect another one to come in the quarter. And if that happens, we will have a total payment of $5 million in the quarter. The operating expenses on the vessels is stable. We’ve added four vessels to the fleet, so increasing the number of vessels that are included. So far this year, we have docked five vessels and there are three more that will be docked during the remaining part of 2014. We have so far spent $9.7 million on docking and then we expect an additional $5 million over the remaining part of the year. We have docked Alliance, and Navigator and Leader One, which are the oldest vessels in the fleet and other than that it’s five-year dockings.

Next year, we expect three to four dockings and it’s all five-year special survey, so it should be more limited in cost. The company has kept its strategy about trading the vessels in the spot market. And if you look at the Capesize vessels, the coverage is only related to ongoing voyages in the near term. Other than that the fleet is exposed to the markets.

On the Panamax and Kamsarmaxes there are still some long-term charter contracts for on Kamsarmaxes and three on ice class vessels and other than that the vessels are trading. There has been some development on the Jinhaiwan situation for the last three months, so I will spend some time on that, the three final awards that we reported that were obtained in last quarter. We have now received payments on all those awards. In Q2, we received 45.8 plus 10.4 in interest, and in Q3, we have received 38.65 in installments and 8.7 in interest.

In relation to those three contracts we have paid down debt of $32 million. Then we have obtained preliminary awards on the remaining six contracts. We have been awarded that we were entitled the council and we’ve awarded the right to demand refund for the installments. However, on two contracts we have not been awarded interest. All the contracts are the same and the procedures have been the same. So we find this decision to be wrong and we have applied for leave to appeal to High Court in London.

The others also applied for leave to appeal and we have agreed that these two awards will be reconsidered in the High Court, and we are awaiting to decide when that will be done. With the four other awards where we have been awarded installments and interest, the yard has decided to ask for leave to appeal. However, the High Court will have to decide whether that should be granted prior to any appeal.

Since, these cases have already been in arbitration, it should only be one court – one round in court. And we expect within the next three to four months to know whether leave to appeal is granted and also the timing of the hearing of the ones where there will be article. As you can see from the numbers, the installments remaining is $90.8 million, the interest accrued as per the award is 11.5, so there we have nothing due to the interest for the ones where we are appealing, that is in total between $7 million and $8 million, and we have remaining interest of $11.25 million.

You can also see the estimated book value in Q2, change in book value in Q2 and the remaining book value as it’s on from the book as per the end of Q2. As mentioned, the company received $5.3 million in relation to a default on a charter for Golden Feng. In addition, the company had sold almost one-third of the shares in Korea Line with a net proceed of $1.4 million.

We have also reduced the interest rate hedge during the quarter and the company raised the convertible bond in Q1 and the convertible bond of the fixed interest rates, so adding that to our debt increase to our relative amount of fixed debt. The company has decided to delist from SGX, the Singapore Stock Exchange and are preparing work to inform the shareholders about that process.

If you look at the market environment, the second quarter was a bit weaker than what we have expected. When we focus on the macro, it’s a lot of the focus is also on China this time as earlier. If you look at the economy in China, Q2 was slightly better than Q1 around 7.5%, which is spending high growth rate for the country. The property market, which is very important for our dry-bulk through steel and cement production has been positive with increase in housing price. However, the prices have gone down slightly, and there has been some more negative herein used after Q2 in July and August.

Even though the steel production has been strong and up 5.1%, 40% approximately of China steel goes to the real estate market and with the growth of 7% to 7.5% in GDP that should equate to 3% to 4% of steel increase historically, while it’s been 5.1% year-to-date.

The import of iron ore has been very strong, as you can see the volumes from Australia has been increasing a lot and covering most of the market, while Brazil also had some increase in exports so far this year, and we expect more to come for the second half. The iron ore prices are low, but still higher than the producers cost, and it seems like the Australian producers are bumping a lot of iron ore volumes into the markets.

If you look at the import to China, there has been an increase of 18% year-to-date, which would equate to 925 on an annualized level, which is far above what was expected a few years back. The steel production in China has been higher than what you would expect neither internally, and you can see that the steel export has increased along the lines of the steel production. So there has been more export of steel this year than earlier, taking off some of the volumes.

If you look at the split between the domestic and imported iron ore, the quality of the domestic iron ore is worsening and the total produced volume if you look at the high-quality Fe content is more or less plus for the last six years. While the increase that has been needed in iron ore consumption has been taken from the imported volumes. While the iron ore has been strong so far this year, it is the coal imports to China that has been very disappointing, and that is the main explanation for the lower market in the second quarter.

In addition, when it comes to other commodities, there has been a ban on bauxite and nickel ore, which also has reduced the import to China of other commodities. (Indiscernible) have drawn on the docks on these commodities and we’ll have to start to import from other sources, which in particular the bauxite could increase the turmoils going forward.

The reduction in coal imports that has been seen so far this year could equate to 100 Panamaxes or 50 Capesize. The coal prices has also been falling and it’s so low that almost 70% of the coal companies are making losses. There has been a lot of coal sold and produced from internal sources, the first half of this year, and there are speculations that there are new regulations coming with certain levels of calorific value of the coal and the ash content, and that minors that have low value coal have been pushing that to the market before the new regulation comes. That is just a speculation and one out of many rumors on why this has happened.

Even so the imported coal is a very small fraction of the total coal demand in China and should – a few of the domestic producers closed down the sensitivity towards the import is quite high and you could see a rebound of the imported volume in the second half of the year. Another reason for why the coal import has been lower in the first half of this year is that there has been higher hydro production in China than earlier, both due to a new power plants and also due to a lot of rain increasing (indiscernible).

However, in the long-term picture, the coal is still a very significant source for the energy production in China, and we expect that to continue still for a quite sometime. The increase in the need for power consumption seems to be higher than the possibility for producing renewable are interesting in the shorter-term. Another importer that can support coal and surprise on the upside is India, whether has been the most spring season is coming close than end, and there are very low stocks and they would need to import coal for the autumn and for the winter season. The amounts are of course, smaller and the distances are typically shorter, but they will support the market if they increase the import as expected.

Looking at the fleets, there is an estimated fleet growth through 2014 of around 5%, 5.5% and 6% for 2015 and 2016. This is an estimate from Platou research. If you look at Clarkson, they estimate 5% for 2014 and 7% for 2015 and 2016. It’s worth noting that the Panamax order book relative to the fleet is now smaller than what the other segments were. This has changed from earlier.

If you compare this with demand estimated by Clarkson of the term is an increase of 6% this year, 4% in 2015 and 4% in 2016. This is an increase in term, while the estimated increase in turmoil is higher, and Clarkson as other forecasters that we used, expect higher utilization going forward.

The next slide shows an overview of hedge profile of the fleet and the current order book of 2,000 ships is approximately 20% of the fleet. If you compare that with the crest potential, Eric Clarkson has estimated what they call distracting tool, which is all the capes that are up for the fourth special surveys, the Panamaxes for their fifth special surveys are being 25 years, and the Handy is up for the sixth special surveys by 30 years. That is in total approximately 1,000 vessels. So there is small balance in the order book now that there have been for a while.

In the presentation, we have used the data from our slides from Snow Dragon for Ethel, Clarkson and Platou. This slide shows per Ethel’s estimate for supply and demand increase as well as utilization. And as you can see the expectation is of utilization, it will go up towards 90%.

In the shorter-term, looking into the fourth quarter, it’s slightly with volatility through the period, and you can see the low prices around or even below today’s level, but you can also see high match above today’s level and match above the estimates for the year of 18,000.

If I run some of the strategy, we are continuing to hold our open exposure towards the markets, our cash position is strong and we can afford that. Our base cases that we will see are strong in Q4, but we will utilize this. To that (indiscernible), we will have significant of cash to utilize the market to increase our fleets, and take advantage of that market.

We are then ready for Q&A session. so operator, can you please take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will now take the first question from [Hans Kloss] (ph), a Private Investor. Please go ahead.

Unidentified Analyst

Good morning, Birgitte. I have a question regarding the [E&I] (ph) bond situation, why is the intermediate bank updating the claims against E&I bond?

Birgitte Ringstad Vartdal

Because the guarantee says that as long as there is an arbitration ongoing, they can withhold the payment. the payments that we have received whether that has been paid from the bank, or from the yard that is the money has been received from the yard that we are sure that have received funds from the bank to cover those payments.

Unidentified Analyst

Thank you.

Operator

Thank you. (Operator Instructions) There are no further questions.

Birgitte Ringstad Vartdal

Okay. then I would like to thank everyone for participating on this call, and wish you a nice afternoon.

Operator

That does conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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