Golden Ocean Group's (GOGL) CEO Birgitte Vartdal on Q3 2016 Results - Earnings Call Transcript

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Golden Ocean Group Limited (NASDAQ:GOGL) Q3 2016 Earnings Conference Call November 22, 2016 9:00 AM ET

Executives

Birgitte Vartdal - Chief Executive Officer

Per Heiberg - Chief Financial Officer

Analysts

Herman Hildan - Clarksons Platou Securities

Fotis Giannakoulis - Morgan Stanley

Rune Sand - Nordea Markets

Operator

Good day and welcome to the Q3 2016 Golden Ocean Group Limited Earnings Conference Call. Today's conference is being recorded.

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

Birgitte Vartdal

Thank you. Good afternoon and good morning, and welcome to the Golden Ocean Group Limited earnings call for third quarter 2016. We will start with a Company update about the recent developments and financial results which will be presented by our CFO, Mr. Per Heiberg, then we will move on to comments on the macro outlook and strategy before we round up with Q&A session. So please go ahead Per.

Per Heiberg

Thank you, Birgitte. I will first go through the highlights for the quarter. The Company reports a net loss in the quarter of $26.7 million which is a loss of $0.25 per share in the third quarter. This is an improvement of $12.5 million compared to net loss of $39.2 million for the second quarter 2016.

In August, the Company effected a reverse share split of 1-for-5 shares in order to comply with NASDAQ regulations. And in September, the company took delivery of the Ultramax, Golden Leo and paid the final installment of $15.7 million on delivery. And in October, subsequent to the end of the quarter, the company took delivery of the Capesize Front Mediterranean, which is one of the vessels that previously had been announced as sold, and we delivered the vessel to the new owner according to this sale.

So just to run through the P&L. The increase in the revenue is mainly related to slightly higher market, but also a strong performance on the ice class Panamaxes during this quarter. And we have also - if you look at the net TCE, you will also see that the result is improved by lower or positive change in the loss-making contract that we need to make provisions for, and this led to a $7 million increase in net revenues after voyage expenses and charterhire expenses.

It's worth noting here that amortization of the favorable TCE contracts that we have following the merger back in 2015 amounted to $8.1 million in this quarter, which is been a part of the net operating revenue. In this quarter, the OpEx is a bit higher than previous quarter. This is mainly due to drydocking of two vessels; the Golden Enterprise and Golden Suek, but also due to third quarter for the vessel Golden Fulham that was delivered in May and also Golden Leo. The running OpEx is at the same level at earlier.

And also, a small comment on the depreciation is followed by the third quarter for Golden Fulham and also Golden Leo. Under other financials, it's worth noting that improvement is a result of a better mark-to-market on derivatives compared to Q2.

So turning to the balance sheet, the Company had total cash of $245.9 million at the end of the quarter that includes restricted cash and it is $34.7 million lower than end of Q2. The cash burn is mainly related to the delivery installment for Golden Leo of $15.7 million, and we also paid a pre-delivery installment on Front Mediterranean of $7 million. The purchase and immediate sale of Golden Lyderhorn also had a negative cash effect of $6 million in the quarter. The rest of the difference relates to operation.

Vessel net debt increased by the delivery of Golden Leo less ordinary depreciation. Under newbuildings, it's worth mentioning that we have included $5.2 million in accrued, but not paid installments in Q3. And also I would like to mention that the short-term lease obligation has changed due to delivery or purchase and then sale of Golden Lyderhorn. Also in this quarter, we have not classified any of the bank debt that’s short-term debt, as the cash-free mechanism put in place during the restructuring will not come into effect at our Q3 2016.

Moving on to the development in the fleet. As mentioned also in earlier calls, the owner of Golden Lyderhorn exercised their production to sell the vessel to us and we immediately turned around and sold it to an unrelated third-party and this was successfully delivered on August 22.

In the beginning of September, we decided to take delivery of Golden Leo from Chengxi and paid $15.7 million in cash at delivery. No mortgage on the vessel and it’s expected to have a positive cash flow going forward. As mentioned after the quarter end in October, we took delivery of Front Mediterranean and delivered her to the new owner according to the original sales agreement and received a net cash of $12.7 million following that sale.

At the end of the quarter, outstanding not paid CapEx was $349.9 million, and following the quarter as mentioned earlier we paid $33.5 million in relation to delivery of Front Mediterranean, and the remaining CapEx is $316.4 million. We have not paid any other installments to any yards in Q4 other than the $33.5 million related to Front Mediterranean.

The newbuilding program then consists of two Ultramax’s and eight Capesize vessels. And we are in continuous discussions with the yards for further postponement of these older vessels scheduled for delivery into 2016. Following this, the current fleet consists of 69 vessels of which 59 is currently on the water and trading. We have not during the quarter done any significant changes on the long-term chartered out position, but it's fair to say that we have taken some cover for the winter period and for the front months.

Although, we expect that earnings for the fourth quarter will improve compared to the third quarter, we would like to point out that when we trade vessels in the spot markets, we see a certain lagging effect on the revenue side when we see the – Birgitte will comment on that later on, but we have seen kind of a rapid improvement in the market over the last weeks which will represents our lagging effect.

Just some comments on the operating expenses on the vessels. They are fairly stable. We operate the vessels around $5,000 a day excluding drydock costs. It is slightly higher on the Panamax Ice-class vessels. We see that they are a bit more expensive, but then slightly below 5,000 for both the Capes and the Supramax vessels.

This OpEx include management fees to third-parties for technical management, but all other administrative costs are included in the G&A and that amounts approximately $550 per day. So far in 2016, we have drydocked three vessels and we do not plan for any drydockings in Q4. Going into 2017, we expect that seven vessels will be drydocked during that quarter.

Following that, I will hand over rest of the presentation to Birgitte.

Birgitte Vartdal

Thank you. So the development since our last earnings release have been positive relative to our expectations and fair to say as well as the expectation to most of the market participants. In particular, Capsize rates started to improve during September and even with some volatility during October they reached new highs this month with [TS4TC] peaking at $20,000 last week. Rates for the smaller vessels have been lagging a bit during the last few weeks. Although, the Panamax market has also improved and lately we have seen strength on the Supra.

Coming from a low utilization of around 7% to 8% in the first quarter we are now well above 80%. I would guess that the third quarter on average was likely in the range of 82% and that we currently see even higher utilization. Increased utilization has been driven by demand growth across all major commodities for the second half of this year and that all commodities move in the same direction is quite unique as it is right now.

During the first quarter of this year commodity prices where at historically low levels and below cash breakeven for many producers. Following supply adjustments, we will comment a bit more on that later on. Prices have increased and transported volumes have remained strong. In particular, you can see this on the met coal prices which have spiked from below $100 per ton at the start of the year until 300 or even above $300 per ton lately.

The good thing though is that steel prices have held up and supported positive steel margins, although the raw material prices have increased. This trend has been going on for a year, but recently steel margin is narrowing and on the marginal production probably negative.

Looking at the world steel production, global production has been relatively flat over the last few years with seasonal fluctuation. What is interesting to absorb for the last few months is that there has been a growth not only on the Chinese steel production, but also in steel outputs from the rest of the world. We view this as a positive development as diversified demand may add to the sustainability of trend in global production. However, I think it’s too early to conclude on this being sustainable.

Our Chinese steel production has increased. Imported volumes of iron ore have also gained market share versus domestically produced iron ore. We have commented on this in many presentation and it has continued to drop off during the last month. It still estimated to be around 150 million to 200 million ton of 52% FE constant equivalent iron ore produced domestically and there is potential for some further replacement. Also with the high cost of the met coal that is used in the blast furnaces this has led to buying higher FE content iron ore to more efficiently use the costly met coal.

As you can see from the charge, both Australia and Brazil are increasing their market share with lower cost production and increases in exports. They are both been replacing domestically produced iron ore, but also production from of other country. Going forward, it seems that the Australian producers plan to keep their volumes relatively stable while volumes from Brazil should increase on the new S11D project and possibly if and when some met coal come back on stream and this should lead to an increase in long-haul trade going forward.

Demand for seaborne coal has continued to improve during the quarter, demand from India has moved up slightly and European demand which was dropping at the beginning of the year has stabilized. Still the demand from China is the main driver in the coal seaborne transportation.

As discussed previously the Chinese domestically produced coal has been reduced through regulations by the government, aimed at improving the pricing as well as reducing the number of inefficient domestic mines. At the same time there has been less hydropower available due to warmer and dryer summer. And as electricity consumption began to increase during the autumn, the electricity generated from thermal coal increased and this has supported stronger imports.

More recently though the government has opened up for the mines to increase their production over the winter period. The effect of this was not seen in October. It takes some time before the production comes back on the transport and it’s also the winter season, but we expect to see some increase in domestic production of coal. However, combined with what this seems to be a cold winter we think that the need for imported thermal coal will continue.

Looking to India which started the year with high stockpiles they have come down during the year still at decent levels. India have not been importing as much coal yet to date, but we could see with prices coming slightly up that they will increase their imports. Europe as commented on has been dropping in terms of import but also their coal stocks are very low currently.

Of course in general there has been a negative trend on the coal production in Europe. So due to power plants outages in France there has been need for additional thermal coal fired electricity. Besides iron ore and coal other minor bulk commodities have shown favorable transportation trends as well. Grain exports are still strong and with a good season in the U.S., large volumes are currently being exported. Brazil and Argentina has also had good volumes this year.

For Bauxite it's also interesting to note that the trade is shifting from a short-haul integrated trade to a more long-haul trade in particular from West Africa. China is increasing its imports and also new aluminum plants are coming on stream in the Middle East. Both these areas will require further volumes exported from West Africa. Bauxite is also increasingly being transported on Cape, in October alone there were eight listings on Capes. And next year a new Cape port will be develop in Guinea which should further increase the trade for the Capes.

Moving to the supply side. The net fleet growth have been modest year-to-date. Although scrapping has more or less stopped as the rates improved over this summer, newbuilding deliveries has also lagged behind original schedule. Through October 42 million deadweight ton have been delivered and with only two months left of the year it is likely that a total delivery will end in the range of 45 to 47 million deadweight tons not much more than half of the 84.5 million which was scheduled for delivery at the start of the year.

Deliveries in September was strong with 5 million, but October was back down to 2.7 million deadweight which has been relatively stable volume for the – after the strong deliveries in the first quarter. And normally you see limited deliveries towards the end of a year.

Based on the October deliveries and projections for the rest of the year our average fleet growth of around 2% is expected. There are big variations between the sizes Supra will have the strongest growth and Cape and Panamax will be close to zero on growth. The same applies for 2017, for 2018 the net fleet growth should be zero to negative.

Based on the freight environment seen financial difficulties facing the shipyard and limited available capital there are hardly been any new orders this year. In addition, new regulations may compel owners of older tonnage to consider scrapping. And installation of ballast water treatment system and potential compliance with new mandates on Sulphur emission are coming in the future.

Comparing the order book growth of 11% with the age profile of the fleet whereby 8.5% of the fleet on a deadweight basis is about 20 years, and 16.5% of the fleet will be above 15 years of age next year and combining this with the potential investments that are required, this should support a view that there will be limited to negative fleet growth over the next few years.

Another interesting element is if you analyze the order book which I mentioned is crossing the range of 11%. I think it is likely that the real order book is lower than that. Using data from IHS Sea-web and ViaMar combining that with the information that 42 million deadweight tons so far has been delivered obviously 84.5 implies a lot of delay or potential cancellation. If you take the order book by the contractual delivery date there are still 9.8 million deadweight tons that was due for delivery before October 16, which has not yet been delivered.

Adding to this the 44 million deadweight tons which is scheduled for delivery until the summer of 2017, more than half of the order book is scheduled for delivery within the next eight months. Out of these volumes even 15.3 million deadweight ton has not even started.

Around 20 million deadweight ton is launched and it is likely that these vessels will be delivered. And then you have almost 20 million deadweight tons that are in progress, meaning it’s even either been [indiscernible]. Of course many of these orders will be delivered, but there are also questions whether some of them will not be delivered.

Bearing in mind financial difficulties, owners requirement to pay it’s therefore realistic to say that the order book is more in the range of 7% to 8% then 11%. Asset values have been stable since last quarter after they came up from Q1 of this year. There are a lot of vessels being circulated in the market for sale and many transactions are concluded and levers are holding up, it’s seen as a positive in this respect.

It's also still a very widespread between newbuilding prices and resale and also relative to a five-year old vessel. Therefore, owners want to increase their exposure maybe more inclined to purchase secondhand tonnage than ordering new vessels. The rate environment as we see at the moment is of course positive particularly as it comes on the back of stronger commodity prices, increased steel production and also underlying stronger electricity demand.

However, the forward curve has not moved a lot and there is still upside in rates if iron ore and coal import trends continue particularly if the fleet growth slows due to less deliveries or higher scrapping. However, there are clearly some downside risk in terms of China changing policies with the effect of decrease in coal imports, lowering steel mills or lower levels of steel production.

If we see lower scrapping this will likely be in a better rate environment where rates are consistently above OpEx. Thus, in the medium-term regulation should adjust for this. We also believe that there are many factors that will seasonally affect the start of next year including slowdown in exports due to weather related issues, coal demand dropping when winter is coming to an end and a lot of vessels delivered at the beginning of the year which is normal.

However, in the medium-term we are cautiously optimistic on the outlook based on the expectations around the slowing growth on the supply side and the continuing strong demand driven [volume]. We think that the Company is well sufficient for a market recovery whether it's on this quarter or a year from now. In particular, our cash breakeven levels are competitive as it provide significant leverage to a stronger market and also allow us to remain efficient during periods of market weakness.

It is important not to forget the sensitivity to changes in rates environment. Our large fleet is primarily employed in the spot market and we have significant exposure to a period of market strength. I would also say that the financial strength and the scale of our commercial operation is an advantage in the current market as we see that the charters are increasingly evaluating their counterparty risk, the safety record of the fleet and want to know who they are dealing with asking more questions and requiring more compliance.

As Per mentioned we are continuing the discussions regarding further performance of metal deliveries following the performance achieved earlier this year for six vessels and also earlier achievements for vessels now delivered. We expect the rate environment to be volatile, but the trends will be positive. So with our strong cash position and no near-term debt repayments, we are confident that we can manage through this volatile market environment and the challenges it represent for owners.

Then we would like to open up for Q&A if anyone should have any questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will now take our first question from Herman Hildan from Clarksons Platou. Please go ahead. Your line is open.

Herman Hildan

Good afternoon. My first question is on the status of the newbuildings, has construction of the vessels kind of halted or is it still being constructed i.e., the interesting part being will they be delivered regardless or is there a standstill on construction in understanding where they are?

Birgitte Vartdal

You are talking about our newbuildings now?

Herman Hildan

Yes, the ones that are not guaranteed.

Birgitte Vartdal

Well, as we have said, I think we’ve stated earlier as well, but they are more or less ready all of them, so it doesn’t affect as much the construction schedule.

Herman Hildan

Okay. And then final question on both Navios and Star Bulk, and you reported numbers, and all of you show significant premium on achieved rate relative to what [indiscernible] has been reporting? Is it possible to give any color on why you are achieving such significant premium to the reported benchmark rates?

Birgitte Vartdal

As we commented in our report that we have some contracts on our ice classes that achieved better rates, then obviously we have some charters, and then we also have some index related contracts whereby we have a premium on the index. I can't comment on the other companies performance, obviously but I would say that’s the background for our stronger performance.

But it is also worth taking note in particular in Q4 that there is some lagging when you fix vessels, and the market prices strongly obviously you have to perform your voyage before you can re-fix, so there will be some lagging relative to where the market is observed on the spot.

Herman Hildan

Okay. Thank you very much.

Operator

Thank you. [Operator Instructions] We will now take our next question from Fotis Giannakoulis from Morgan Stanley. Please go ahead. Your line is open.

Fotis Giannakoulis

Yes, hello and thank you. Birgitte you gave us very interesting numbers about the market. I want to ask you about the sentiment across the other ship owners and whether you have any concerns that this increase in rate is going to slow down the scrapping activity? Can you give us your estimate how much scrapping do you expect for next year if there is going to be any change from around 4%, 4.5% that we have seen so far?

Birgitte Vartdal

Well, if the market is too good to scrap, okay then we are maybe fine in a way. I think scrapping is much related to the rate environment you observe on the spot. Obviously, next year you have the addition of the requirement for the ballast water that may add some scrapping, but as long as rates are seen to be sort of above OpEx or stable above OpEx, I think you will see lower scrapping, but once rates struck back down you may see scrapping accelerating. So, okay maybe with scrap around 30 million deadweight ton this year I think it's very much dependent on where the markets end up next year. Maybe, we're talking 25 to 30 million based on sort of where the forward market is at the moment.

Fotis Giannakoulis

And you mentioned about Bauxite and the changes in ton miles. How important this is - can you tell us what type of vessels this Bauxite trade. Is it going to impact and how much volume do you expect that – how much demand do you expect that this trade is going to bring to the market?

Birgitte Vartdal

Well, it’s obviously small in terms of numbers relative to iron ore and coal. What I think is interesting is that it moved from being a pure Panamax trade to also moving on to the Capesizes, so it's kind of an additional commodity being traded on the capes. We know for sure that there are some new projects coming on stream in the Middle East. There are projects that still we are talking maybe 5 million to 6 million ton per month currently. So it’s obviously not competing with some of the bigger commodities, but it's a nice addition.

Fotis Giannakoulis

And my last question has to do with the demand for coal and iron ore; we have seen a significant increase in commodity prices. I was wondering whether given this increase in commodity prices, you start seeing a little bit more interest from charters trying to secure tonnage given the fact that transporting from Australia to China is still around $7 per ton, which is extremely low compared to the value of the commodity. Have you seen any interest from charters in locking up contracts and try to take advantage of this low freight cost at this point?

Birgitte Vartdal

There has been some more interest on sort of one-year period, but talking to the various charters they are pricing their commodity spot three months et cetera. So for them as well many of them prefer to play spot on the freight because they also place spot on the commodity. The strategy between the charters varies quite a bit I would say on that respect, but we haven’t seen like or we haven't seen [indiscernible] sort of say three years or five years, it’s more on the shorter-term.

Fotis Giannakoulis

Thank you very much Birgitte.

Birgitte Vartdal

Thank you.

Operator

Thank you. [Operator Instructions] We will now take our next question from Rune Sand from Nordea Markets. Please go ahead. Your line is open.

Rune Sand

Good afternoon. I just have one quick question. What’s the plan with respect to the financing of the Ultramax, when do you expect to have that in place or do you plan to operate them with no leverage?

Per Heiberg

For the time being as we said earlier we have taken Golden Leo for one vessel obviously paid by pure cash and we find that to be the best solution for that vessel for the time being. At will then run low cash breakeven, all the OpEx and we’ll generate a good cash flow going forward. So for the time being we will maintain the flexibility that gives the have the vessel and finance.

Rune Sand

Okay. But there is no – there are no restrictions in the new bank financing you got in Q1 that puts any limitations for you to drop new debt on these vessels or if you like you could drop that there?

Per Heiberg

Yes, we could.

Rune Sand

Thank you.

End of Q&A

Operator

Thank you. There are no further questions in the phone queue at this time. I would like to hand the call back over to speakers for any additional or closing remarks.

Birgitte Vartdal

Okay. And we would like to thank you for listening into our call. We are eager to see how the market develops in the next month or so and we will hopefully speak again in February.

Operator

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.

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