Golden Ocean Group - Earnings Call - Q2 2020

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 Golden Ocean Group Ltd Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your first speaker today, Mr. Ulrik Andersen. Thank you. Please go ahead, sir.

Ulrik Andersen (CEO)

Thank you, Alvarado. Let me start by saying it's wonderful to see the interest in Golden Ocean's Q2 release. Thank you for that. My name is Ulrik Andersen. I'm the CEO, and today I have with me Peder Simonsen, our CFO, and Thomas Semino, our Chief Commercial Officer. We will keep the presentation short and focused. In a moment, I will talk you through the highlights for the quarter. Hereafter, Peder will provide details on our financial results. I will round off the market update or the presentation with a market update before talking briefly about our coverage strategy and cash generation potential. After the presentation, we look forward to welcoming any questions that you may have. So, without further ado, let's have a look at the Q2 highlights. The quarter ended with a $41.3 million loss.

Needless to say, it's not satisfying for me to sit here today and deliver a negative result, but like many companies across various industries, our market was severely impacted by COVID. On top of that, we also incurred expenses relating to our final scrubber installations. So, in total, despite the loss, we feel we came through a very difficult quarter in an acceptable fashion. Adjusted EBITDA was $4.2 million. On a more happy note, we completed the final eight of 23 planned scrubber installations. It means that as of today, we have no more expenses relating to scrubber installations and only very few dry docking costs left, and all of the dry docking costs are towards the back end of the year.

During the third quarter, the market increased significantly, and we utilized this market strength to secure additional cover, most of it for the remainder of the year, but also some that cover into next year. It means that as of today, we have 38% of the Capesize vessels covered at $18,800 per day and 56% of our Panamax vessels covered at $14,900 per day. As a guidance for Q3, so far, we have achieved $17,900 for 74% of our Capesize and $12,900 for 92% of our Panamax vessels. Finally, worth mentioning for this quarter, we joined the Getting to Zero Coalition. In Golden Ocean, we are committing, or very committed, in fact, to bring down emissions. But we also realize that we cannot achieve this in a meaningful way without cooperating with others who share our ambitions. This is why we have joined the coalition.

For those who are not familiar with the Getting to Zero Coalition, it brings together 110 companies from across the shipping value chain as well as governments. The coalition is working on the very ambitious goal of getting zero-emission vessels into operations before 2030. We are naturally looking very much forward to working in the coalition and to work on decarbonizing our industry. With those words, I will hand the word on to Peder for the financials.

Peder Simonsen (CFO)

Thank you, Ulrik. As Ulrik mentioned, the net P&L for the quarter was a loss of $41.3 million. This is a significant improvement compared to the previous quarter of $160.8 million in loss. This, as you know, that was significantly impacted by non-cash items, including impairments and mark-to-market losses on U.S. interest rate hedges.

Operating revenue fell by $26.8 million, mainly due to the continuation of a weak market that continued into the quarter from the previous quarter. The strengthening of the market towards the end of the quarter had a limited effect on the second quarter, but should positively impact third-quarter results. Lower market rates and lower trading activity also led to a reduction of voyage expenses of $12.8 million and a reduction of charter hire of $4.7 million. Ship operating expenses, including dry dock and estimated OpEx on short-term leased-in vessels, was $44.7 million for the quarter. This is down from $55.5 million in the previous quarter. The decrease was comprised of $2.9 million in reduced dry dock expenses and a $600,000 decrease in estimated OpEx on leased vessels. Effectively, the running OpEx on our own fleet decreased by $7.3 million compared to the previous quarter.

Some of this relates to delayed crew changes caused by the COVID-19 pandemic, and we expect these expenses to increase in the short term as crew changes are currently more difficult and costly than under normal circumstances. G&A came in at $3.4 million for the quarter, a slight increase compared to the previous quarter. Depreciation decreased by $2 million. This is mainly due to lower asset values following the $94.2 million impairment on leased vessels that we took in the previous quarter. Net financial expenses were down by $1.7 million, mainly due to lower LIBOR rates on our floating debt. U.S. interest rates continued to drop during the quarter, and the company booked an unrealized loss of $4.4 million related to our portfolio of interest rate hedges. Offsetting this loss, we booked a gain of $2.6 million on FFAs and $1.4 million on bunker hedges.

We also booked an unrealized loss of $2.2 million related to our shareholding in Scorpio Bulkers and a loss of $5.2 million related to associated companies. Adjusted EBITDA was $4.2 million for the quarter, and we achieved a TCE per day of $8,782 across the entire fleet, compared to $11,076 for the previous quarter. Moving on to the cash flow. The company ended the quarter with $128.4 million in cash, and the cash flow from operation was $16 million. This had a positive impact from positive change in working capital. During the quarter, Swiss Marine repaid $5.4 million, or 50% of their shareholder loan, and the company made regular principal payments of debt of $23.4 million, and in addition, we paid $15.1 million on leased vessels. Investments during the quarter mainly relate to the final scrubber installations and amounted to $7.2 million.

Following these changes, cash at the end of the quarter amounted to $104.1 million. This includes restricted cash and is a decrease of $24.3 million from the start of the quarter. Going forward, the company has no significant capital commitments. We have limited dry dock commitments, and for the remainder of the year, and given the current strength in the market, we expect to strengthen our cash position significantly over the next months. Moving on to the balance sheet. If you look at that, it's worth mentioning that during the quarter, we have changed our accounting principle related to how we book restricted cash. Cash required to cover covenants on our loan agreements is now booked as free cash, whereas it was previously booked as restricted. Short-term restricted for installments due within the next 12 months and long-term restricted for the long-term debt.

As this cash is not legally restricted and is available cash for the company, we think this method provides investors and analysts better transparency, and it's also in line with most other shipping companies' record minimum cash requirements under debt facilities. Restricted cash is a separate line in our balance sheet and currently relates to collateral held as security for interest rate swaps and derivative trading. Short-term debt includes the full outstanding amount on one of our loan facilities and facility financing 14 Capesize vessels that matures on March 31st, 2021, and we expect to refinance that facility well ahead of maturity. At the end of the quarter, the company's book equity was 48%.

Looking at the credit facilities, then in addition to the one previously mentioned that will be refinanced within March next year, the remaining facilities are term loan with reputable shipping banks that matures in 2023 and later. That ends my presentation, and I hand over the word to Ulrik Andersen.

Ulrik Andersen (CEO)

Thank you, Peder. Let's have a quick look at what happened in Q2 before we turn the attention to the outlooks. As mentioned in the introduction, market conditions for much of the second quarter were severely impacted by COVID. The quarter started with a pause in economic activity in countries across the world. This was on top of the lockdown we saw in China for much of the first quarter, so really difficult conditions altogether, which, of course, also were reflected in the rates.

Moving through the second quarter, activity began to resume in China as lockdowns were lifted across the country. This led to the start of a quite dramatic recovery in dry bulk rates, which was driven mainly by a sharp increase in iron ore exports into China, but also, to a lesser extent, COVID-related logistical issues that continued to cause delays and bottlenecks, primarily in the Chinese ports. Chinese iron ore imports rose almost 19% in the second quarter compared to the same quarter last year, and in fact, imports reached the second highest level ever. In this connection, it's interesting to point out that most of the imports came from Australia rather than Brazil. So, in other words, short-haul voyages. Brazilian export volumes decreased as the country struggled to contain the pandemic.

Looking forward, and I will talk about this in a second, we expect exports to increase out of Brazil, which will naturally benefit the ton-mile demand significantly. Turning to page 11 and looking at the market outlook, starting with the supply growth, it is fair to say that the growth is slowing down fast. There's been quite a fair share of vessel demolitions so far this year. The first six months saw 30 capes scrapped, and to provide some context around that number, 29 capes were scrapped for the full of 2019, and only 18 capes were scrapped in 2018. We have to remember that scrap prices have been low, and scrapping capacity in general has been reduced due to restrictions relating to the pandemic. So it's been a fairly good scrapping year so far, and it's a trend we hope to continue throughout the year.

On top of that, in a very low order book, the vessel supply picture is clearly improving. There will be further deliveries this year, yes, of course, but there will also be an offsetting effect from scrapping. Growth begins to slow in 2021, and in 2022, we see the lowest fleet growth in over a decade. And mind you, this is before we have factored in the potential for further scrapping. All in all, we will say that the order book is at a historical low, and we do not expect many new orders. Financing is not really available, and perhaps, and I think this is more important, there are major question marks over what future technologies will become widely adopted, competitive, and also IMO 2030 compliant.

If we turn the page to slide number 13 and look at the other side of the equation, the demand side, then we have here the picture, the GDP growth. It's one of the most important determinants for the demand of dry cargo ships. We all, of course, know that 2020 will not be a good year for GDP growth, but 2021 is starting to look quite promising based on various forecasts, including the one that we have here in front of us from IMF. IMF expects the global GDP growth to increase by 5.4% next year, which is quite a recovery from the almost -5% that they expect this year.

What is very notable or is important to note in this connection is that two of the world's largest importers of dry bulk commodities, namely China and India, are expected to grow well above that at 8.2% and 6.0%, respectively. There are always uncertainties in these forecasts and other sources may have different views, but a recovery led by China and India would naturally be very well received by the dry bulk markets, and right now, it looks to be the case, so if we turn the page and look at page 14, then we have summarized our market view here. As it appears, we expect the continuation of the recent strong markets that we have seen so far to continue until the end of the year and also into next. This is on the back of unprecedented global stimulus packages.

As was the case after the last major recession, stimulus money will lead to infrastructure investments and a pickup in industrial activity. The result will be a greater demand for iron ore and coal, the two primary dry bulk cargoes. Pertaining particularly to iron ore, we expect the recovery of lost Brazilian export will lead to increased ton-mile. As many of you may recall, the production was impacted by an unanticipated and highly regrettable event in early 2019 when a dam collapsed at the Vale mine in Brazil. It led to a severe downsizing of production.

We do not see that dam collapse weighing negatively on the Brazilian production to the same extent any longer, and if Vale reach even the low span of that guidance, which we are positive is achievable, then we are looking at almost 50% increase in volumes out of Brazil from the first half of this year to the second. These are very significant volumes. Finally, the fleet growth supply outlook is positive. I just talked about it. In fact, it is so positive, or it is as positive as it has been for years. Generally speaking, it's hard to imagine given what has transpired since the start of the year, but 2020 was shaping up to be a very strong year for dry bulk shipping. Naturally, COVID and the world changed everything, but some very positive underlying factors have not gone away.

I think I would be an unwise man if I didn't provide a disclaimer saying that, of course, there's still a lot of uncertainty out there. We don't know what will happen with COVID or if other black swans will appear, and that's why we've taken out coverage, but at the same time, we are clearly optimistic on behalf of the segment, and we believe with good reason. Turning to the last slide for today, I will talk a bit about our cash flow generation potential and our balance sheet approach. I'm very comfortable to say in the short term, and by short term, I mean until the end of the year, that our results will be significantly better than the first half, and on top of that, that we are in a good position to further build our cash balances.

When the market began to pick up during Q3, we secured some profitable charters for Capesize and Panamax vessels to lock in some cash flows at good levels well above break-even. In the meantime, and we are happy about that, the market stayed strong, and we have a large amount of spot exposure remaining. While this definitely is not the typical year, the second half is generally the strongest for dry bulk rates, and we expect the same will happen this year. In some sense, you can say it's already happened because we are seeing today Capesize rates north of $20,000. If we look at the right-hand side of the graph, it's clear that over the last five quarters, we have sent a lot of cash out in connection with CapEx for our scrubber program. That is now behind us, which again will benefit our cash balances going forward.

Also, 2020 dry docks are more or less at least out of the way, which will give combined a good runway throughout the end of the year. So all in all, we believe we are positioned very well to take advantage of the anticipated strong markets we see in front of us. With that, I will hand the call over to the operator, and he will take care of the rest, and we are ready to take any questions you may have. Thank you very much.

Operator (participant)

Ladies and gentlemen, if you do wish to ask a question at this time, please press star one on your telephone keypad. Once again, press star one on your telephone keypad to register your question and the hash or pound key to cancel. We have one question coming from the line of Gregory Lewis. Please go ahead with your question and answer your company's name.

Yes, thank you, and good afternoon. I guess I just had a few questions. The first thing, clearly you guys laid out somewhat of a bullish outlook on the market heading into the back half of this year and next year. Looking at asset prices, it looks like they'll come down a little bit. Should we be thinking, I mean, just as I think about those two things, I mean, should we be thinking that, I mean, is this an opportunity for Golden Ocean to grow its fleet at this point, or kind of just kind of curious, just given some of your comments, how you think about positioning the company for the next, it sounds like, 12 months to 24 months under that positive backdrop?

Ulrik Andersen (CEO)

Yeah, thank you for the question. I think that we will always be looking to do good S&P deals if they are available. Of course, we have the consideration towards the regulations from IMO towards 2030. So it's a balance between trying to find attractive deals of modern tonnage primarily versus looking at new technology. But in general, yes, we are ready to go out and invest if we believe we can make a deal that will add to the value of the company.

Okay, and just as we think about the market right now, I mean, I guess it's slow, it's summertime. Are there, I mean, do you see, if you were to gauge the activity in the sales and purchasing market, are there, I mean, are there vessels for sale, or is it one of these things where, since prices are down, I don't know, 5%-10% since the start of the year, kind of there's, would you characterize it, well, how would you kind of characterize the liquidity in the second-hand market?

I think that the liquidity, or at least what we see with regards to liquidity, is mainly that it's older tonnage that is being circulated for sale, whereas more of the modern tonnage is held back because, as you rightly pointed out, the spot earnings are good, and perhaps the values are somewhat underestimated at the moment. So we see most liquidity on the older tonnage.

Okay, great. And then just another one, just kind of as we think about coal, you kind of mentioned some comments around IMO 2030, kind of talking about the outlook for China and India. I mean, I guess the question would be, year to date, realizing that this is an odd year or a hard year for everybody because of the coronavirus. I mean, you guys have vessels that move a lot of coal. How are you thinking about the outlook for coal over the next couple of years? Should we be thinking that we could see an uptick in coal demand over the next couple of years, really just as some of these economies around the world get going higher, or I mean, you're in Norway, but you're next door to the continent of Europe. I mean, it seems like coal continues to have challenges.

So I'm just kind of curious how you're thinking about the coal markets over the next couple of years.

Yeah, we think in general that it's too soon to declare coal dead as a dry bulk commodity. There's still a lot of demand in India and China. I mean, China is the biggest producer of coal altogether. Of course, the imports there are a little bit politically regulated, but overall, we expect actually growth in the import volumes both to India and China over the coming years. Coal is not going to be in the energy mix forever. It's definitely being phased out, and I think that's a good thing. But in the short term, let's say the next two, three, four years, it still has an important role to play in dry bulk shipping.

We have to remember one thing, of course, and that is that the ton-mile from coal is nowhere near that of iron ore. Iron ore is the driver, of course, in all of this. But you can say that coal is kind of an icing on the cake. I mean, we have seen cape rates go from $2,000 a day to $35 without seeing any coal really moving. So of course, if we can go get coal back to moving to some extent, it will be a good extra catalyst for the cape rates.

Okay, and then just, I guess, just since we're talking about coal, you kind of touched on something that we've seen throughout the year where it's kind of normalized, but for most of the year, Capes really have outperformed some of the smaller vessels, or at least coming out of the pandemic and kind of the spring. Why do you think that was? Any kind of color, realizing you guys primarily operate with bigger ships, but it seemed like the Capes were really outperforming. Just kind of curious if you guys had any view around that.

Are you comparing Capes and the Panamaxes, or are you comparing Capes to the Handys and?

Well, I mean, Ultramaxes, Panamaxes, I mean, realizing that Panamaxes have converged on Capes over the last month or two. But it seems like over the last kind of three, four months, the smaller vessels, even including the Panamaxes, seem to have outperformed. Like you mentioned, capes went to $30,000 a day. It seemed like they were really outperforming the smaller vessels. Just kind of, if you could provide a little bit more color around that, that would probably be helpful.

I can try, and maybe Thomas Semino will also have a few words on this. But what I can say is that the way we see the world is that there is a larger upside, also larger volatility, but larger upside on the larger segment. You could say the cape sort of establishes the ceiling for the smaller segments. That's also why we have deliberately taken out more coverage on our Panamaxes and kept a larger exposure to the capes. So I think it's natural.

We see this in other segments as well, that the larger size vessels have the largest upside. And we expect that to continue to be the case. I'm not sure if that answers your question, and maybe Thomas, you have some more to put on this. But yeah, let me know if this suffices.

Thomas Semino (Chief Commercial Officer)

Yeah, I think Ulrik, sorry, Thomas, thank you for your question. I think it is as well in part relevant to what we mentioned before on the iron ore and coal. On Capesize, 85% what we move is iron ore, right? And therefore, we have been not really too affected about the coal being slow. While on the Panamax, the mix is still adding some more coal on it. So clearly, that's one of the reasons why the Capesize has been moving faster and higher compared with the smaller size in general.

But I mean, lately, we have seen that actually the Panama sector has been moving quite strongly higher thanks to strong demand on the grain from both East Coast of America and the US Gulf and catching up on the spread compared with the cape.

Okay, perfect. Hey, thank you very much for the time today.

Ulrik Andersen (CEO)

You're welcome.

Operator (participant)

We have another question coming from the line of Anders Karlsen. Please go ahead with your question and announce your company's name.

Yes, hello. I was wondering, have you heard any talk about any newbuilding orderings in the market given the uncertainty around fuel outlook, etc.? Or are you considering doing any newbuildings?

Ulrik Andersen (CEO)

Yeah, I can maybe start, and then Thomas can follow up. But I can say that we are in a wait-and-see position. And when I say wait-and-see position, I mean not in a passive way, but in an active way. We are monitoring very closely the technologies that are emerging now. The industry is running faster than it used to. And I think there's going to be many ways to essentially 2030 compliance, which is what we are aiming at.

And even further down the road, of course, we have 2050 we have to consider as well. So right now, there's not one widely adopted technology or fuel. And we are very conscious of the fact that we have to be sure that we choose the right technology when we go to the yard. So right now, we are not there or ready to push the button. And I think that will go for a lot of other owners. I think they will see the same.

And that's what I talked about when we talked about the supply growth that is slowing down. The other owners will probably sit with the same headache as we have. So in a way, that is good. With regards to ordering, maybe Thomas, you can throw some comments on. We know that the BHP have been in the market for a tender, but other than that, it's not much we are picking up. But Thomas, maybe you can throw a few words on that as well.

Thomas Semino (Chief Commercial Officer)

Yeah, no, absolutely. As you said, I think the new ordering has been very, very slow. There have been some rumors about hybrid LNG vessel being ordered or better letter of intent has been signed for a few of those vessels. But apart from that, it has been very slow for the reason that you highlighted before.

So really, on the ordering side, newbuildings, there has been very little activity going on.

Okay, thank you. Then a little bit on scrapping. I mean, you are very right in saying that scrapping has been a big factor earlier this year. But with your current rate expectations of a bullish second half of the year, fairly low bunker prices, why should people start scrapping vessels big time? I mean, it's an option.

Ulrik Andersen (CEO)

Yeah, no, I also don't think I said that. If I did, then what I meant was that it has been a good year for scrapping so far. We hope the tendency will continue, whether it will. Okay, let's see. I agree. We have a strong market now. We have good outlooks. It's not going to be scrapping that's going to be the driver of this market.

It's going to be the iron ore imports into China. So whether there is a lot of scrapping more from today and onwards is not going to be the determinant of the market. But we still expect, because there are vessels that are older, that there will be scrapping also in a strong market. But of course, it will be less.

Okay, thank you. And then finally, I guess a question to Thomas. In terms of the market, I mean, we saw record volumes going into or iron ore going into China in July. How is that looking now? And what will it take to lift the market, to say, the cape market to 30,000 a day or thereabouts? Do you see any signs that that will be happening soon?

Thomas Semino (Chief Commercial Officer)

Thank you for the question. The cape market has been very volatile, and we are quite optimistic for the second half of the year. We might see, who knows, another spike to $30,000 a day. The trend in Brazil, export pace from Brazil, is quite strong. Western Australia as well is moving. They're moving as much as operators and shippers are moving as much as they can. With the inefficiency coming from the fleet because of the crew changes that we are seeing now, and vessels having to quarantine, so making basically trip longer than what they were before, so more ton-miles, there is the possibility for the market to move up to another step, so back to the $30,000. Certainly, the possibility is there. Congestion is pretty high in China now, so that is something that, of course, we should monitor.

And I mean, potentially, there is some bad weather coming over into China that would potentially increase the congestion and waiting time for discharging. So that could be another positive factor on that. So as usual, it's not only one factor, but you need to have a convergence of multiple efforts to push the market to $30,000. So it could well happen. We hope it's happening, of course. And the market is with the demand on iron ore and as well the increased tons per mile that we see in the market is set for that to hopefully happen.

Okay, thank you. That's all for me.

Operator (participant)

Once again, ladies and gentlemen, to register your question, you can press star and one on your telephone keypad. And to cancel your question, you can press the hash or pound key. We have another question coming from the line of Clement Mehren. Please go ahead with your question and announce your company's name.

Good morning, gentlemen. Thank you for taking my question. You've used current market strength to fix a considerable amount of remaining 2020 trading days, and I was wondering if you are looking into fixing a large portion of your 2021 open days.

Ulrik Andersen (CEO)

Thank you for the question. We will keep a balanced approach also through 2021. That is our starting point. We do believe, as we have told today at this call, that the market is going to be strong. So we will see as and when is the right time. We feel that the balance for now is good for the remainder of the year. We also see normally a weak first quarter in dry cargo, and it means that right now there's quite a discount on the TC levels for Q1.

That means we don't think it's the right time to move. But as and when we get closer to 2021, and as and when we see the opportunities, we will certainly continue to take money off the table when we feel that the rates are at the right level.

All right, that's helpful. My second question is related to your small stake position. How do you currently view it?

Yeah, it's a position we've had for quite some time. And yeah, it's up for discussion what we will do with that position. It is so insignificant now that it doesn't really impact our results or, yeah, in general, our business. So it's a relatively small investment. I don't have an answer for you today what we will do with that.

No problem. Thank you very much, guys.

Thank you.

Operator (participant)

We appear to have no further questions at this point.

Ulrik Andersen (CEO)

So I hand the conference back to you, sir. All right, it concludes today's session. Thank you for attending Golden Ocean's second quarter results. If you have any other questions, you can always contact myself or Peder. Thank you very much for today and have a nice day. Thank you.

Operator (participant)

Ladies and gentlemen, thank you for your participation today. This concludes today's conference call. You may now disconnect your lines. Thank you.