Golden Ocean Group Q1 2023 Earnings Call Transcript

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May 16, 2023

There are 4 speakers on the call.

Operator

And gentlemen, thank you for standing by and welcome to the Q1 2023 Golden Ocean Group Limited Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer I would now like to hand the conference over to the CEO, Ulrik Handelsdell. Please go ahead, sir.

Speaker 1

Ladies and gentlemen, good afternoon. It's my pleasure to welcome you to Golden Ocean's quarterly release presentation. Thank you very much for tuning in. In today's call, we follow our usual procedure. Peter Simonsson, Goldinossian's CFO, will talk us through the financial highlights.

Speaker 1

And hereafter, I will be discussing the market and the outlook for the company. Towards the end, I will also offer some insight into how our decarbonization journey is developing. So in the next 15 to 20 minutes, you will see that, 1, Despite a weak Q1, the gradual recovery of China is on and combined with the seasonal uplift, it provides momentum for strong freight rate environment for the rest of the year. That 2, our fuel efficient fleet continues to outperform the benchmark indices significantly. And finally, 3, we will show how Golden Ocean has invested in reducing emissions and reducing fuel cost while future proofing the company.

Speaker 1

With that, let's take a look at the main highlights for the quarter. In Q1, we recorded an adjusted EBITDA of $55,000,000 which resulted in a net loss of $9,000,000 or $0.04 per share. We achieved average net TCE rates of $13,600 per day for our Capesizes and $16,600 per day for the Panamaxes. Like the last four quarters, these earnings are well above the benchmark indices. The fleet made 4,900 Dollar per day per vessel more than the market every day throughout the quarter.

Speaker 1

Our modern fuel efficient fleet, fixed paying contracts and scrubbers Drive the premiums. Rate guidance and looking at this quarter, Q2, we have so far secured $20,000 per day for 74 percent of our Cape days and $14,600 per day for 76% of our Panamax days. Looking ahead and into Q3, we have secured 22,300 per day for 26 percent of our Cape Days and 19,600 per day for 38% of our Panamax days. During the quarter, we took delivery of the first of our 10 Kamsarmax's new buildings. We will take delivery of another 5 vessels in this series before the turn of the year.

Speaker 1

In addition, we also acquired 6 Newcastle MAX vessels. 2 have already been delivered, the rest will follow before end June. We also entered into an agreement to sell our 2 oldest Capesize vessels as we continue to divest less efficient tonnage and take advantage of firm asset markets. Finally, We announced our 9th consecutive quarterly dividend. We will pay out $0.10 per share for Q1.

Speaker 1

The dividend is a reflection of our belief in the market and underlining the dividend remain a central element of our capital allocation. Now I pass the word to Peter, who will dive into some of the numbers and financial details of the quarter.

Speaker 2

Thank you, Ulrik. If we move to Slide 5, we achieved a total fleet wide time charter equivalent rate of 14,900 in Q1, which was down from $20,400 in Q4. We had 3 ships drydocked in Q1 versus 2 ships drydocked in Q4, resulting in 146 days of fire versus 120 days in Q4. We have 6 ships expected to dry dock in Q2 this year, with 3 completed as the date of this report. We had the time charter revenues of SEK 132,300,000, which compared to SEK 180,400,000 in Q4.

Speaker 2

We recorded sales gains of EUR 2,600,000 versus EUR 2,800,000 in Q4, which will both relate to the sale of 2 Panamax vessels previously announced that were delivered before and after the year end. On the operating expenses, we recorded SEK 61,600,000 in total, which is up SEK 3,500,000 from Q4. This is attributable to higher drydocking costs and also higher OpEx reclassification from charter hire, which is due to higher trading activity. OpEx ex drydock and reclassification was 6,300, unchanged from Q4. Looking at our general and administrative expenses, we came in at SEK 4,200,000 in Q1, which is down from €5,000,000 in Q4 due to lower personnel expenses.

Speaker 2

Our daily G and A came in at Just below $4.50 per day, net of cost we charge to affiliated companies, down from 5.40 in Q4 and still by far the lowest G and A per day among our peers. Our charter hire expense were €16,800,000 versus €12,500,000 in Q4. And this, as mentioned, is due to higher trading activity, which was offset by lower charter in rates in the quarter. Adjusted EBITDA was EUR 54,700,000 versus EUR 112,400,000 in Q4. In connection with the sale of the 2 older Capesize vessels announced, we recorded an impairment loss of €11,800,000 in the quarter.

Speaker 2

Moving to the net financial expenses. We saw interest rate expenses increase And record a SEK 20,500,000 expense versus SEK 17,600,000 in the previous quarter. This change is due to higher LIBOR and SOFR rates and slightly higher average debt in Q1. On the derivatives and other financial income, we recorded a gain of SEK 2,700,000, which compares to a gain of SEK 10,900,000 in Q4. On the derivative side, we saw a SEK 2,000,000 loss Versus a gain of SEK 2,700,000 in Q4.

Speaker 2

And this is mainly due to falling mark to market values on our interest rate swap portfolio. On the results from investments in associates, we recorded a gain of €4,900,000 which was down from €7,800,000 in Q4, which relates to our investments in Swiss Marine, TFG and UFC. And a net loss for the quarter of 8,800,000 Or a €0.04 per share. And as Ulrik mentioned, we have announced a dividend of €0.10 per share. Looking at our cash flow on Slide 6.

Speaker 2

We saw a net decrease in cash of SEK 14,900,000. On cash flow for operations, we saw positive cash flow of SEK 76,500,000. And this includes a total of EUR 15,300,000 in dividends received from our investments in associated companies. Our cash flow provided from financing Came in at €32,000,000 We had dividend payments relating to the Q4 results of €40,100,000 We drew down a total of SEK 80,000,000 relating to the delivery of 2 Newcastlemax vessels. We saw net refinancing proceeds of approximately EUR 15,000,000 for the previously announced EUR 250,000,000 facility.

Speaker 2

And we saw scheduled debt and lease repayments of SEK 23,300,000. On the cash flow used in investments, we recorded SEK 123,300,000. This mainly relates to the sale proceeds relating to Golden's strength of EUR 15,300,000, Payment of deposit and purchase price of SEK 123,800,000 relating to the announced Newcastlemax acquisition, Payment of newbuilding installments of EUR 15,700,000 and Received repayment of shareholder loans of €900,000 or $900,000 On the balance sheet on Slide 7, we recorded cash and cash Equivalence of SEK 123,200,000, which includes SEK 4,800,000 in restricted cash. And in addition to that, we have SEK 100,000,000 in undrawn available credit facilities at quarter end. Our debt and finance lease liabilities totaled SEK 1,300,000,000 up approximately SEK 75,000,000 since Q4.

Speaker 2

Average fleet wide loan to value under our debt facilities was 44.5%, which was unchanged quarter on quarter. Book equity was SEK 1,900,000,000 and the ratio of equity to total assets was approximately 57%. And with that, I give the word back to Ulrik.

Speaker 1

Thank you, Peter. We start off with a quick review of the market developments in Q1. The Cape market came under severe pressure from the beginning of the quarter, impacted both by seasonal slowdown and economic slowdown. The market reached a low point just above $2,000 per day at the end of February. But as the Chinese economy started to react to the policymakers' efforts to stimulate the economy, we saw increasing demand for iron ore and particularly coal.

Speaker 1

Chinese iron ore imports in Q1 were up 9% year on year, while coal was up 100%. The Cape market, both Spot and FFA reacted promptly and firmed throughout March. It gained further in April, although of course that did not contribute to our Q1 results. Despite the rally in March, it was a case of too little, too late and the Cape market averaged just $9,000 per day over the quarter. However, as we will see later, Golden Ocean achieved a premium of 15%, five-zero, with the Capes making close to $14,000 per day.

Speaker 1

In the Panamax segment, we saw the typical Q1 seasonality playbook. We saw pressure on the rates until the post The Chinese New Year activity gave way to a decent recovery, which, however, was kept somewhat by a severe drought in Argentina and weak Chinese grain demand. The Panamax market averaged $11,300 per day during Q1, although Golden Ocean's efficient fleet Sale in daily TCE of almost 50% above that. The world GDP outlook is uncertain Amid financial sector turmoil, high inflation, a war in Europe and increasing interest rates, to mention a few. Yet we remain optimistic for two reasons.

Speaker 1

The first is that the global economy could prove more resilient that feared a few months back, The problems in the supply chain are easing and the pace of U. S. Inflation is slowing. It increases the possibility of soft or at least a softer Landing. Secondly, and this is very important, the market for the large sized drybulk vessels that Golden Ocean owns is highly correlated with China, More so than with the growth in the rest of the world.

Speaker 1

In this respect, we note that China has had a much better than anticipated start to the year. The Chinese economy grew a solid 4.5% year on year in Q1, well above the consensus prediction of 4%. Moreover, growth gained momentum over the quarter and Q2 is now widely projected to come in substantially stronger. Consequently, Many analysts have lifted the outlooks significantly and the consensus across the investment banks now predict the Chinese economy to grow nearly 6% this year. GDP growth is, of course, a headline rate and the effect on demand for dry bulk shipping will depend on many factors.

Speaker 1

We have on previous calls pointed to the property sector as critical not only for the Chinese economy, but also for TriCargo. The property sector is faring better. It expanded in Q1 following 6 quarters of contraction. In addition, new home prices rose at the faster pace in 21 months in March. Meanwhile, steel production has been strong in Q1, Increasing 6.1% year on year, further reducing the already low iron ore inventories, of course, supporting near term demand.

Speaker 1

Having said that, all the data points paint a more negative picture. The PMI fell below 50% in April, indicating a contraction in factory activity. Iron ore and steel prices have softened in recent months, while there are rumors of a cap on steel production. In conclusion, China has clearly shaken off the COVID related drag on its economy and is settling on a trajectory of very decent growth. The rebind is fragile and we have to watch the space, particularly the steel production.

Speaker 1

But indication thus far are that the Chinese comeback is on, which bodes well for drybulk demand. Demand for drybulk commodities has grown consistently over the past 30 years. On average, 30% more pro ano than global GDP. In other words, historically, it was not a lack of demand causing dry bulk shipping markets to suffer. It was the ship owners sealing their own faith by contracting too much.

Speaker 1

This is not the situation today. The highly positive supply situation persists with growth rates at 30 year lows. Particularly, the Capesize segment looks favorable with the lowest order book of all drybulk classes. In the Capes segment, Golden Ocean is with our 62 Capes, the largest owner in the world. Another reason for supply side optimism is the commencement of the IMO 2023 regulations, which Reducing the efficiency of the fleet as a majority of the global drybulk fleet is forced to slow down to comply.

Speaker 1

The exact effect of CII and EEXI is hard to quantify, but all other things equal, it will require more vessels to move the same amount of cargo If the global fleet is slowing down, the impact of the IMO regulations will grow over time as the threshold for compliance increases. We expect limited impact this year, but from next year onwards, we expect a meaningful effect. Finally, we expect ordering to stay muted. Prices remain elevated. There are question marks over future proof technology and there are few, if any available slots until 2026.

Speaker 1

Naturally, with such an attractive supply side, the market does not need particular growth. Normalized demand growth would be enough to outpace the supply and create very strong supply demand fundamentals. So putting supply and demand together, we expect an extended period of sustainable healthy earnings. The world may be facing headwinds in terms of inflation, bank sector turmoil, slowing economies. However, it is not enough to offset the outlook for dry bulk shipping.

Speaker 1

In the short term, the freight market looks to have bottomed out in February And with the Chinese rebound on track, combined with the typical seasonality, we see sufficient momentum to sustain a healthy market through the rest of the year. In this respect, it is important to point out that the most promising class of vessels in the dry space is the Capesize. There are three reasons for this. The first is that the Capes have the highest correlation with China. The Handys and Supers depend more on global GDP, Therefore often referred to as GDP carriers, the outlook for the rest of the world is not as good as for China.

Speaker 1

Secondly, In recent years, the smaller vessels enjoyed significant support from the red hot container markets. Many small dry cargo vessels carry containers. That demand is gone and it will not come back. Finally, the Capes have the lowest order book. In the longer term, the historical low fleet growth Looks to be the main driver of available market balance well into 2026.

Speaker 1

In other words, we remain highly optimistic about the prospects for Golden Ocean, both short term and long term. As we usually explain in our course, we always seek to secure fixed paying contracts when levels are attractive, And we do that in whatever segment, be it Cape or Panamax, that offers the best value. We do not want to be fully spot exposed at any time. For Q2, we have approximately 3 quarters of our fleet fixed above $20,000 per day, net of oil commissions. For Q3, we have 26% of our Cape days fixed at 22,000 per day and 38% of our Panamax days Fixed at $19,600 per day.

Speaker 1

We believe the near term prospects for the Capesizes are more promising than any other classes Given the high correlation with China, therefore, we have taken more fixed paying contracts on the Panamaxes than the Capes. In 2021, Golden Ocean set ambitious emission reduction targets. Compared to our 2019 baseline, we want to reduce our carbon intensity by 15% in 2026, 30% by 2,030 and have net zero emissions by 2,050. We believe decarbonization is changing the traditional ship owning model And will impact cost of capital, asset prices, customers buying criteria and much more. A low carbon business model is much more resilient.

Speaker 1

It will have superior earning capabilities and be much better suited to service customers and comply with future regulations. In Gold Denotion, we have a pragmatic approach to decarbonization. We want to monetize it. And as can be seen, it is entirely possible to invest profitably In 2021, we commenced our efforts to reduce our emissions. We began divesting high emitting tonnage often with lower cargo capacity and replaced it with fuel efficient tonnage, often with higher cargo capacity.

Speaker 1

We also initiated a digital transformation in which we rolled out a performance management IT infrastructure that through sensors and data allows for real time monitoring of our ship's performance. In addition, we now use digital speed and route optimization, have improved hull cleaning procedures to reduce drag and much more. Our efforts have paid off and radically increased the fleet's efficiency. And in turn, of course, also save large amount in bunkers. Last year alone, we reduced our carbon intensity compared to our baseline by 9.2%.

Speaker 1

That translated into safe cost of around $20,000,000 In the years to come, Gold Denotion will continue our decarbonization efforts to the benefit of the shareholders and the environment. The green transition and making money is a duality, not mutually exclusive. On the last slide, today I will talk about cash flow generation. Golden Ocean has the industry's lowest cash breakeven and one of the most efficient fleets. It means we have substantial cash flow potential.

Speaker 1

For instance, which we achieved $20,000 per day On an annualized basis, which is close to where the Q3, Q4 FFA curve is trading, we stand to generate $229,000,000 in free cash. Note that the graph does not take our fleet superior performance into consideration. It only looks at a cheap rates. It's a bold decision what we do with future earnings, but we have for the past 9 quarters paid dividends even with acquiring vessels. So it is a fair assumption that dividend continues to be a top priority when it comes to capital allocation.

Speaker 1

Before opening up for questions, I'd shortly wrap up 3 main points from today's presentation. Gold Notion outperformed the market in Q1, beating the indices by an average of $4,900 per day across our entire fleet. Gold Notion is not taking the foot off the gas when it comes to monetizing decarbonization and building a more resilient and future proof business model. Gold Ocean continues to focus on returning capital to our shareholders through dividends. We pay out a dividend for Q1 despite making a small loss.

Speaker 1

It emphasizes our belief in the market fundamentals and marks our 9th consecutive quarterly pay up. And now we start the Q and A session. I therefore hand the word back to the operator. Thank you for your

Operator

attention. Ladies and gentlemen, we now begin the question and answer We have one question. Please standby. And the first question from Greg Lewis from BTIG. Please go ahead.

Operator

Your line is open.

Speaker 3

Hey, thank you. Thank you and good afternoon and thank you for those comments. Clearly, It sounds like the team is a little more bullish on Capes than maybe the smaller vessels here. Could you talk a little bit about What's going on in the FFA markets? As I look at the Capes, they're it looks like they're in backwardation In the medium near medium term, while as I look at something like the smaller vessels, they're in contango As we kind of head into like Q3, just kind of curious if you have any kind of not that I expect yes, just kind of what your view is on maybe what's driving that Difference between the larger ships and the small ones.

Speaker 1

Yes. Hi, Craig. Thank you for listening in and thank you for your question. Of course, when we look at the FFA curve, it's a snapshot of what is happening right now. Our comments are more in the can you say in the longer term perspective when we look down at 12 month and the general outlook for the various segments.

Speaker 1

So I won't be able to comment specifically on the FFA curve between the 2 the different segments. I don't think it's relevant here. Can you hear me, Craig, sorry?

Speaker 3

Yes, absolutely.

Speaker 1

I just got a message that there may be Some audio problems, but I suppose it's all fine. So I think our comments are more on a, can you say, on a high level in the sense that Where we have seen the past couple of years, the smaller sized vessels performed relatively well compared To the larger sizes, then what we see is a return to the, can you say, normal hierarchy in terms of freight rates where the large sizes are Also the ones making the most money and also with the biggest upside. So I think it's in that light that you need to see the comments. And also I will say that it's not that we believe that there's a collapse happening for any of the dry cargo, can you say, segments. We think that they all are looking to have some strong years.

Speaker 1

It is more this conclusion that We are maybe seeing a more normalized world now that there's less or let's say no support from the containers anymore for the Handys.

Speaker 3

Got you. Okay. So really you're just the point of that is just you're expecting more of a normalization in the historical patterns Of the various vessel spreads. Okay. So then as I think about India, There's debate there's always been debate about India becoming more impactful into dry bulk Demand, specifically around the coal side.

Speaker 3

As we think about that and Obviously, we have the huge not the huge, we're taking delivery of the first of, I guess, what's going to be 10 or 11 CampsterMAX Kind of what's your view and how do you expect those vessels to where do you see the sweet spot in terms of What's going to be the driver of demand for the Camstrom RackS fleet as you take delivery of those As you boost your fleet in that sector.

Speaker 1

Yes. No, I mean, the demand for the Cape sorry, from the Kham So Max's will definitely depend on the coal flows for once. It will also depend on how the Capes vessels are faring. And ultimately, it will, of course, also depend on how the smaller vessels are faring as it is a correlation between the I think the kicker that we need right now to have the Panamaxes perform better is we need to see more grains flow, which has been weak. I think we also need to remember that the Russian market is more or less gone.

Speaker 1

It was a big uptick of Panamax tonnage as well. And we don't see that much more. It's become almost a carbo tage Trade now. And that's also why we say here with Our eyes open that it looks more tilted towards the larger sizes. It looks better in the short term.

Speaker 1

We also, as I just said on the call, have taken more coverage on the Panamaxes than we have on the larger sizes. So we need to see if certainly the grains keep flowing out of the Black Sea and we surely would like to see more coming Out of the you can say out of South America. And then finally, we need to continue seeing the coal flows, which really are there to a large extent, But that needs to keep on flowing.

Speaker 3

Okay. And then just one more for me. Congrats on the Newcastlemax Acquisition. Realizing you already have a fairly one of the youngest Cape fleets or K Plus, we'll call it, fleets out there in the market. As we think about that Decision,

Speaker 1

is part

Speaker 3

of that a function of renewal as kind of you do have, I guess, a handful of Capesetter now, I guess, 2,009, 2010 vintage. Is part of that, like, I guess, just a normal renewal strategy or is it We're really looking at this as incremental growth here over the next couple of years for our fleet.

Speaker 1

I'm not sure I understood the question or was it more common?

Speaker 3

So really as I think about the decision for these Newcastle Max acquisition, Was this more of a build an incremental increasing the fleet as these vessels get delivered Or is this more of it beyond renewal strategy given the fact that you now have some vessels that are 10 plus years old?

Speaker 1

Yes. I think it was a combination. I mean, to begin with, it's the market for S and P transactions is not a Bloomberg terminal, As I like to say, so you have to wait for the right opportunities. And before we did this transaction, we have been turning a lot of stones without Finding any possibilities. So the first thing is to find attractive tonnage and then, of course, trying to time it, which we think we happen to do very well.

Speaker 1

So I think it's part of the overall strategy of continuously, can you say, renewing the fleet, Keeping a low age and striking when you have the opportunity. What you have noticed that perhaps we did is that we've sold 2 capes. I don't think we would have sold those Capes if it wasn't because we got the possibility of buying these 6 Newcastle Maxes. So this is a, I think, a classical ship owning move. You sell something old, recycle the equity into some new buildings, you lower Your average age and you have a, can you say, higher generating vessels coming in.

Speaker 1

So it was a kind of an optimistic Transaction, it became possible and then we were striking for it because it fit Well, into the strategy that we have, which is, as I say, to have a modern and young fleet.

Speaker 3

Perfect. Thank you very much for the time. Have a great day.

Speaker 1

Thank you.

Operator

Thank you for your question. There are no further questions at the moment. I will hand back the conference over for closing remarks.

Speaker 1

All right. Then we would like to say thank you very much for the attention. As always, please remember, you can find more information about the Golden Ocean on LinkedIn, either by following myself or the Golden Ocean profile. And to those of you based in Norway, happy 17th May and see you all next time.

Operator

That concludes the conference for today. Thank you for participating. You may

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