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Golden Ocean Group Ltd (GOGL) Q3 2020 Earnings Call Transcript

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Golden Ocean Group Ltd (NASDAQ: GOGL)
Q3 2020 Earnings Call
Nov 19, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Golden Ocean Group Limited Earnings Conference Call. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your first speaker today CEO, Ulrik Andersen. Please go ahead.

Ulrik Uhrenfeldt Andersen -- Chief Executive Officer

Good afternoon, and a warm welcome to Golden Ocean's Q3 release presentation. My name is Ulrik Andersen, I'm the CEO of Golden Ocean. I am delighted to present our results today together with Peder Simonsen, the company's CFO.

We will keep the presentation short and focused. In a moment, I will talk you through the highlights of the quarter. Thereafter, Peder will provide details on our financial results. I will round off with a market update before talking about our corporate strategy and cash breakeven. After the presentation, we look forward to answering any questions that you may have.

In the quarter, we achieved an EBITDA of $76 million, this resulted in a very satisfying net profit of just shy of $40 million. The result was driven by strong spot chartering performance on both Capes and Panamaxes combined with our decision to take out and not insignificant number of TCEs at fixed levels during the peaks in Q2 and again during this quarter. I will talk more about this later.

We also completed the refi of the $425 million credit facility at highly attractive terms. It lowers our cash breakeven with more than $1,100 per day for the vessels in the facility. It underline Golden Ocean's ability to secure attractively priced finance with the traditional and in our view more flexible global shipping banks. And this despite, of course the turbulent times we are currently facing.

As mentioned, we have again this quarter secured more fixed cover. It means that as of today, we have 73% of our Capesize vessels days covered at $21,750 per day and 82% of our Panamax vessels covered at $12,750.

Finally, we have divested our in-house ship manager SeaTeam, we want to focus on our core activities, which are ship owning in the Panamax and Capes segments. So, we have completed a transaction with OSM. On the sale, we have made a profit of $3.5 million.

Also we have discontinued our commercial, accounting and operational agreement with SFL regarding their seven handy vessels. The reason for this is the same, we want to focus on our core business, which is not management of vessels outside the Panamax and Capes segments.

With that, I will pass the word on to Peder for the financials.

Peder Simonsen -- Chief Financial Officer

Thank you, Ulrik. We'll start buying going through the profit and loss on Slide five. Our time charter equivalent revenue came in at $143 million for the third quarter, which compares to $67 million in the second quarter. This is a reflection of achieved TCE rates for the Capesize ships of $19,950 and $13,500 for our Panamaxes, which compares to $8,300 per ship per day for the Capes in Q2 and $8,100 for the Panamaxes in Q2.

Our total time charter equivalent rate across the fleet was $17,900 in Q3. We had no dry dockings this quarter, which compares to nine ships in the previous quarter and this obviously also impacts the time charter revenue.

Looking at our charter hire expense this quarter, we recorded a charter hire expense of $20.4 million, which compares to $12.3 million in the previous quarter. This is largely due to our index-linked time charter in which follow the market rates by increasing during the third quarter.

Moving over to the ship operating expenses, they came in at $43.4 million in the third quarter. This was lower than the previous quarter, mainly due to no dry docking costs recorded in Q3, but this was offset by higher costs relating to crew change particularly, but also other COVID-19-related cost increases.

Our G&A costs were $3.1 million, which equals approximately $450 per ship per day and this is slightly down from the previous quarter, but fairly flat quarter-on-quarter. We had -- as Ulrik mentioned an EBITDA of $76.7 million.

When you move down the P&L, our depreciation was slightly up by $600,000, due to depreciation of the ballast water treatment systems and scrubbers installed in previous quarters. Our financing expenses were down to $9.8 million, which is largely due to lower LIBOR rates, which was down by over 1 percentage point during the third quarter.

Looking at our derivatives and other financial income or loss, we recorded a positive $600,000 result, which compares to $8 million in loss in the previous quarter. This is due to the net effect of positive movements in mark-to-market and realizations of derivatives, which is offset by a negative result from our investment in the dry bulk operators SwissMarine in this third quarter.

The net profit as Ulrik mentioned, was $39 million or $0.27 per share, which compares to a loss of $40 million or $0.29 per share in Q2.

Moving to Slide six. If we look at our cash flow for the quarter, we generated the cash flow from operations of $58 million and we repaid debt both through our financial leases and also our credit facilities of just above $30 million. And we had as mentioned no major investments this quarter only $300,000, which resulted in a cash position at the end of the quarter of $131 million.

Moving to Slide seven. If you look at our balance sheet, we had -- as mentioned the cash position of $131 million and this includes $28 million of restricted cash, which secures our FFA, our IRS and bunker hedging positions. We have continued to repay debt to further strengthen our financial position by $30 million this quarter and -- which leads to a debt and lease liabilities at the end of the quarter of $1.2 billion. Our total assets was $2.7 billion, which leads to a equity to total assets ratio of just shy of 50%.

If you move to Slide eight. I just want to mention our credit facility, refinancing that we did in November, where we have signed and closed $304 million term loan and revolving credit facility, which replaces the $425 million facility that originally matured in March 2021. It is a five-year facility that is priced at 235 basis points, we have been able to extend our repayment profile, which has a 20-year age adjusted repayment profile or 16-year straight line profile and this contributes to a lowering of the cash breakeven rate for these ships of above $1,000 per ship per day.

We have a strong interest in the -- from the banking -- our banking group and its consisting of the same banks that we're in, say for one bank that has replaced all banks are part of the biggest global shipping banks in the world. We have also included a revolving credit facility, which per now is fully drawn, but will serve as cash management tool going forward for us to save costs and manage our liquidity in a good way. Otherwise, the terms in the facility is equal to our other credit facilities.

And with that, I'll pass the word back to you, Ulrik.

Ulrik Uhrenfeldt Andersen -- Chief Executive Officer

Thank you, Peder. Now, turning the attention to the market review and outlook on Page 10, you can see a slide showing the market developments, since Q3, 2019. What we can see is that the strong rebound of the market, which began in Q2 and was driven primarily by the lifting of the lockdown in China and the unprecedented stimulus package released by the Beijing government, lost some of it momentum coming into Q3. This was perhaps not surprisingly, that the market took a breather having reached rates above $30,000 per day.

However, as we move through the third quarter, we saw China's -- I want to say almost insatiable appetite for iron ore. The import growth with 13% over the same quarter last year and it was in fact the highest quarterly iron import ever to China, standing at 321 million tons. Worth noticing in this connection is that the increased share of imports -- or increasing share of imports came from Brazil instead of Australia naturally increasing ton miles. All in all, this aided the market in rebounding once again in the second half of the quarter.

Looking at the outlook and turning to Slide number 11, and starting with the supply side. We can see that the supply picture is very clearly improving. The order book is at historical lows, the growth slows down significantly next year and the year after. And right now the order book stands at a mere 2.7% and 1.6% respectively. Remind you this before scrapping and delays. We do expect ordering to stay relatively muted. Cheap finance is not readily available to everybody, but perhaps and I think this is actually more important, there are question marks hanging over technology and future regulations, which will encourage most players to wait with ordering. It means that we should have at least a few years with a modest influx of vessels.

Turning the attention to the outlook and looking at the bond side first, how does that look. Well, we know the 2020 has been a difficult year for the global economy. With the exception of China all lots of countries have had negative growth this year. However, the year is coming to an end and 2021 looks like a rebound year. The IMF expects global GDP to increase by 5.2% next year and that in itself is of course a quite remarkable recovery. But what we notice of course that China and India, two of the world's largest importers of dry bulk commodities are expecting to see GDP growth, well above that number. India IMF expects a growth of 8.8% and China and -- a growth of 8.2%.

What I also have noted since our last quarterly call, is that the global GDP growth forecast has actually come down slightly. Growth numbers for China and India, however has actually both been revised up. This is of course net positive good for dry bulk. We know there's uncertainty with this forecast and all the forecast -- with every forecast, but a recovery led by China and India, would be well received by the dry bulk markets.

So if you summarize the outlook on -- and look at Page 13, what we see is that, overall we have a positive situation, the unprecedented stimulus money as was the case with the last major recession will likely lead to infrastructure investments and a pickup in the industrial activity. The result would be a greater demand for iron ore and coal, the two primary dry bulk cargoes.

With respect to iron ore production is expected to expand significantly in Brazil over the next two years. You may recall that iron ore production was impacted by dam collapse in Brazil in early 2019, which severely hampered production. This has weighted on the market, but this trend now looks to have reversed. Recovering industrial activity will likely to an increased demand for coal, therefore we expect coal to start flowing again next year as well.

As mentioned, the fleet growth supply outlook is very positive too, in fact as positive as has been for years. Looking into 2021 and beyond ton mile demand is forecasted to outpace supply growth for the first time in a decade. While uncertainty continues to persist as COVID-19 cases have dramatically increased in the last six weeks, we are still very optimistic in our long-term view.

Turning to Slide number 14, looking -- and looking specifically at Golden Ocean, we have continued to actively manage our spot exposure to protect against downside scenarios, but while maintaining significant exposure to increases in freight rates. We have applied the same trading strategy in Q3 as we did in Q2 and secured additional cover during the peaks. This has helped us lowering the risk and increased our earnings and it has actually put us in a comfortable situation, while we have adequate cover at good levels to bridge between now and the Q2, where we expect rates to improve.

It's important for me to emphasize that we are not looking for balance per se, rather we are constantly assessing the market to look for opportunities, to lock in cash flows without giving up too much upside. You will also notice that we take out more cover in the stable Panamax segment, while keeping more exposure to the Cape market, which traditionally has the largest upside.

We are also, of course focused on maintaining our industry low breakeven levels. We have -- as Peder just explained further lowered our cash breakeven this quarter. It means that as of today, our cash breakeven for the Capes, of which 50% are scrubber fitted or $13,001 day and remind you, this is including servicing the debt.

On the Panamax fleet, we have a cash breakeven of $8,600. So if you put it all together, what we see is an attractive fleet supply demand balance in the years to come. That coupled with our disciplined chartering strategy, low cash breakeven, solid balance sheet and large exposure to the Cape market makes us believe that Golden Ocean are in a very good position to capitalize going forward.

That concludes today's presentation. Thank you for your attention. We now continue to the Q&A session.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question we have today comes from the line of Gregory Lewis from BTIG. Please go ahead.

Gregory Lewis -- BTIG -- Analyst

Yes, thank you. Thank you and good afternoon and thanks for taking my questions. I guess, I'd start off just wondering, I mean, clearly walking through the slides and then just like listening to your comments about the market, it sounds to me my takeaway is that you're constructive on the outlook for 2021 and even beyond that.

And so just as I think about that and the potential for clearly you guys already have a sizable fleet, but it does seem like there is opportunities to expand your footprint right now there's -- all these vessels were staying on the dry bulk market, but there is -- what's maybe say there's more vessels for sale today. Just kind of wondering maybe what you guys are waiting for? How you're thinking about potentially expanding your footprint? Or is it one of these scenarios where, hey, we own roughly 70 ships and this is what we think we're comfortable managing it and then we're not really interested in growing that fleet out?

Ulrik Uhrenfeldt Andersen -- Chief Executive Officer

Thank you for your question. And we are constantly monitoring all opportunities. I think, we have to remember that we had a good quarter -- this quarter, but we had Q1 and Q2, which was -- which were more challenging. So, our focus right now is to pass the balance sheet to ensure that we have -- what can you say a sort of a buffer should any unforeseen circumstances arise. When that is said, of course, we are looking at our capital allocation constantly and addressing that. And if we are seeing good opportunities we're also not afraid to pounce on them. But there would be a question of whether this goes to dividends, go to say the balance sheet or we reinvest.

Generally speaking, I can say on investment opportunities most of what we see at the moment is tonnage of an older age being pushed around and we are not so keen on investing in tonnage that is not modern. So, that is a comment I'd just like to make in connection with this. Does that answer your question?

Gregory Lewis -- BTIG -- Analyst

Yes, absolutely. That was super helpful. Thank you. And then just as I think about this knowing that there's -- I guess congratulations on you guys, I guess, now running Golden Ocean. But as I think about Golden Ocean over time historically, there's -- clearly the company has been able -- has been willing to lever up its balance sheet. And I think, you know, you kind of touched on it with the comments around, yes key banks are still there. But, I guess, as you think bigger picture as the -- maybe the ship lending market is evolving or changing. Does that, kind of, change the way you think about leverage through the cycle, i.e., if I was thinking about maybe how Golden Ocean was managed a handful of years ago?

Is peak leverage -- do you envision peak leverage being lower over the next couple of years versus what it might have been a handful of years ago? Just kind of curious, if things in the markets or -- has anything changed in the way you -- we think about Golden Ocean being managed from a balance sheet perspective? Has that evolved at all over the last couple of years?

Peder Simonsen -- Chief Financial Officer

Hi, Greg. I think that we are in a very fortunate situation in that market, specifically, which has contracted. And a lot of banks have disappeared out of the market, but we have ample capacity and are one of the fortunate companies to be very much an attractive customer among the biggest shipping banks. So we are -- in that sense, we have not changed our view. We have been vocal on previously that we have targeted a leverage ratio of around 55%. I think that, currently the -- there is so much lower risk appetite in the equity markets. So I don't think that an excessive leverage will benefit you in the long-term. But we definitely have the capacity in our balance sheet to lever up to enter into interesting transactions.

But we are very much focused on cash breakeven, keeping our costs low. And I think that it's sensible to be able to have -- and to be able to have a low cash breakeven, you need to manage your leverage for sure. So, I think, it's -- we are not afraid of levering up, if the transaction to be done is right. But I don't think we will lever up for its own sake.

Gregory Lewis -- BTIG -- Analyst

Okay, great. Thank you. That was super helpful. Have a nice day, guys.

Ulrik Uhrenfeldt Andersen -- Chief Executive Officer

Thank you.

Peder Simonsen -- Chief Financial Officer

Thank you.

Operator

Thank you very much. [Operator Instructions] We have a follow-up question here from Gregory Lewis from BTIG. Please go ahead.

Gregory Lewis -- BTIG -- Analyst

Hey, guys. Sorry about that, I was going to -- I was trying to be polite and let other people get in. But I guess, what I was kind of wondering is -- and you kind of touched on it. Clearly, iron ore is what's going to drive the dry bulk market and we can, kind of, watch that and see how it's developing as China has restarted. But you did, kind of, mentioned coal and it's interesting to me, because we've been doing a lot of work and while -- from a news perspective, it sounds like coal is not going to be around yesterday, let alone in the years to come.

But I'm just kind of curious, realizing that coal is still a big part of the dry bulk market. How are you guys thinking about -- and you have, you know, vessels across the spectrum, that the small vessels move coal and large vessels move coal. So just kind of curious, how you're thinking about the coal market developing over the next couple of years? Thanks.

Ulrik Uhrenfeldt Andersen -- Chief Executive Officer

Yes. Thank you. We still -- I'm sorry, as we also spoke about on the last call, I believe it's too early to declare coal as a dry bulk commodity there. We think definitely it's going to have a diminishing, and I think that's a good thing place in the energy mix going forward. But we still have the advanced economies to a large extent still being dependent on coal and they cannot outpace the coal in a few years.

So, what we see happening is that while coal has been basically non-existent for this year, we expect that -- as we see a rebound of GDP growth in both India and China, and laxing [Phonetic] presumably of the import quotas in China on coal, we expect to see coal flows next year help the dry bulk market. We don't think it's going to be the main driver, but we think it can assist in making the supply demand balance more attractive in the longer run. And by that I mean, yes, five, 10, 15 years down the line. Yes, of course, it's going to be phased out eventually of that I have no doubt. But for the shorter term, we don't have any expectations that coal will not continue to be an important commodity in dry cargo.

Gregory Lewis -- BTIG -- Analyst

Okay, great. Thanks. Super helpful, guys, once again have a great day.

Ulrik Uhrenfeldt Andersen -- Chief Executive Officer

All right. Thank you.

Peder Simonsen -- Chief Financial Officer

Cheers.

Operator

Thank you. [Operator Instructions] Thank you very much. There are no further questions coming through over the phone at this stage.

Ulrik Uhrenfeldt Andersen -- Chief Executive Officer

Okay. Thank you for joining.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Ulrik Uhrenfeldt Andersen -- Chief Executive Officer

Peder Simonsen -- Chief Financial Officer

Gregory Lewis -- BTIG -- Analyst

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