Q2 2022 Golden Ocean Group Ltd Earnings Call
Okay.
Good day and thank you for standing by welcome to the Q2 2022 Golden Ocean Group Limited earnings call and webcast.
This time all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.
I'll ask a question during the session you will need to slowly press star one and then one on your telephone Kiwi then here and there to make that message advising that your hand is raised.
Please note that today's conference is being recorded I would now like to hand over the conference to speak up Mr. Erik Anderson. Please go ahead.
Good afternoon, everyone welcome to Golden Ocean second release caught in 2022, where we will talk you through the key highlights of our Q2 results.
Name as Ulrik Andersson under CEO next to me I haven't paid a few months from Golden Ocean CFO .
Today's main messages that Golden Ocean delivered another strong quarter, while also having secured four would cover to weather the near term headwinds.
And the next 15 to 20 minutes, we will show you that.
Road notion has taken fixed pay carver in Q3, and Q4 to manage near term uncertainty.
Given our belief in the longer term market fundamentals and our strong balance sheet, we continue to pay out meaningful dividends.
And finally, despite the uncertain macroeconomic context dry bulk fundamentals are constructive driven mainly by an attractive supply side.
With that let's take a look at the main highlights of the quarter.
In Q2, we recorded an EBITDA of $192 million, which resulted in a net profit of 164 million or <unk> <unk> per share.
We achieved average time charter rate equivalent of 30600 per day for our Capesize vessels, while the Panamax vessels achieved an average TCE of 26 27600 per day.
Worth noticing in this respect is that our chief Capesize rates were 9000 per day or 44% above the benchmark rate.
We have also divested two ultra Max vessels from 2015.
These four vessels outside our core segment Panamax and Cape.
Including these vessels, we have sold seven ships in total in the past 10 months by which we have been releasing cash to continue adding more modern and competitive tonnage to our new building program.
We also published our 2021 years three report.
One of the main highlights being our commitment to decarbonization by introducing emission reduction targets of 30% by 2030 and net zero emissions by 2015.
Looking at this quarter Q3, we have so far secured 28000 per day for 80% of our Cape days.
27000 per day, 492% of our Panamax days.
Looking into the next quarter Q4, we have secured 29000 per day for 25% of our cafes and 22000 per day for 27% of our Panamax days.
In other words, we have taken out fixed paying cover at good rates for the remainder of the year to hedge against near term uncertainty.
Something I will discuss later in the presentation.
Finally, we announced another dividend.
We will pay up $6 per share for Q2.
The dividend underlines our belief in the longer term fundamentals and takes the dividend we paid since 2021 to more than $720 million.
Now over to Peter who will dive into some of the numbers and financial details of the quarter. Thank you rich.
If we move to our profit and loss.
For Q2.
We achieved.
We achieved TCE revenues of $250 million compared to TCE revenues of $208 5 million in Q1.
This was driven by a modern fuel efficient fleet and a solid base coverage ending at a total fleet wide TCE rate of 29400.
Looking at our operating expenses, we came in at $50 4 million, which was down by $7 8 billion from $58 2 million in Q1.
This was largely a result to fewer ships being dry docked.
And also lower COVID-19 related expenses.
We had one ship drydock in Q2 versus six ships dry docked.
Which resulted in a <unk>.
Off hire days of 187 days.
Versus 294 days in the previous quarter.
We do however continue to see Covid costs continue which for Q1 Q2 resulted in a $142 per day impact.
Our Opex ex Drydock was 5800 for Q2.
The dry dock costs consisted of $74 per day versus over $600 per day in Q1.
Moving to the general and administrative expenses.
We saw.
G&A in that $5 5 million, which was slightly up from $5 1 million in Q1.
Daily G&A per ship day came in at $612 per day net of recharge.
Which was impacted by profit sharing accruals and one off personnel expenses.
Amounting to $180 today.
Looking at our charter hire expense ended at $15 4 million versus $10 3 million in Q1, which mainly reflects higher average charter in rates.
This resulted in an adjusted EBITDA of 191 6 million up from $149 million in Q1.
Moving to our financial expenses, we saw the impact of higher reference rates LIBOR and sulfur pushing our.
Our interest rate costs slightly ending at 11.
About $9 million versus $10 million in Q1.
Our derivatives and other financial income.
We have seen impacted our P&L significantly the last quarters and also this quarter came in with a gain of just below $20 million, which compares to a gain of 32 9 million in Q1.
The most notable changes was <unk>.
This gain of $7, one down from $18 7 million in Q1.
Of which interest rates swaps was the main driver.
And also results from investments and associates.
<unk> came in with a gain of $12 7 million.
And this mainly relates to investments in Swiss Marine PFG, UFC and with that we came in with a net profit as Rick mentioned over $163 seven or eight <unk> per share.
Declared dividend of <unk> <unk> per share for Q2.
Moving to our cash flow on slide six.
You can see that we had a net decrease in cash of $52 6 million.
This is the result of cash flow from operations of $156 million, which was up.
Right.
From $123 million in Q1.
Our cash flow used in financing was 147.
In which we saw a net.
Refinancing proceeds.
Of the 275 million facility that we refinanced last quarter of $6 7 million.
B, so that lease repayments of $47 8 million, which includes also a $14 million in debt repayments related to the sale of two of the three panamax vessels sold.
And of which one vessel was repaid in Q1.
Cash flow provided from investments of 37 eight relates to the sale proceeds of the mentioned panamax vessels or $51 5 million.
And offset by payments on our new building program of $13 7 million.
Moving to our balance sheet on slide seven cash position at quarter end was $168 3 million, which includes $4 3 million of restricted cash and.
And in addition, we have 100 million in Undrawn and available credit facilities at quarter end.
Our debt and lease liabilities totaled $1 4 billion.
By the end of the quarter.
And with our book equity of $1 9 billion, we had a ratio of equity to total assets of approximately 57% by quarter end.
Having a look at our cash breakeven or capex and debt maturities on the next slide.
We can see that.
Following the $275 million refinancing last quarter, our next debt maturity due in Q3.
2024.
Debt financing on our new buildings is expected to be established during the first half of 2023.
And basis.
Debt financing on new buildings, and the sale of the two ultra <unk> vessels.
We consider our new building program to be fully funded.
Looking at our cash breakeven on the right hand graph, we can see that our the general interest rate level increase has impacted.
Cash breakeven.
Offsetting this on the capes.
We have had a reduction in our leased charter rates.
Then keeps our cash breakeven unchanged at $30000 per day, while we see our product.
Panamax cash breakeven come in.
$200 above last quarter.
But we still maintain our absolute best in class.
Industry cost levels.
With that I give the word back to Rick Thank you Peter.
We begin with a quick review of the market developments in Q2.
In the second quarter, the Panamax market build on the strong Q1 and continued to farewell, mainly driven by healthy coal demand and new trade routes emerging from the Russian invasion of Cree.
The Panamax market averaged 26000 per day in the quarter.
The Cape market also started off well, peaking at just shy of 40000 per day in May also for the Capes code was an important driver.
Towards the end of the quarter Hello, both segments came under pressure due to the unwinding of port congestion in China, which reduced vessels into the global fleet simultaneously COVID-19 related inefficiencies pertaining to crew change currency and so on Easter as well.
These factors are still contributing to the current market weakness.
I've worn Ukraine, and energy crisis, and central banks moving to tighten monetary policy to tame inflation are the latest challenges the world is facing in the aftermath of Covid.
What was expected to be a continued strong recovery has recently been transformed stalling global economy with slower growth prospects and high inflation.
This is naturally tensing the salt short term demand prospects for Drybulk and has also caused the markets to come under pressure.
However, we are optimistic that a soft landing as possible with the global economy forecasted to grow to 9% next year, which remains high in a historical context.
Looking at China, specifically, the largest importer of dry bulk commodities COVID-19 restrictions have been eased while economic policy stimulus measures increased lending rates trend.
It will take time for these to take effect and undoubtedly more and Chauffer measures will be required in the fall next year.
Ever with what has actually been done already in China, combined with increasing volume iron ore output and continued inefficient allocation of coal we believe the market will rebound to more profitable levels before the turn of the year.
In conclusion, we believe the dry market will be challenged in the short term until chinas growth normalizes and the rest of the world has battled inflation, having set that a rebound from the current levels is likely before the turn of the year.
Turning to attention to the supply side on slide 12, the highly positive supply situation for dry bulk persists.
Golden Ocean is the largest owner of Capesize vessels in this segment. The order book is below 6% of the global fleet and at 30 year lows.
This sorry, the already modest projected growth rate based on the order book doesn't take scrapping into account no the likely delays in delivery schedules caused by Covid in other words, the net supply of Cape vessels is extremely limited and with most yachts only checking orders for 2024.
For 2025, the runway with minimal supply growth is at least two and a half years, but likely longer as little points to increased appetite for new building among the owners, mainly because of the high new building prices.
Naturally with fleet growth slowing significantly the market does not need to protect dealer growth in the demand normalized demand growth would be enough to outpace supply growth and create very strong fundamentals for the dry bulk market.
So the order book is reason to be optimistic, but there are other dynamics at play on the supply side as well.
From next year. The IMO 2023 regulations also known by ESI are coming into force.
In short the new regulations stipulate that all vessels need to be as efficient as of 2015 built vessels.
If a vessel is not in compliance there are two main path to compliance.
The first one is an engine power limitation or EPL, essentially low and cap the top sailing speeds.
Depending on the vessel this would constitute an up to 25% reduction in the top speed.
The second.
Path is upgrading the vessel.
Think air lubrication systems, better propel of all checks and so on.
Some upgrades required products some do not.
For the vast majority of owners of power engine limitation and retail will be the preferred option since it doesn't cost anything.
It is estimated that at least 73% of the global dry bulk fleet is noncompliant and the majority of vessels are likely to Epo.
It means that the fleet is no longer able to sale as fast and thus our cost will be less efficient as it will require more ships to carry the same amount of cargo.
In depressed market. It will have no impact the vessels will not be full steaming anyway, but in good markets that would be much less flexibility in the fleet.
The fact that ESI will congratulate through 2023 and be in full effect from 2024.
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 and slowing economies, but it is not enough to offset the longer term outlooks for dry bulk we believe.
While we acknowledge macroeconomic factors, we do not expect the type of deep prolonged recession that would have an overweight impact on the demand side of the equation.
In short, we expect demand will continue to grow.
Maybe not at the pace that was forecast at Johns just months ago, but we think growth will be steady and sufficient.
At the same time, we are looking at a historically positive vessel supply.
Supply outlook and there is nothing that can change that in the short term given the lack of shipyard capacity and high new building prices.
Combined with inefficient coal grain traits impact from the IMO regulations in 2023, it is practically impossible to have a negative view on supply.
In our view the favorable supply side will support a continued strong freight environment in the years to come.
As we have discussed on prior.
Our earning calls we have no intention of being fully spot exposed at anytime.
We seek to take out fixed contracts in the best possible market conditions and mitigate risks.
The group disability and protects our capacity to pay out dividend.
During Q2 as rates weakened we actively worked to secure cash flows through the balance of the year.
While rates are likely to pick up as a result of seasonality and the current state of the coal trade in particular, taking coverage in Q3 and Q4 was the prudent thing to do.
Thus as pets, a day more than half of our available vessel days in 2022 are fixed.
In Q3, we have 85% of the fleet booked at levels well above the market on.
On average our daily earnings on a fleet wide basis up 10 to $11000 per day, better than Q, Q3, Cape and Panamax bent benchmark rates.
Looking into the fourth quarter, we have more than 25% of the fleet on fixed paying contracts on levels well above the FFA forward curve.
We will continue to actively manage our exposure to what the two segments to extract as much value as possible with the lowest possible risk.
Finally, we will focus on cash flow generation.
Through well timed acquisitions economics of scale and access to competitive finance, we have achieved industry low cash breakeven.
As it appears Golden Ocean is cash flow generation potential the substantial despite the weakening freight environment.
For instance, if we are achieving the same rates, we have seen year to date Golden Ocean stands to generate $463 million in free cash over the next 12 months.
Be reminded that the graph does not take our strong forward took into account.
It is a board decision, what we do with future earnings, but we have made clear that dividends is top of our priority list with today's dividend announcement, we have paid out $720 million in dividends since 2021.
Before we open up for questions I'd like to shortly wrap up three main points from this release.
Golden Ocean delivered a solid net profit of $164 million in Q2 on the back of a purposeful commercial strategy.
The company has fixed 56% of the available days in 2022 at healthy levels.
Despite a slowdown in economies around the world supply side fundamentals are better that they have been in decades.
Overall, while we acknowledge current headwinds we believe we are well insulated from near term rate weakness and are well positioned for the future with a strong forward book.
Martin and growing fleet and industry, leading cash breakeven levels.
And now we start the Q&A session are therefore hand, the word back to the operator. Thank you.
Thank you.
A reminder to ask a question you will need to slowly press star One and then one on your telephone and wait for your name to be announced.
Once again, it's still one and then one on your telephone.
Please stand by while we compile the Q&A roster. This will take a few moments.
We are going to proceed with the first question. Please standby.
We have the first question is coming from the line of Omar knocked off from Jefferies. Please ask your question. Your line is open.
Thank you Hey, guys good afternoon.
Hi, you guys have done obviously, a very good job of fixing a ship charters here and as you said insulating yourself from a lot of the weakness we're seeing here.
Just wanted to ask maybe if you could characterize the market at the moment and you did give a I think a good overview, but just wanted to ask is we've seen capes completely come off here not down towards about 10000 a day.
Clearly a tough steel market has been an issue, but what's going on with the panamaxes as you've highlighted the coal trade has been very strong.
Especially with where energy prices are so what's driving the weakness in the panamax as well.
Yes, Hi, Rick here.
Yes, so as I say the.
The crisis.
On the Capes as Ben has been pretty pretty deep.
Of course, there is a correlation between the segments to begin with so that's the first I would point to.
Otherwise we are also seeing can you say a weaker grain.
Flows given the Ukrainian and Russian conflict. So this is this is reflected poorly on the on the on the Panamaxes.
Well, so and so these are two of the of the reasons. Finally, the last one I would point to is also decreasing congestion and higher efficiencies and all combined here.
We have seen pressure on the on the on the Panamax market as well, albeit not as much pressure as we have seen on the on the Cape sizes.
Okay got it so a bit of cascading a bit of a tough screens period and then.
Congestion.
As you kind of think about how things are at the moment what are you seeing in the sale and purchase market.
Obviously, we've seen some gains over the past year and secondhand values.
Soft patch that we're seeing currently how do you see that affecting values.
Our ships here in the near term.
There is a correlation.
Albeit not directly one to one but certainly a correlation between the spot market and in the asset prices or the secondhand prices.
So when we see the pressure that we see now on the on the on the rates. It has an effect on the S&P market as well.
I think the first thing that happens is that the that the market cools a bit because most people that are buying a vessel will like to bind and a strong market. So that they can go out and make a good picture on the first.
The first time that they employ the vessel. So its cooling can you say the activity but of course also we do see a cooling of the prices here in the near term impacted by the by the.
The spot market.
How much and how little depends on.
On the class and the size and the age et cetera.
But to say that the that the secondhand market.
So I think it's a fair statement. It may it may also be cooling slightly.
Okay. Thank you. Thanks, all right and then just a follow up then for.
<unk>.
Golden Ocean sits today, obviously, you have a pretty sizable fleet, you've got critical mass and the capes and panamax.
Segments.
And this cooling off period potentially of asset values coming off a few percentage points you see that as an opportunity.
Or are you more.
I'm happy to sit back harvest to your cash flow and focus more on returning capital as you said earlier.
Yes, I should say.
We have to remember that we have been on a very.
Steep journey from.
On the asset.
Asset side right.
Depending on the class and size.
Some second hand.
Sure.
Vessels have gone up 30%, 40% maybe bond value.
So that we are clearly in a couple of percentage points does not is not something that makes us panic.
Here you are asking whether we see this as a buying opportunity for secondhand tonnage.
So that I can categorically say no.
We are not looking to to snap up.
Tonnage on the contrary we.
Staying true to the strategy, we have communicated in the past.
Well six to eight months, which is that we have gone from that can you say a growing phase to more of the harvesting phase. So we will continue to look for opportunities to divest older.
<unk>, which is high meeting in.
Not future proof.
And.
We will of course do for the right timing, which may not be right now, but but but as I just outlined in the in the presentation. We have an expectation that the market will.
We'll recover from where we are today, which could spark some some life in the S&P market again and be a good opportunity to continue our strategy of divesting from input market.
Yes, very good all right. Thank you for that that's very clear.
Thanks, again, I'll turn it over.
Thank you. Thank you.
Once again, ladies and gentlemen, please press star one and one on your telephone if you have any questions or comments at this time.
We appear to have no further question at this time I'll hand back the conference to you for any closing remarks. Thank you.
Alright. Thank you everyone for dialing in May I, just add that I have said and I made a little mistake is at 92% cover on our Panamaxes and this quarter is actually 9% to 6% also written on the slide I apologize for that otherwise. Thank you everyone for tuning in please.
Please.
Youll get a website if you have.
The need for further information on reach out. Thank you for this assertion and have a good day.
Ladies and gentlemen that does conclude our conference for today. Thank you for participating you may now disconnect. Thank you.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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