Q3 2022 Golden Ocean Group Ltd Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Ladies and gentlemen, thank you for standing by and welcome to the Q3 2022 Golden Ocean Group Limited earnings Conference call.
At this time, all participants are in listen only mode.
After the speaker presentation, there will be a question and answer session.
I'll ask a question you will need to press star one and one on your telephone.
I would now like turn the conference, albeit speaker today, the heel he'll Rick Anderson. Please go ahead Sir.
Good afternoon, ladies and gentlemen, and welcome to this conference call presenting gold notions Q3 results.
You very much for listening in.
Today's call is the same procedure as usual.
Sitting next to me the Companys CFO , which I'll go through some of the financial highlights and hereafter I will be discussing the market and the outlook for the company in the next 15 to 20 minutes. We will show you that despite macroeconomic factors presenting a challenging backdrop golden Ocean generated solid results in the third quarter.
But we continue to divest non core and older tonnage checking advantage of furnaces process.
Despite unexpected slowdown at the beginning of next year, the long term dry bulk fundamentals remained strong.
With that let's take a look at the main highlights for the quarter.
In Q3, we recorded an adjusted EBITDA of $118 million, which resulted in a net profit of $105 million. All 52 cents per share. We achieved average TCE rates of 22, and a half per day for all Cape sizes, and 23 and a half for the Panamaxes.
In Q1 and Q2 these earnings are well above benchmark indices for the Capes. It is $9000 per day per vessel.
The index the premium is driven by scrubber and a modern fuel efficient fleet.
Looking at this quarter Q4, we have so far secured $23000 per day for 75% of all kept pace.
And 19000 per day, 478% of our Panamax days looking into Q1 next year, we have secured 21000 per day, 4% of our cafes and 21000 per day for 20% of our Panamax days.
We also completed the sale of true Ultra Max vessels, which are outside of our core segments with a profit of $22 million.
During the quarter, we also announced a share buyback program of up to $100 million and finally, we announced our seventh consecutive quarterly dividend, we will pay out 35 cents per share.
Dividend underlines our belief in the long term fundamentals and take the dividend we have paid since 2021, so almost $800 million.
Now I will pass the word to Peter who will dive into some of the numbers and financial details of the quarter.
Thank you rich.
To move to slide five we can have a look at our P&L for the quarter.
Our time charter revenues.
Was impacted by a solid contract coverage and strong chartering performance in a volatile freight rate.
Gold price environment.
Our total fleet wide TCE rates came in at 23000.
Down from $29400.
In Q2.
We had six ships dry docked in Q3 versus one ship in Q2, resulting in approximately 272 days so far.
Versus 187 in Q2.
This resulted in TCE revenues of $195 6 million.
Compared to $250 million in the second quarter.
On our operating expenses, we recorded $59 3 million versus $50 4 million.
Rich.
As mentioned was a result of the increase in number of ships dry docked.
And also installation of energy saving devices and sensors of approximately $2 million in the quarter.
We saw lower COVID-19 related costs.
As costs relating to.
Quarantine hotels and.
And the testing has been lower.
While we see freight costs on spares and has increased quite a bit in the quarter.
Our operating expenses, excluding Drydock was 6200 compared to 5800 in Q2, well dry dock constituted $800 per day versus the $74 per day in the last quarter.
Our general and administrative expenses and $4 8 million.
Which is down from five 5 million.
Constituting $529 per day net of recharge.
Our charter hire expenses increased.
Due to higher trading activity during the quarter ending at $19 2 million up from $15 4 million in Q2.
Our adjusted EBITDA.
$118 2 million versus 191 6 million.
Second quarters.
Moving to.
Financial expenses we.
We have seen.
Higher reference rates are being LIBOR and sulfur impacting both our interest rate expense.
Our net financial expenses ended at $14 4 million versus $11 9 million in the second quarter.
Moving to derivatives and other financial income, we recorded a gain of $17 3 million.
Compared to a gain of $19 9 million in the second quarter.
Most notable we saw derivative portfolio.
Which is a portfolio of interest rate swaps.
Fay and bunker derivatives.
<unk> recorded a gain of $11 4 million purchased $7 1 million in the second quarter.
In addition, we saw results from the investments and associates.
Come in with a gain of $5, one 9 million versus $12 7 million in Q2, which relates to our investments in Swiss Marine T F G and UFC.
Our net profit came in at $104 6 million or.
Or <unk> 52 per share and a dividend of <unk> 35 was declared for the quarter.
Moving to our cash flow on slide six.
We recorded a net decrease in cash of 36.1 million.
We had cash flow from operation of a 98.
7 million down from $155 5 million in Q2.
We saw cash flow used in financing of 171, three which is the aggregate of.
Dividend payments.
Turning to the second quarter of $125 million.
Debt and lease repayments of $50 8 million, which included $20 million in extraordinary debt repayments relating to the sale of the two ultra <unk> vessels.
Mentioned before.
We are so our cash flow provided by investments of $36 6 million, which is the sales proceeds of the two.
Max vessels of $61 7 million nuts.
On payment of new building installments of.
Of 23.9 million.
Moving to slide seven.
Our balance sheet, we had cash on our balance sheet of $132 3 million at the end of the third quarter, which included $3 million in restricted cash securing our derivatives portfolio.
In addition to that we have a 100 million in undrawn available credit lines at quarter end.
Our debt and lease liabilities totaled $1 3 billion at the end of the quarter and our average fleet wide loan to value on.
The company's credit facilities was 42% at the end of the quarter versus 37% at the end of the second quarter.
Our book equity was $1 9 billion and a ratio of equity to total assets of approximately 58% at the end of the third quarter.
With that I give the word back to Rick.
Thank you.
Let's start off with a quick review of the market developments in Q3.
In the third quarter, the Panamax market stayed firm not as good as Q2, but still averaging 17000 dollar per day.
The Panamax market was mainly driven by a healthy core demand and new trade routes emerging from the Russian invasion of Ukraine, including the U N drains corridor.
The Cape market has suffered this year with the main culprits being the unwinding of congestion in China, and a weak Brazilian iron ore exports.
Those factors continue to suppress the Cape market through most of July and August before we saw recovery in early September .
Overall, Cape rates did disappoint and averaged only $9000 per day.
I warn you crane and energy crisis, and central banks moving to tighten monetary policies means that the world is facing new challenges in the aftermath of Covid.
What was expected to be a continued strong recovery has been transformed into a stalling global economy with slower growth prospects and high inflation.
This is naturally tensing to short term demand prospects for dry bulk and has caused the market to come under pressure and we do expect a soft start to 2023.
Having said that inflation rate in the U S slowed for the fourth month in a row in October and is now the lowest level since January it eases the pressure on the U S. Federal reserve to continue its policy of increasing interest rates to battle inflation.
Also worth noticing as to China for the first time since the pandemic began has announced an easing of some of the Covid restrictions. In addition, extra measures to support the real estate and infrastructure sectors were announced last week.
We expect that China will gradually reopen during 2023, which combined with stimuli will provide a boost to iron ore and steel demand.
We are by no means out of the woods, yet and we do expect Q1 and most likely also part of Q2 to be challenging however.
However, with the historically low order book, So I would talk about on the next slide combined with a come back up the Chinese economy next year, we remain optimistic that the market will rebound strongly.
Turning to attention to the supply side on slide 11, it is clear that the highly positive supply situation persist.
As is well known Golden Ocean has the largest listed owner of Capes. In this segment. The order book is below 6%, which is a 30 year low.
The already modest growth rate is before accounting for scrapping. So in other words, the net supply of Capesize vessels will be lower and with yachts only taking orders for delivery into 'twenty 'twenty four if you're lucky or 'twenty to 'twenty five the order book is fixed for at least two years.
Another reason for supply side optimism is the commencement of the I'm, a 'twenty to 'twenty three regulations, which will reduce the efficiency of the fleet as many vessels will be forced to slow down to comply.
The effect of final 2033 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 on average is slowing down.
Naturally with such an attractive supply side the market does not need spectacular growth normalized demand growth would be enough to outpace the supply and create very strong supply demand fundamentals for the dry bulk market.
So putting supply and demand together, we expect an intent and extended period of sustainable healthy earnings.
The world may be facing headwinds in terms of inflation and slowing economies, which means we are heading for a softer start to 'twenty two 'twenty three.
However, it is not enough to upset the long term outlook for dry bulk we believe.
While we acknowledge macroeconomic factors, we do expect China to lift Covid restrictions next year, which will boost demand for dry bulk commodities, primarily iron ore at.
At the same time, we are looking at a historically low.
Vessel supply situations and there's nothing that can change that in the short term given the lack of shipyard capacity.
Combined with inefficient coal and grain trades and the impact of I'm, a trader twenty-three regulation.
It is practically impossible to have a negative view on the supply side and it will support a strong freight environment in the years to come.
As we have explained on previous calls we always seek to secure fixed pit contracts when levels are attractive.
And we do that in whatever segment be it cable panamax that offers the best value.
We do not want to be fully spot exposed at anytime and we seek to take out fixed contracts in the best possible market conditions.
Poultry fault, we have 75% of the fleet covered at fixed rates, averaging above 20000 dollar per day that.
That is $6000 per day per vessel about the quarter to date benchmark rates in other words, we are on track to beating the market significantly again this quarter.
For Q1, we have 10% of our total fleet as covered.
As it appears we have focused on securing panamax coverage, rather than Cape coverage simply because the Q1 pricing. This year has been much more attractive for Panamaxes then for capes.
We always balance our commercial strategy between the two segments to extract maximum value at the lowest risk.
On the last time today, we will focus on cash flow generation.
Through well timed acquisitions economies of scale LOE G&A and access to competitive finance, we have achieved industry low cash breakeven.
And as it appears Golden Ocean has cash flow potential is substantial.
For instance, looking at the time charter equivalent rates, we have achieved year to date, despite a challenging macro backdrop, what on an annualized basis generate more than $400 million in free cash.
This is a direct yield of 21% on today's share price.
Its support decision, what we do with future earnings, but with a strong balance sheet and a fully funded new building program I believe it's a fair assumption that Golden Ocean, but continue to have dividends on top of the priority list when it comes to capital allocation.
Before opening up for questions I'd like to shortly wrap up three main points from this release.
Golden Ocean outperformed the market again in Q3 and delivered a solid net profit above $100 million.
Despite a slowdown in the world economy, and unexpected slow start to 2023 for dry bulk.
The 30 year low order book means that the fundamentals are in place for a strong rebound in freight rates.
Golden Ocean continue to focus on returning cabinets, which all shareholders with a Q3 dividend we have not paid almost $800 million since last year.
And now we start the Q&A session are therefore hand, the word back to the operator. Thank you.
Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question. Please press star one and one on your telephone.
We are now taking the first question.
The first question for Greg Lewis from BTG. Please go ahead.
Yeah.
Okay.
Mr. Lewis Your line is open.
Yes.
Yes.
If you wish to ask a question. Please press star one and one on your telephone stock one one.
Ask a question.
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We're taking the question.
It's from the line of hormone from Jefferies. Please go ahead.
Hi, Thank you Hey, guys. Good afternoon, I just have a just a quick one for you on the on the buyback and return of capital to shareholders in general you've declared the 35 cent dividend.
And overall the buyback is a pretty sizable piece of the market cap you know roughly 5% just in general how are you thinking about that you're announcing in October I'm sure, there's blackout periods and whatnot and restrictions when you can use it but have you put that capital to work yet and how do you think about putting that capital currently given.
And where the stock is in relation to <unk> and then also in relation to your outlook as we go into 'twenty three.
Hi, Omar.
Yeah, No we haven't had a blackout periods since we announced it.
So the so we haven't really.
Been able to utilize it.
We wanted to.
When it comes to the share price we haven't.
We haven't traded at a massive discount to NAV.
Following.
Following that.
The announcements so so there has been some some support.
<unk> support on it on the on the share price when it comes to <unk>.
But that is that.
Part of the market during an avs are always relative but we are we announced in the in the buyback program that we will utilize it.
As part of our capital allocation strategy.
While we continue to prioritize.
Prioritize dividends us are the main sort of source of allocation.
We are we have a 12 month program in place.
Uh huh.
If we see value in buying back shares.
At the at the discount to NAV, we will of course take that opportunity and the and we do expect the.
As in line with our market outlook.
We will go into weaker part of the.
The euro right now and that.
We will open up opportunities to buy back stock at the.
Attractive prices.
Okay, Yeah understood and then maybe just as a follow up to that as we get into this potentially weaker.
Part of the at the market.
We've seen some softness in secondhand values, you clearly have critical mass across the capes and Panamax you have the handful of new buildings also so there doesn't seem to be a real need to go out and think about expansion, but do you think there are opportunities that are developing that you'd look to maybe pick off.
A few ships here and there.
This has come in further.
Yes.
Yeah.
Yes is the short answer we will of course always.
Monitor the market to see if there are attractive opportunities whether that is a that is buying or selling.
Can you say more general note.
We continue to.
Find it attractive to divest our older vessels.
Despite a slight weakening of.
Of of asset prices, they are still historically very high.
And we believe at the same time, Mr. I think to do two to focus on decarbonization and through modernizing the fleet and keeping our average age down.
But naturally.
We are always on the lookout for opportunities that create shareholder value that are accretive. So if something comes along we would we would we would look at it.
This is Sam this is in our DNA.
Yes, yes definitely okay well. Thank you that's it for me I'll turn it over.
Thank you. Thank you.
Thank you for your question.
We are now taking the next question.
From Sherry Panama.
From BTG. Please go ahead.
Hi, Good morning, Thanks for taking my question on an.
I M. O 23, you have a relatively new fleet, but are there any vessels that could be adversely affected by new regulations. I know you said, you're looking to divest some of the older fleet and then beyond slow steaming what could the impact be to the broader fleet in terms of retrofitting.
I didn't get the second part of the question, but maybe we can come back to that and I'll just answer the first is to begin with.
So our average age is six years for the fleet, which obviously puts us in a very good persistence.
Hello.
As my time coming through yet.
Yes.
Sorry, Okay.
That's just a bit of noise no. So the.
So the average age we have is very low. In addition, we have in the past 12 months or more invested.
Quite heavily into the fleet and upgrades and then and digitalization. So all I can.
It is a fleet average today would be a b rating on D. C. I R.
But of course, that's a theoretical ratings so in real life. It depends on how you utilize your fleet and if your vessels are getting stuck somewhere in China for reasons outside.
Your own control of the ship owners control you can still receive a lowest score.
But the point is that if you look at the average we have a very very good starting point, so and so we are we.
We are ready for IMO 2023, we do have some outliers in our fleet. We have we have some that are around 10 years old.
Did that all if you look at.
The rest of the fleet out there, but for US they are older at least and some of these vessels will have to be EPL, meaning that we will have to cap the top speed of this.
The engine.
And of course that will give them less flexibility and that's also what I referred to when I spoke previously on the supply side optimism one of the could you say taxes here is that there are a lot of vessels that are from 10010 and before that would have kept their engines.
And obviously that means less efficiently. So we are we are.
We are not.
Can you say or we will have to do some some changes to our fleet, but they have minimal compared to the effect that it will have on a on a on a fleet wide basis on a global basis, well, what I would take out capacity, which all other things equal should shoot eight the freight the.
The freight.
Environment in a positive way.
So I think I hope that was the answer to the first question.
Yes that was very helpful.
Parts of it was just kind of beyond like you say your fleet with me, but beyond looking at the broader fleet.
Beyond slow steaming what could the impact be in terms of you know to be see retrofits is there anything else that can drive utilization higher next year, just beyond ships capping the speed.
I mean that will.
Presumably it is hard to quantify but that will presumably be.
Number of ship owners out there that are doing what we are doing which is to.
Install energy saving devices it could be your stock, which is that it's a propeller vortex it could be low friction paint it could be other things and this can you say upgrades can prolonged.
Dark space, so that could give some can you say a inefficiency.
Inefficiency gain if you like or at least reduce the efficiency of the fleet, but I think that.
The Big can you say CAGR here is.
All the vessels that are being slowed down which is up too I mean, some say that up to 70% to 75% of the of the Golar fleet as Noncompliant with IL 2023, with a lot of vessels will have to reduce the SP. The big kicker comes only when the markets are strong because in a weak market. The vessels are not full speed.
Anyways, so you'll have a situation where the moment that you reach a certain thresholds on the rates.
Depending on your on your ship, then you'd want to speed it up and your comp. So you remove a flexibility in the fleet, which in my World means that you will have the can you say higher highest because the the normal situation is that there is an inherent flexibility in the fleet as a win win rates.
Kris and demand increases then the fleet starts beating up which will of course.
Can you say.
We'll of course soft in the market, but that possibility would be gone for a lot of vessels. So the real effect you will only see when the market is becoming stronger and then I would also like to add that.
This is being can you say gradually Amazon today has been gradually implemented over the course of 2023. So the full effect of this regulation will only really be at present.
In 'twenty.
2020, 'twenty 'twenty Paul.
That's really helpful color. Thank you.
Thank you.
Thank you for your question there are no further question at the moment.
Yes.
Okay in that case, we will say thank you very much.
Turning into Golden Ocean, <unk> third quarter release.
You can always follows on Linkedin, if you are in need of more information and with that I'll say, thank you very much for the intention and have a good day.
To conclude the conference for today, Thank you for participating in the whole disconnect.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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