Golden Ocean Group Limited

Good afternoon, everyone. Welcome to GoldenOcean's first quarter release call. My name is Ulrik Andersen, and I'm the CEO, and next to me I have Peter Simonsen, our CFO. Today is about looking back and ahead. We will give you insight and information on the key numbers from the first quarter, but also talk about how the outlook for DryBulk looks. Today's overall message is that we deliver another strong and solid financial performance, courtesy of a firm, Panamax Market, and a high degree of CAPE contract coverage secured at attractive levels last year. In the next 15 to 20 minutes, we will show that we have refinanced debt, lowering our already industry-low cash break even, that we continue to pay out a significant portion of our net profit in dividend, and that despite worldwide economic headwinds, the fundamentals remain in place for a sustained period of profitable markets. With that, let's take a look at the main highlights for the quarter. In Q1, we recorded an EBITDA of $149 million, which resulted in a net profit of $125 million, or $0.63 per share. We achieved average time chart equivalent rates of 24,800 per day for the capes and 23,600 for the Panamaxes. Worth noticing is that the average rate for a cape-sized vessel in Q1 was 14,700. In other words, our strategy of hedging Q1 with fixed-paying cape contracts last year paid dividends. Our average cape earnings were 10,000 per day better than the market. Looking at this quarter, Q2, we have so far secured 28,000 per day for 78% of our CAPE days, 27,000 per day for 77% of our Panamax days. Looking ahead and into Q3, we have secured 38,000 per day for 15% of our CAPE days and 35,000 per day for 33% of our Panamax days. During May, we signed a $275 million loan agreement. The new facility will reduce cash breakeven for the 14 vessels in the facility by $1,500 per day. Finally, we announced another significant dividend. We will pay out $0.50 per share for Q1. The dividend underlines our belief in the longer term fundamentals and takes the total dividends paid over the past 11 months to more than $600 million. Now, I pass the word to Peter, who will dive into some of the numbers and financial details of the quarter.

Thank you, Ulrik. If you look at our profit and loss, we recorded TCE revenues of $208.5 million. which was down from 306 million in the previous quarter, but as Ulrik mentioned, supported very much by strong performance from our Panamax segment and also the coverage in our Cape segment in an otherwise weak, seasonally weak part of the year. The total TCE rate per day was 24,300, down approximately 11,000 from Q4. We had six ships dry docked in Q1 versus five ships in Q4, which resulted in approximately 3.5% of our total days of hire, or 294 days. We have five ships dry docking in Q2 this year. Looking at our operating expenses, they were more or less flat, adjusting for the additional ship that was dry docked compared to previous quarter, coming in at around 58 million. Our OPEX continues to be impacted by COVID-19 pandemic, which impacted our OPEX by approximately $300 per day in Q1. Looking at our GNA, it was more or less unchanged, slightly up due to the impact of profit sharing accruals coming in just below $900,000. Charter hire expense was 10.3 million, which was slightly down from previous quarter, reflecting lower charter hire rates on chartered-in tonnage, while the chartering activity increased in number of days. Our adjusted net EBTA was 149 million versus 243 in Q4. Moving to our financial expenses, we saw the expenses unchanged quarter on quarter, save for an addition of capitalized interest on the new buildings of 300,000, which we recorded this quarter. On our derivatives and other financial income, we recorded a gain of 33 million in Q1, compared to a gain of 10 million in Q4. The main contributors here were the interest rates derivatives, which contributed with 16.4 million in gain, as LIBOR rates moved higher in the forward curve. From FFA derivatives and bunker derivatives, they contributed with approximately 2.5 million. In addition, we had the results from investment in associates gain of 15.3 million, of which our investments in dry bulk operator Swiss Marine contributed with 13.4 million. This resulted in a net profit of 125.3 million, or 63 cents per share. Moving to the cash flow, we can see that we recorded a net decrease in cash of 94.3 million, which is the aggregate of cash flow from operations of 123 million, the cash flow used in financing of 223 million and cash flow from investments of 4 million. The most notable here is the cash flow returned from our investment in Swiss Marine, which returned both a shareholder loan repayment of 5.4 million and a dividend of 6.5 million recorded in Q1. In terms of debt repayments, we had scheduled debt and lease repayments of 33.8 million, of which 6.8 million related to extraordinary repayments of the sale of one Panamax vessel. Moving to our balance sheet. We recorded a cash position of 115.7 million, which includes 8.4 million of restricted cash. In addition to this liquidity, we also have 100 million of undrawn available credit facilities at quarter end. We have debt and lease liabilities of a total of 1.4 billion and an unchanged book equity of 1.9 billion which gives a ratio of equity to total assets of approximately 56%. Looking at the new financing that we have signed prior to this release, we have put in place a 275 million credit facility, which includes a 50 million revolving credit capacity. This is our first financing based on the SOFR rate, which is the reference rate that will replace LIBOR in all new facilities and eventually in all our credit facilities. The financing is priced on the basis of SOFR plus 190 basis points and a 20-year repayment profile. If you look at the difference between SOFR and LIBOR, SOFR has traded approximately 15 to 30 basis points below the LIBOR rate historically, which means that the margin that we have put in place equals approximately 165 basis points on the LIBOR basis. And as Ulrik mentioned, the cash break even for the new facility will be reduced by approximately 1,500 for the facility. and approximately $400 per day for the full Cape fleet. If you look at our cash break even for both segments, you can see that the cash break even has increased somewhat due to the increase in reference rate or in LIBOR during the quarter, which has impacted the Panamax cash break even by approximately $400 per day. and the CAPE approximately the same with then the adjustment for this financing. With that, I give the word back to Ulrik.

Thank you, Peter. Now let's begin with a quick review of the market developments in Q1. In some ways, the quarter developed as expected. We saw a return to normal seasonality, a seasonality that was largely absent in 2021. but there were also other events and drivers at play. We saw decreasing industrial production in China ahead of the Winter Olympics. We saw unusually heavy rainfalls in Brazil hampering iron ore export. We saw the emergence of the Omicron variant and obviously Russia launching an invasion of Ukraine. The Cape and Panamax markets responded differently with Cape rates coming under pressure and averaging a shy of 15,000 per day whereas the Panamax rate stayed firm throughout the quarter at an average of $23,000 per day. A war in Ukraine, an energy crisis and increasing inflation mean that the world is facing new challenges in the aftermath of COVID. The IMF forecasts global GDP to grow 3.6% in each of 2022 and 2023, which is a slight downward revision since its last forecast. Having said that, the forecast remains high from a historical perspective, and worth noticing as well is that the growth from the emerging economies remains strong. In this respect, it is interesting to look into the relationship between GDP growth and the demand for shipping. As it appears, seaborne trade has consistently grown over the last 32 years at a pretty solid 3.7% per year on average. Only during extreme events like the financial crisis and COVID did volumes retract. There's a high correlation between GDP growth and seaborne trade. In fact, seaborne volumes are, on average, growing by 20% more than world GDP. In other words, it is the owners building too many vessels which cause the markets to come under pressure, not the lack of demand. On that note, of course, it is interesting to look at the supply side and see what the owners are doing. Contraintuitively, perhaps, the ordering is at a 30-year low. The fact is that the owners are not placing any orders and have not done for quite some time. There are several reasons for that, but the three main ones being that new building prices are very high in a historical perspective, that capacity is limited and available delivery slots are minimum two years out. And finally, there are question marks over what technology is truly future-proof. On the back of that, we expect the order book to stay muted for the foreseeable future. So pitching supply and demand together much point to an extended period of sustainable earnings. The world may be facing headwinds in terms of inflation and slowing economies, but it is not enough to upset the outlooks for dry bulk, we believe. As we have shown today, demand will continue to grow, and at the same time, we are looking at a historically low influx of vessels, combined with inefficient allocation of coal and grain, and inefficiencies from congestion and new IMO regulations next year. In our view, this will support a continued strong freight environment in the years to come. As we have been explaining on our last calls, we planned our commercial strategy around hedging a lot of Q1 and some of Q2, while keeping more exposure to the second half of the year, which traditionally is much stronger than the first part. It is important to underline we do not want to be fully spot exposed at any time, but we seek to take out fixed contracts in the best possible market conditions. It mitigates risk, improves visibility and protects our capacity to pay out dividends. As of today, for Q2, we have secured around 78% of our available vessel days at around $28,000 per day net. Looking into the next quarter, we have taken out 15% of our Cape days at $38,500 per day and 33% of our Panamax days close to $35,000 per day. As it appears, we are focused on securing Panamax days, simply because the pricing in the last few months has been much more attractive for Panamaxes than for capes. We always balance our commercial strategy between the segments to extract maximum value at the lowest risk. On the last slide of today, we will focus on cash flow generation. Through well-timed acquisitions, economies of scale and access to competitive finance, we have achieved industry-low cash break-even as already laid out by Peter earlier. As it appears, the cash flow generation potential in GoldenOcean is substantial. For instance, looking at the FFA or futures market for this year, GoldenOcean stands to generate more than $500 million in free cash over the next 12 months. As we know, it is a broad decision what we will do with future earnings, but with no material capex, strong balance sheet and no appetite for new buildings, I believe it's a fair assumption that GoldenOcean will continue to have dividends on top of the priority list when it comes to capital allocation. Something which certainly has been the case so far, seeing we have paid out more than $600 million in dividends in the past 11 months. Before opening up for questions, I'd like to shortly wrap up the three main points from this release. GoldenOcean hedged Q1 and delivered a solid net profit of $125 million. GoldenOcean has refinanced part of the debt and lowered our already industry-low cashback even. Despite a slowdown in economies around the world, the 30-year low order book means that fundamentals remain in place for a continued strong freight environment. And now we start the Q&A session, and I therefore hand the word back to the Operator.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound hash key. Once again, please press star 1 on your telephone keypad. Your first question today comes from the line of Greg Miller. Please go ahead. Your line is open.

is that is that me am i on line yes you are okay yeah i think i think she pronounced i think she mispronounced my name um hey guys how are you doing good afternoon and thanks for taking my question um you know thanks for the detail on the slide where you kind of outline you know some of the challenges facing the cape market um at the start of the year um you know Clearly, the last few weeks have been very constructive for the Cape market, you know, despite some of the ongoing challenges in China. Could you talk a little bit about, you know, what you're seeing in the Cape market that has really kind of helped that market start to recover and get back where it traditionally is above smaller vessels' sizes in terms of rates?

Yeah, sure. Hi, and good afternoon to you. Yes, it has been a quite constructive few weeks, as you point out, with now CAPE rates in the mid-30s. So that's good to see. As always with these things, it's a combination of several factors driving the market. But the main two reasons I would point to is the very, very inefficient allocation of coal. With Russian coal now... soon about to be banned, but in essence for many practical purposes already being banned by many, we see coal going from places we have not seen before. That is helping. At the same time, we are now through the rain season in Brazil, and we have seen Vale return to the market with cargo, and that is obviously causing optimism and, of course, long-term long, we can say, ton-mile heavy demand. So these would be the two main factors I would point to being the drivers behind the uptake. And if you ask me just one last comment, we think that we have turned a corner now with the rate spotting amount here, well, about a month ago, and from here on, We expect a firm cave market, albeit, as always, nothing is a straight line in shipping. There will be volatility, but we certainly see a strong market from here on.

Yeah, and then I did want to touch on that, you know, and thank you for those comments. You know, clearly Russia is important to the coal markets. You know, the loss of those volumes is disruptive. As we think about changing trade patterns and realizing that the grain is later in the year, but let's talk about coal now. As we kind of go through that, has the market kind of stabilized around the disruption from Russian coal or is that something that probably continues to play out over the next few months?

In my view, that's going to continue playing out. There's a scramble right now for coal, primarily. Leading by example on this is India that have been acquiring a lot of coal, but also Europe. We have seen coal cargoes from Australia going into Europe, which really tells a story about how inefficient this is. We think that there's a, can you say... there's like a structural change in the trade patterns around coal because we expect most countries to try and outface energy and commodities in general from Russia. So we expect this to be, if not a permanent situation, then certainly a longer term thing. And this is very good news for the Cape size vessels, of course. So for the next few months and perhaps also until the end of the year into next, we expect coal to contribute to the ton mile quite heavily for the Cape size vessels.

Okay, great. And then there's just one more for me. It's around fuel spreads. Clearly those have risen again where the delta between high sulfur and low sulfur fuel oil is pretty attractive. As we think about vessels going into dry docking, maybe we'll just think about this year, realizing that a lot of larger vessels already have scrubbers installed, are there thoughts or plans to install any additional scrubbers on any vessels as we move forward in 2022?

We have a little more than 50% of our fleet scrubber fitted, and we are very happy with that. Investing more in scrubbers, I can categorically say we will not be doing that. We are focusing on decarbonization efforts and investing into upgrading our vessels with a lot of other, can you say, energy-saving devices, and we think that is the way forward to reduce emissions and reduce bunker consumption, rather than investing in a scrubber play, in a spread play in essence. So, no, you will not be seeing us investing in scrubbers, but rather in other types of technologies to bring down emissions and bong consumption.

Okay, perfect. Thank you for the time, everybody.

Thank you.

Thank you. Your next question comes from the line of Clement Mollins from Value Investors Edge. Please go ahead. Your line is open.

Good morning, gentlemen. Thank you for taking my questions. You have one of the youngest fleets in the sector, which provides quite a significant edge in the current environment, given lower fuel consumption. Vessel values remain well supported by freight rates, and I was wondering if you could provide some commentary on the oldest portion of your fleet, like the vessels built prior to the echo component being widely available. Are they still deemed like a central part of the fleet, or is it something you will potentially look to the best in the medium term?

Thank you for your question. You're absolutely right. We have the youngest fleet among the large listed owners, and that is obviously giving us a good starting point in thinking about decarbonization and future regulations, but also of course extracting a lot of value out of the markets. Having said that, we cannot stand still and we will be looking and we have already analyzed our fleet in that respect on which vessels are, can you say, possible to upgrade and to make future proof and which ones will have to be sold off because our strategy is to bring down emissions going forward. So It's always prudent as a ship owner to sell when markets are strong, and we will do that. But we will look not only at the age, but also at the performance of the vessels and what investments would otherwise be required to keep them competitive. So the short answer is, yes, we will sell vessels. We have sold seven vessels this year, well, the past 12 months already. And we feel we can also do that having... acquired 18 vessels last year and also have 7 on order.

Indeed, that's helpful. And do you expect to incur into significant capex expenses due to the upcoming regulations? Or is it something you believe will be negligible for your fleet?

I would actually deem it relatively negligible, but what you have to remember is that I mean, for us, we wouldn't have to do anything to be in compliance with IMO. But how you need to think about this is that if you can make an investment into an energy-saving device, let's say low-friction paint, to mention something, and you can get a payback time of 12 months because you bring down your bunker consumption and you have four years to the next dry dock, then it's just a good sound investment. So you save, can you say, you save the bunkers, and it's a relatively easy investment, and low investment. So these capex will not be particularly significant, but they will all have, at least those we are looking at in terms of upgrading the fleet, will all have relatively short payback time. So it would be not very smart not to take these low-hanging fruits, and that's what we are doing.

Basically, just like you eat with the scrubbers. All right, that's all from me. Thank you for taking my questions, and congratulations for this quarter.

Thank you. Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star and 1 on your telephone keypad now. Star and 1 if you would like to ask a question. There are currently no further questions. I will hand the call back to you.

Thank you for dialing in and have a nice continued day.