Golden Ocean Group Limited

Good afternoon, everyone. Welcome to Golden Ocean's second release call in 2022, where we will talk you through the key highlights of our Q2 results. My name is Ulrich Andersen. I'm the CEO, and next to me, I have Peter Simonsen, Golden Ocean's CFO. Today's main message is that Golden Ocean delivered another strong quarter, while also having secured forward cover to weather the near-term headwinds. In the next 15 to 20 minutes, we will show you that GoldenOcean has taken fixed paying cover in Q3 and Q4 to manage near-term uncertainty. That, given our belief in the longer-term market fundamentals and our strong balance sheet, we continue to pay out meaningful dividends. And finally, that 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 82 cents per share. We achieved average time charter rate equivalents of 30,600 per day for our capsized vessels, while the Panamax vessels achieved an average GCE of 27,600 per day. Worth noticing in this respect is that our cheap Cape size rates were 9,000 per day, or 44%, above the benchmark rate. We have also divested two Ultramax vessels from 2015. These were 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 ESG 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 2050. Looking at this quarter Q3, we have so far secured 28,000 per day for 80% of our CAPE days, 27,000 per day for 92% of our Panamax days. Looking into the next quarter, Q4, we have secured 29,000 per day for 25% of our CAPE days and 22,000 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 a year to hedge against near-term uncertainty, something I will discuss later in the presentation. Finally, we announced another dividend. We will pay out 60 cent 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, Ulrik. If we move to our profit and loss for Q2, 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 29,400. Looking at our operating expenses, we came in at 50.4 million, which was down by 7.8 million 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 dry docked in Q2 versus six ships dry docked. which resulted in off-hire days of 187 days versus 294 days in the previous quarter. We do, however, continue to see COVID costs continue, which for Q2 resulted in $142 per day impact. Our OPEX xDryDoc was $5,800, for Q2, and 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 our G&A end at $5.5 million, which was slightly up from $5.1 million in Q1. The 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 per day. Looking at our charter hire expense, this ended at $15.4 million versus $10.3 million in Q1, which mainly reflects higher average chartering rates. This resulted in an adjusted EBTA 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 SOFR, pushing our interest rate costs up slightly, ending at 11.9 million versus 10 million in Q1. Our derivatives and other financial income, we have seen impacted our P&L significantly in 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 a derivatives gain of 7.1, down from 18.7 million in Q1, of which interest rate swaps was the main driver, and also results from investments in associates, which came in with a gain of 12.7 million, and this mainly relates to investments in Swiss Marine, TFG, and UFC. And with that, we came in with a net profit, as Ulrik mentioned, of 163.7, or 82 cents per share, and a declared dividend of 60 cents per share for Q2. Moving to our cash flow on slide six, we can see that we had a net increase in cash of 52.6 million, This is the result of cash flow from operations of 156 million which was up from 123 million in QO. Our cash flow used in financing was 140.7 in which we saw a net refinancing proceeds of the 275 million facility that we refinanced last quarter of 6.7 million. We saw debt and lease repayments of 47.8 million, which includes also 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 37.8 relates to the sale proceeds of the mentioned Panamax vessels of 51.5 million and offset by payment on our new building program of 13.7 million. Moving to our balance sheet from slide seven, cash position quarter end was 168.3 million, which includes 4.3 million of restricted cash. And in addition, we have 100 million in undrawn available credit facilities at a quarter end. Our debt and lease liabilities totaled 1.4 billion by the end of the quarter. And with a book equity of 1.9 billion, we had a ratio equity to total assets of approximately 57% by quarter end. Having a look at our cash break even, our capex and debt maturities on the next slide, we can see that following the 275 million refinancing last quarter, Our next debt maturity falls due in Q3 2024. Debt financing on new buildings is expected to be established during the first half of 2023. On basis of the debt financing on new buildings and the sale of the two Ultramax vessels, we consider our new building program to be fully funded. Looking at our cash break even on the right-hand graph, we can see that the general interest rate level increase has impacted cash break evens. Offsetting this on the CAPEs, we have had a reduction in our lease charter rates, which then keeps our CAPE cash break even unchanged at $13,000 per day. while we see our Panamax cash break even 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 Ulrik.

Thank you, Peter. We begin with a quick review of the market developments in Q2. In the second quarter, the Panamax market built on the strong Q1 and continued to fare well. mainly driven by healthy coal demand and new trade routes emerging from the Russian invasion of Ukraine. The Panamax market averaged 26,500 per day in the quarter. The Cape market also started off well, peaking at just shy 40,000 per day in May. Also for the Capes, coal was an important driver. Towards the end of the quarter, though, both segments came under pressure due to the unwinding of port congestions in China, which released vessels into the global fleet. Simultaneously, COVID-related inefficiencies pertaining to crew change, quarantine and so on eased as well. These factors are still contributing to the current market weakness. A war in Ukraine, an 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 to a stalling global economy with slower growth prospects and higher inflation. This is naturally denting the short-term demand prospects for dry bulk and has also caused the markets to come under pressure. However, we are optimistic that a sub-landing is possible with the global economy forecasted to grow 2.9% next year, which remains high in a historical context. looking at China specifically, the largest importer of dry-boiled commodities. COVID restrictions have been eased, while economic policy stimulus measures increased and lending rates trimmed. It will take time for these to take effect, and undoubtedly more and tougher measures will be required in the fall next year. However, with what has actually been done already in China, combined with increasing valid 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 China's growth normalizes and the rest of the world has battled inflation. Having said that, a rebound from the current levels is likely before the turn of the year. Turning the attention to the supply side on slide 12, the highly positive supply situation for dry bulk persists. Golden Ocean is the largest owner of Cape size vessels. In this segment, the order book is below 6% of the global fleet and at 30 year lows. The already modest projected growth rate based on the order book doesn't take scrapping into account, nor 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 taking orders for end 2024 or 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 spectacular 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 EEXI, are coming into force. In short, the new regulations stipulate that all vessels need to be as energy efficient as a 2015 built vessel. If a vessel is not in compliance, there are two main paths to compliance. The first one is an engine power limitation or EPL. Essentially you lower and cap the top sailing speed. 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 propeller vortex and so on. Some upgrades require dry ducts, some do not. For the vast majority of owners, a power engine limitation, an EPL, would be the preferred option since it doesn't cost anything. It is estimated that at least 73% of the global dry-bought fleet is non-compliant and the majority of vessels are likely to EPL. It means that the fleet is no longer able to sail as fast and thus, of course, 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, there will be much less flexibility in the fleet. The effect of EEXI will come gradually 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 forecasted just a month ago, but we think growth will be steady and sufficient. At the same time, we are looking at a historically positive vessel supply outlook, and there's nothing that can change that in the short term, given the lack of shipyard capacity and high new building prices. Combined with inefficient coal and grain trades 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 earning calls, we have no intention of being fully spot-exposed at any time. We seek to take out fixed contracts in the best possible market conditions. It mitigates risks. improve visibility, and protects our capacity to pay our 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 per today, 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 average, our daily earnings on a fleet-wide basis are $10,000 to $11,000 per day better than the Q3 CAPE and Panamax 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 towards 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 break-even. As it appears, Golden Ocean's cash flow generation potential is 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 book into account. It is a broad 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 the three main points from this release. GoldenOcean 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 than 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, a very modern and growing fleet, and industry-leading cash break-even levels. And now we start the Q&A session. I therefore hand the word back to the operator. Thank you.

Thank you. As a reminder, to ask a question, you will need to slowly press star 1 and then 1 on your telephone and wait for your name to be announced. Once again, it's star 1 and then 1 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 stand by. We have the first questions coming from the line of Omar Nocta 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 your ship on chargers here. And as you said, insulating yourself from a lot of the weakness we're seeing here. Just wanted to ask me if you could characterize the market at the moment. And you did give a, I think a good overview, but just wanted to ask if, you know, we've seen capes completely come off here now down towards sub 10,000 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 Panamaxes as well?

Yeah, hi, Ulrich here. Yeah, so as you say, the crisis on the capes has been pretty deep. And of course, there is a correlation between the segments to begin with. So that's the first I would point to. Otherwise, we have also seen, can you say, weaker grain flows given the Ukrainian and Russian conflict. So this has reflected poorly on the Panamax as well. So these are two 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 Panamax market as well, albeit not as much pressure as we have seen on the Cape sizes.

Okay, got it. So a bit of cascading, a bit of a tough grains period, and then the congestion. You know, 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 in secondhand values. This soft patch that we're seeing currently, how do you see that affecting values for shifts here in the near term?

There is a correlation, albeit not directly one-to-one, but certainly a correlation between the spot market and the asset prices or the secondhand prices. So when we see the pressure that we see now on the rates, it has an effect on the S&P market as well. I think the first thing that happens is that the market cools a bit because most people that are buying a vessel would like to buy it in a strong market so that they can go out and make a good fixture on the first time that they employ the vessel. So it's 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 spot market. How much and how little depends on the class and the size and the age, et cetera. But to say that the secondhand market towing I think is a fair statement. It may also be cooling slightly.

Okay, thanks, Ulrich. And just to follow up then, as Golden Ocean sits today, obviously you have a pretty sizable fleet. You've got Critical Mass and the CAPES and the PENAMAX segments. In this cooling-off period potentially of asset values coming off a few percentage points, do you see that as an opportunity, or are you more happy to sit back, harvest your cash flow, and focus more on returning capital, as you said earlier?

As you say, we have to remember that we have been on a very steep journey on the asset side. I mean, again, depending on class and size, some second hand vessels have gone up 30, 40 percent, maybe more in value, so that we are cooling a couple of percentage points is not something that makes us panic. I hear you asking whether we see this as a buying opportunity for secondhand tonnage, and to that I can categorically say no. We are not looking to snap up tonnage. On the contrary, we are staying true to the strategy we have communicated in the past six to eight months, which is that we have gone from a growing phase to more of a harvesting phase. So we will continue to look for opportunities to divest older tonnage, which is high emitting and not future proof. We will, of course, look for the right timing, which may not be right now, but as I just outlined in the presentation, we have an expectation that the markets will recover from where we are today, which could spark some life in the S&P market again and be a good opportunity to continue our strategy of divesting in firm markets.

Yeah, well, very good, Ulrich. 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 1 and 1 on your telephone if you have any questions or comments at this time. We appear to have no further questions at this time. I hand back the conference to you for any closing remarks. Thank you.

All right. Thank you, everyone, for dialing in. May I just add that I made a little mistake. I said 92% cover on our Panamaxes in this quarter. It's actually 96% as it was also written on the slide. I apologize for that. Otherwise, thank you, everyone, for tuning in. Please look at our website if you have the need for further information or reach out. Thank you for this session and have a good day.