Golden Ocean Group Limited

Good afternoon, ladies and gentlemen, and welcome to this conference call where we'll be presenting GoldenOcean's Q4 results. Thank you very much for listening in. In today's call, we follow our usual procedure. Peter Simonsen, GoldenOcean's CFO, will talk us through the financial highlights, and hereafter, I will be discussing the market and the outlook for the company. At the end of the presentation, I will provide more details on our recent acquisition of six modern Newcastle MAXs. So in the next 20 minutes, we will show you that despite macroeconomic factors presenting a challenging backdrop, Golden Ocean generated solid results in the fourth quarter. That we continue divesting older tonnage and recycle the proceeds into equity for modern tonnage. And that despite an expected slow first half of the year, the long-term dry bulk fundamentals remain strong. With that, let's take a look at the main highlights for the quarter. In Q4, we recorded an adjusted EBITDA of 112 million, which resulted in a net income of 68 million, or 34 cents per share. We achieved average time chart equivalent rates of 21,000 per day for our CAPE sizes and 19,000 per day for the Panamaxes. Like the other three quarters in 2022, these earnings are well above the benchmark indices. For the capes, it is $7,000 per day per vessel, and for the Panamaxes, $5,000 per day per vessel. The premiums are driven by our modern fuel-efficient fleet, fixed-paying contracts, and scrubber premiums. Rate guidance and looking at this quarter, Q1, we have so far secured $13,000 per day for 63% of our CAPE days and $15,000 per day for 73% of our Panamax days. Looking ahead into Q2, we have secured $21,000 per day for 19% of our CAPE days and $18,000 per day for 14% of our Panamax days. During the quarter, we entered into a 250 million facility, refinancing 20 vessels. We also completed the sale of two older Panamax vessels while entering into an agreement to acquire six modern Newcastle Maxx vessels for a total price of 291 million. I will discuss this transaction later in the presentation. Finally, we repurchased 460,000 shares and announced our eighth consecutive quarterly dividend we will pay out $0.20 per share for Q4. Dividends remain a central element of our capital allocation, and we are pleased to be able to expand the fleet while delivering on our commitment to return cash to our shareholders. 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 we move to our profit and loss, we, as Ulrik mentioned, achieved a CAPE rate of 21,400 for the quarter, which compares to 22,700 in Q3. Our Panamax and Ultramax combined achieved 19,000 for the quarter. Our total fleet YTC rate was 20,400, which was down from 23,000 in Q3, and our full year TCE was 24,300. We had two ships dry docked in Q4 versus six ships dry docked in Q3, which resulted in off-hire days of approximately 120 days in Q4 versus 272 days in the previous quarter. We have five ships expected to dry dock during Q1 2023. This resulted in TCE revenues of 180.2 million, which compares to 195 million in Q3. Looking at our operating expenses, we recorded 58.1 million in operating expenses versus 59.3 million in Q3. As mentioned, we had fewer dry dockings this quarter, which we expense, but we had higher expense investments in energy saving devices and sensors, which totaled 2.8 million in Q4, which is 2 million in Q3. On the running expenses, we see that although the COVID-19 related costs have disappeared, we are starting to see higher inflation effects in our OPEX figures. Our OPEX x dry dock was 6,300 per day. $100 per day above the previous quarter, and dried up constituted $440 per day versus $790 per day in Q3. On our general and administrative expenses, they ended up at $5 million, up from $4.8 in Q3, And the daily G&A came in at $537 per day net of recharge of costs to affiliated companies. Our charter hire expenses came down from 19.2, which was mainly due to a decrease in chartered-in rates, while we have an increase in chartered-in ships for the quarter. This resulted in an adjusted EBITDA of 112.4 versus 118.2 in Q3. On our net financial expenses, we recorded 17.6 million, which was up from 14.4 million in Q3. which is attributable to higher LIBOR and SOFR reference rates on our floating rate loans. On our derivatives and other financial income, we recorded a gain of 11 million, which compared to a gain of 17.3 million in Q3. Most notable was a derivatives gain of 2.7 million, which relates mainly to interest rate swaps, which was down from 11.4 million in Q3. On the results from investments in associates, we recorded a gain of 7.4 million, which was up from 5.9 million in Q3, and this relates to investments in Swiss Marine, TFG, and UFC. Our net profit came in at 68.2 million, or $0.34 per share. And as Ulrik mentioned, a dividend was declared of $0.20 per share. For 2022, we recorded a full year net profit of $462 million, or $2.30 per share, and dividends relating to 2022 of $1.65 per share. Moving to our cash flow. We saw a net increase in cash of 5.8 million. We saw a strong cash flow from operations of 125.6, which compares to 98.7 in Q3. We saw that falling inventories with falling bunker prices had a positive effect of 28 million on working capital versus a negative 26 million in the third quarter. We also saw cash flow from operations include dividends from associated companies of 2.2 million. On our cash flow used in financing, this netted at $114.3 million. This was the result of the dividend payment recorded relating to Q3 of $70.3 million. Debt and lease repayments of $40.7 million, including $11.4 million in debt repayments relating to the sale of Golden Eyes and Golden Strength. Cash flow used in investments came in at 5.5 million, mainly relating to the sales proceeds of golden ice and recorded in the quarter, and payment of new building solvents of 16.8 million. Moving to the balance sheets, We recorded a cash of 138.1 million, which includes 3.3 million of restricted cash. In addition, we had 100 million of ungrown available credit facilities at quarter end. Debt and finance lease liabilities totaled 1.2 billion at the end of Q4. And the average fleet-wide loan-to-value under its debt facilities came in at 44.5%, following an average valuation drop on our fleet of around 9% quarter-on-quarter. Our book equity was recorded at 1.9 billion and the ratio of equity to total assets of approximately 59%. Having a look at our cash break even and the new financing announced this quarter. In addition to the Newcastle Max transaction and associated financings, we have put in place a new 250 million credit facility, which is secured by 20 Panamax and CapeSize ships with a group of top-tier shipping banks. The facility has a five-year tenor, a 20-year repayment profile and a credit margin of 185 basis points above the SOFR rate, which constitutes a 50 basis points reduction of the three facilities that we are refinancing. This contributes positively to our cash break-even reduction. We are obviously exposed to floating interest rates and inflation on our OPEX and GNA, but we are continuously trying to push down costs where we can, and on our credit margins, we are successfully doing so. If you look at our cash break even for the coming year, we estimate a cash break even on our Cape size and Newcastle max fleet of 14,300. and 10,500 for our Camstomax and Panamax fleets. We do see that the increase in sovereign LIBOR rates has started to come off, and if you look at the forward curves, we do expect those to start to come down again if the if the forward rates are a proxy for where the market is moving. We are also, as mentioned, seeing some impact of inflation on our OPEX and GNA. But we do expect that the refinancing going forward will mitigate the majority of these increases from where we stand today. And we do also see the effect of a short-term increase in cash break-even due to the Newcastle Max acquisitions financing, which will come down once we refinance the ships. Regardless of that, we maintain the absolute best-in-class cash break-even levels in the industry. And as you can see, together with the superior fuel economics of our fleet, puts us in an optimal position for the expected market recovery. And with that, I give the word back to Rick.

Thank you, Peter. We start with a quick review of the market developments in Q4 last year. The Cape market followed an unusual pattern last year. It was stronger in the first half than in the second, something we rarely see. The economic slowdown in the global economy was one factor weighing on demand, but also, and perhaps more crucial, lower Chinese steel demand and the unwinding of congestion impeded the Cape rates from rising. Demand from bauxite and coal was strong, but not enough to make up for the lost iron ore turmoil. The Cape market averaged 15,000 per day during the quarter. The Panamax market saw better fortunes, but without excelling. U.S. Gulf logistical issues and general muted grain exports put a dampener on the market. On a positive note, the inefficiencies in mineral flows created by Russia's war in Ukraine did subside while coal continued to be in demand. The Panamax market averaged $16,000 per day during the quarter. The soft start to 2023 should come as no surprise to those following the dry bulk market. Q1 typically brings seasonal headwinds as cold weather in the northern hemisphere hampers construction activity. And certainly this year has been no different. However, optimism is slowly returning after three significant events signaling that China is prioritizing growth once again. Firstly, the discontinuation of the zero COVID policy end of last year. Secondly, the easing of the three red line policy in the real estate sector. and finally the easing of the Australian coal import ban. Naturally, a growing Chinese economy will increase the demand for dry-fired commodities, most notably iron ore. We are not out of the woods yet and it will take time before the Chinese efforts to revive the economy translates into increasing demand. We must also keep an eye on developments in the Chinese real estate sector, but we are starting to see signs a recovery of the dry markets in the second half of the year is realistic. Another indicator that things are turning around is the GDP growth forecast. The demand for dry-bought commodities is highly correlated with GDP growth. And looking at the IMM forecasts, which were recently revised upwards, by the way, global GDP is set to grow by around 3% in 2023 and 2024. Zooming in on the important emerging Asian economies, growth above 5% is expected both this year and the next. And finally, India's GDP is forecast to grow by more than 6% in 2023 and 2024. The forecast remained healthy by historical standards at approximately the 20-year average and should support dry bulk commodity demand. As mentioned, things will take time, but we remain confident that the historically low order book, as I'll talk about on the next slide, combined with a comeback of the Chinese economy, means that the freight market will lift itself back into profitable territory later this year. Demand for dry bulk commodities has grown consistently over the past 30 years, on average 30% more than global GDP. In other words, historically it was not a lack of demand causing dry bulk shipping markets to suffer, it was the ship owners sealing their own faith by contracting too much. This is not the situation today. The highly positive supply situation persists with growth rates in the coming years at 30-year lows. Particularly the Cape Sire segment looks favorable with the lowest order book of all dry bulk classes. In the Cape Sire segment, Golden Ocean is by a margin the largest owner in the world. A position we cemented this week acquiring six Newcastle Maxx vessels. Another reason for supply-side optimism is the commencement of the IMO 2023 regulations, which will reduce the efficiency of the fleet as a majority of the global dryball fleet will be forced to slow down to comply. The exact effect of CII and EEXI 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. The impact of the IMO regulations will grow over time as the threshold for compliance increases. We expect limited impact this year, but from next year and onwards, we expect a meaningful effect. 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. 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, which means we are having a soft start to 2023. However, it is not enough to upset the long-term outlook for dry bulk, with China, as discussed earlier, once again focusing on growth. While we acknowledge macroeconomic factors, we are encouraged by the lifting of the zero COVID policy, which will boost demand for dry-bought commodities, primarily iron ore. At the same time, we are looking at a historically positive vessel supply situation, and there's nothing that can change that before 2026, given the lack of shipyard capacity. The positive supply dynamics combined with Chinese growth, increasing coal demand, increasing and very turn mile heavy bauxite export from West Africa and the impact of 2020-2023 regulations means that it's hard not to be upbeat. As we usually explain in our calls, we always seek to secure fixed paying contracts when levels are attractive. And we do that in whatever segment, be it Cape or Panamaxes, that offers the best value. We do not want to be fully spot exposed at any time. For Q1, we have 66% of our vessel days fixed at an average of around $14,000 per day. This is well above the quarter to date market and of course the current spot market. Since the turn of the year, we have secured fixed paying contract coverage for Q2, and combined with our acquisition of six Newcastle MAX vessels, all with GCs attached, we have raised our coverage to 19% on the CAPEs well above cash break-even levels. For the Panamaxes, we have 14% of the Q2 vessel days covered at $18,000 per day. In other words, we have built a bridge through Q2 into the expected stronger second half of the year. Before looking at our recent acquisition of six Newcastle Maxels, let's talk about cash flow generation. Golden Ocean has the industry's lowest cash breakeven and the largest and most modern fleet. It means we have substantial cash flow potential. For instance, looking at the time charter equivalent rates we have achieved last year, Despite a challenging macro background, may I add, would on an annualized basis generate 360 million in free cash. This is a direct yield of 19% on today's share price. It's a broad decision what we do with future earnings, but we have for the past eight quarters paid dividends, even when acquiring new vessels. So it is a fair assumption that dividend continues to be a top priority when it comes to our capital allocations. Earlier in the week, we announced the acquisition of six modern Newcastle Max vessels. On my last slide today, I will explain the rationale behind the transaction and how it ties in with our strategy. In the past three years, Golden Ocean has acquired or contracted 34 modern and fuel efficient vessels, while we have been selling 11 older and less efficient vessels. We have been on a mission to renew and become highly competitive and ensure we have a future-proof fleet that can comply with our environmental regulations and charters requirements. We have financed this fleet renewal through divestments. The 11 vessels we have sold have released 124 million net proceeds, which we have recycled into the equity for the 34 acquisitions. It means we've been able to grow the fleet by 36% while having paid $840 million in dividend. The latest transaction is a continuation of that strategy and a transaction which we believe is well-timed and well-structured. To begin with, we have been able to acquire these modern vessels at an attractive price well below the market level, taking advantage of what we believe is a temporary weakness in asset prices. Further, the acquisition is structured in a way where we get instant cash flow, supporting our dividend capacity and protecting us against near-term uncertainties. However, in the medium run, the vessels would be charter-free end of 2025. at a time when influx of vessels will have been historically low for years and where the requirements for CII regulations have become much tighter than today. The vessels are super efficient and will have no CII compliance issues. Also, they command a premium to a standard Baltic vessel of up to 139% and on top of that comes the premium from the scrubbers. Acquiring these vessels will therefore not only improve our cash flow generation potential, but also contribute two and a half percentage points towards our ambition of reaching a 30% reduction in emissions before 2030. Before opening up for questions, I'd like to shortly wrap up three main points from today's release. GoldenOcean outperformed the market again in Q4. beating the indices by an average of $7,500 per day across our entire fleet. Despite a soft start to 2023, we see signs that the market could rebound soon, driven mainly by the reopening of China. GoldenOcean continues to focus on returning capital to our shareholders through dividends and share repurchases. But we do so while prudently investing for the future, as proven by our acquisition of six modern vessels this week. Before I hand the word over to the operator, please remember you can follow GoldenOcean and myself on LinkedIn for news and updates on GoldenOcean. Operator, over to you.

Thank you. As a reminder, to ask a question, you need to press star 11 on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we'll compile the Q&A roll start.

This will take a few moments. Now we're going to take our first question.

And the first question comes from the line of Omar Nocta from Jefferies. Your line is open. Please ask your question.

Thank you. Thank you, operator. Hey, guys. Thanks for the update. I did want to ask, you know, just a bit about the market and how we're seeing things develop here recently. And just from your perspective, and you touched on this during the presentation, but in general, what do you think has changed in the dry bulk market to cause the seasonal lull that we're in now to be a bit more pronounced and lead to such a big drop in earnings? Has it been iron ore specific? Is it coal? Is it just across the board? What would you say, just kind of broadly speaking, has caused rates to come off so aggressively this year versus last year?

Yeah, hi, Ulrik here. Thank you for the question. You are right, it has been an exceptionally weak start to the year. I mean, Q1 is seasonally the weakest quarter, so that as such is not a surprise, but clearly rates are now very, very low and also lower than I think most have expected, certainly ourselves. And the reason why we are where we are is primarily due to a lack of iron ore exports out of Brazil. They are really pumping at low levels also compared to last year. And we are simply not seeing a lot of activity. So this would be the main call print. Clearly there's no help from congestion or anything else either. So we are faced with a very inactive market and that is of course causing the pressure. From a positive perspective, you can say we don't see bauxite or coal volumes being hit as hard, but we cannot expect the markets to be good without iron ore. It is that simple. And right now, there is no iron ore flowing to speak of.

Okay. Well, that's helpful, I guess, because we have seen, obviously, stronger steel prices and higher iron ore. But it's not yet translating into the freight market. And I guess no indications just yet of higher demand. Obviously, the backdrop is there or the fundamental story is there. But as of right now, still charters on the sidelines waiting for things to pick up. Yeah, that's right.

I mean, we have to eat through, can you say, a little backlog of vessels before this turns around. And we see the same indicators. We didn't mention it here on the call, but clearly the iron ore price is another factor. And when we start lining up the various factors, we have a good idea and a good indication that things will turn. I think we have been When I look at the analysts out there, there are some that are very bull, and then there are some that are bull. And I think we are a little cautious and have also been trying to, can you say, coordinate our strategy, our chartering strategy according to that. We have a fair amount of cover for Q2. So, we have essentially set ourselves up to wait for that, can you say, effect of China primarily reaching the freight markets. We don't have a crystal ball here and we don't know if it happens in Q2 or Q3 or Q4. Our strategy is, as I say, set ourselves up to wait and then eventually we believe that we will see, can you say, the effects of what is going on in primarily China. filter down to the freight rates. But if we look outside iron ore, there are also some other things that we are, can you say, positive about the ever increasing demand for coal. China has opened up now for Australian coal. That is good news for the larger size vessels. We have, of course, bauxite, which is really starting to become a factor It is long-haul tons. It's actually more ton-mile heavy than from Brazil, and we think that would provide a kicker as well. All we need now is a little help from China, and then we get that flash in the pan, and hopefully rates will start taking off. But I'm not going to sit here today and say that's going to happen on the 25th of March or 25th of April. But We see the signals and we are positioning for that upside. And I think that's the message. If you yourself want to position as a shareholder or an investor, then we are a good bet.

Oh, well, good. The ingredients are there. I appreciate that, Carlo. And maybe just following up on coal, as you mentioned, China's reopened up the coal imports from Australia. One of the big things driving coal over the past maybe year or two has been just the high price of natural gas and We have seen LNG prices coming down here. Do you see any potential headwind to the coal story of switching from coal back to gas? Is that having... an impact yet, or do you see that having a bigger risk?

We don't see that at all. On the contrary, I think we think that the world got a bit of a shock, really, with what happens after the invasion of Ukraine and suddenly security of supply, energy supply, is right up there on the top of the agenda. I think particularly India is interesting here, but also China, of course. our analysis, our take, and you can then tell me what you think, but our take is that because The reason why China is opening up for Australian coal is because they are going into a bit of a growth phase, and that the increase in their domestic production last year is not sustainable over time. It's low quality, and they've had a lot of accidents. So we see that as a signal that China will import more as well. So generally, actually, no. On the demand side, we are very positive. We think the largest constraint is probably supply side. Will there be enough coal to actually pump out is probably the question. Everything that gets pumped out will get shipped, as we are relatively confident about.

Got it. Okay, well, thank you. That's very helpful. I'll pass it over.

Okay, thank you for your interest today. Thank you.

Thank you.

Now we're going to take our next question.

And the question comes from the line of Sharif El Maghrabi from BTIG. Your line is open. Please ask a question.

Hi. Thanks for taking my question. Just one for me. You mentioned emissions regulations are going to have a bigger impact on the fleet over the next few years, really starting next year. So have you given any thought to what you might need to do with some of the oldest vessels in your fleet? Could we see retrofits? Do you expect them to be in compliance for some time? Or is the strategy continued monetization?

Thank you for the question, and a very relevant and a good question. Maybe I can just very quickly elaborate on the point with the with the CII. The reason why we don't think CII will be that impactful this year is a combination of, of course, the threshold is still relatively low for compliance. And secondly, the markets are very weak at the moment. And it means that there's no need for full steaming. The vessels are already slow steaming as it is. So that cap that many people have put on the on their vessels will not really have any impact. So the point is that as we go forward every year, this threshold will increase by 2%, which doesn't sound like a lot, but it is actually a lot when you see over two, three years. So you will have aging fleet, you will have a tighter threshold, and ultimately you will see more vessels getting into a territory where it will become more difficult to retain full commercial flexibility. For Golden Ocean's point of view, we are, you know, this is not something that we have woken up and realized, can you say, today or yesterday. It's something we have been working with over the past couple of years, right? I mean, we have been, as I said on the call, divesting 11 vessels and investing 34 modern vessels in anticipation of this regulation, but of course, also other environmental regulations that we anticipate will impact the market. we will continue divesting our oldest tonnage and the tonnage in the middle group you can say we will upgrade and we have been upgrading with low friction paint sensors new stocks the fusion systems and so on and so forth. And then finally, we have the new builds or the most modern ones, which we don't need to do anything with per se. But of course, if there is an upgrade that has a short payback time, we will install that as well. So it's a combination of several things. And then clearly in the longer run, we will need to look towards different propulsion systems and we are monitoring that space as well. But as long as there's no clear genuine future-proof technology out there. We believe that the best position you can have is to have the most modern fleet, the most upgraded fleet, because then you, you know, there are 2,000 capes out there or more. So there would be an extremely long tail of vessels that would have problems before you do. And it's not realistic to picture a situation where all capes become obsolete overnight. So that is kind of in broad terms. pencil strokes, how we look at the CII and for that matter, all the regulations of environmental regulations.

That's very thorough. Thank you.

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star 11 on your telephone keypad and wait for your name to be announced.

Star 11 for question.

There are no further questions at this time and I would like now to hand the conference over to our speaker Ulrich Andersen for closing remarks.

Thank you operator. Thank you everyone for dialing in and listening and we will be hearing and seeing you again soon. Thank you very much.