Birgitte Vartdal - Chief Executive Officer Per Heiberg - Chief Financial Officer

Fotis Giannakoulis - Morgan Stanley

Good day and welcome to the Q4 2016 Golden Ocean Group Limited Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Birgitte Vartdal, CEO. Please go ahead.

Thank you. Good afternoon and good morning to those listening in from the U.S., welcome to the Golden Ocean Group Limited earnings call for the fourth quarter of 2016. We are pleased to finish off 2016 on a positive note and also that we have managed to continue to deliver on the deferral of our newbuilding program during the quarter. We will start with a company update, recent developments and financial results to be presented by Per. And then, move on to comments on the macro outlook before we round off with a Q&A.

Thank you, Birgitte. The highlights for the quarter is that we report our net income of $6.5 million for the quarter and which is an improvement of $3.2 million compared to the net loss of $26.7 million for the third quarter of 2016. Adjusted EBITDA for the fourth quarter was $24.2 million compared with $8.6 million for the third quarter of 2016. In October, the company took delivery of the Capesize Front Mediterranean, and immediately delivered the vessel to the new owner according to this previously reported sale of the vessel. This resulted in a positive cash flow of $12.7 million in the fourth quarter. During the fourth quarter and early in the first quarter this year, we have reached agreements with the ship yards to defer delivery of 10 newbuildings and achieved an aggregated price reduction of these 10 newbuildings of $15.3 million. Following those agreements, we took delivery of the two Ultramaxes Golden Virgo and Golden Libra early January by paying a total of $31.8 million in final installments. These vessels are together with Golden Leo, the sister vessel not financed and/or fully funded by equity. Further in February, the company took delivery of the two Capesize newbuildings Golden Surabaya and Golden Savannah. With final installments paid of $69.2 million. We draw in total $50 million in debt on those two vessels. Moving on to the P&L, as mentioned the net result was $6.5 million compared to a loss of $36.7 million in third quarter. The operating revenue less voyage expenses are up with $19.4 million compared to previous quarter. This is mainly due to increased freight rates during the quarter, but also realized it due to some higher activity on short-term trading. Following that trading the charter hire expenses are also up in the quarter. After end of the fourth quarter there are no provisions for onerous contract, this compared to $3.3 million in previous quarter. Ship operating expenses are relatively stable over the quarter, but we see a reduction compared to the third quarter of $0.8 million, this is mainly due to no dry dockings in this quarter, while we had two dry dockings in the third quarter. As most of you should know we or the company expensed on dry docking cost when the dry docking occur. A significant contribution to the quarterly net results is the increase in mark-to-market value of the company's interest rate hedges. This follows the upturn in U.S. interest rate during fourth quarter. Cash increased with $21.1 million during the fourth quarter. This is mainly due to delivery on sale of Front Mediterranean that contributed $12.7 million, but also a positive cash flow from the line operations. In the balance sheet, we have no new deliveries during fourth quarter and the reduction in value is due to regular depreciation. Book value on newbuildings is down in the quarter following the delivery of Front Mediterranean, but also offset by installments paid on newbuildings during the quarter. Expected amount to be paid on debt in the second quarter showed cash sweep arrangements with the bank is not included in the current portion. But, we expect to be able to pay a significant portion in the second quarter. The significance is around 3 out of 4 deferred quarterly repayments. A small comment on the reduction in current liability, this is mainly due to the increase in forward U.S. interest rates and also reduced liabilities on newbuildings that were paid in fourth quarter. For the fleet development and newbuildings as mentioned and highlighted, we have taken delivery of one vessel in fourth quarter and four vessels in the first quarter 2017. Front Mediterranean was immediately sold and delivered to the owner according to the previously agreed agreements. The four vessels that they have taken delivery of in the first quarter were all postponed from the previous quarter. We agreed these postponements with the yards and took delivery of two Ultramaxes in January and two Capes in February against certain price reductions. The two Ultramaxes are paid with available cash on 100% financed equity. On the two Capes, we have drawn down 25 million in debt on each of them under an existing loan facility. Remaining CapEx after these deliveries relates to 6 Capesize vessels where delivery is postponed until January 30, 2018. As soon as we receive the final consent from the refund banks we will pay installments of $19.5 million in total during this and the next quarter and following those payments, the remaining CapEx was due on delivery of each vessel. Just restructuring in first quarter of 2016, we have managed to postpone deliveries with 128 months in total. If we incorporate postponements prior to the restructuring, the total number of postponement are 205. These postponements have saved the company from significant cash drain during the low market experienced over the last two years. And in total, we have reduced to pay an expected CapEx with $15.3 million of the last 12 months. Looking at the fleet overview. The total fleet of Golden Ocean consists of 67 vessels of which 61 is currently on the water and trading and six on newbuildings. During the last month, we have utilized the up tick and the market have [fixed] [ph] out two Capesize vessels on one-year time charter contracts at an average rate of $14,175 per day. This is the gross rate prior to deduction of commissions. Looking slightly on the first quarter, we expect operational earnings to be a bit lower than for the fourth quarter due to somewhat softer market experienced in this quarter, which is mostly related to seasonality. For vessel operating expenses, in the total fleet this is relatively stable over the quarters and the average cost is approximately $5000 a day independently of vessels losses. As mentioned earlier, we did not dock any vessels in the fourth quarter; no expense is related to that. And for 2017, we expect six vessels to dry dock during the year. Exact timing is not yet set for all of them, but some will be docked prior to the September limit [indiscernible]. That ends my part of the presentation. And I hand over to Birgitte to update you on the dry bulk market.

Thank you. As [indiscernible] can be reflected in our results for the fourth quarter, the utilization clearly improved during the quarter and the rates seen was the best of served for few years. Then, it is fair to say that we are at historically low levels both in terms of utilization and rate. But, the volatility that we have seen in the rates and the sentiment change happens as rate improves, leads to some optimism. It's also fair to say that the first quarter has been more positive than previously anticipated so far. The increase in utilization has continued to be driven by increase in demand and volumes improved year-over-year across the board. This is on the back of strong commodity prices which is a major change that has occurred during 2016. At the beginning of the year, the commodity prices were at levels where the producers were not earning any money. While towards the end of the year, the commodity prices were at strong levels. And all commodities have strong and high volumes at the same time. In our last quarterly presentation, we commented on the growth of steel production not only in China, but also early signs of increase in steel production in the rest of the world. This trend has continued during the fourth quarter and January also had strong numbers both in China with an increase of 7% year-over-year as well as Russia, Brazil, Middle East and other countries. The fact that also the rest of the world is growing at the moment is positive as this reduced the dependency on Chinese growth alone. Looking at China, however, it's fair to say that consumption has continued at strong levels also on the back of higher prices. This graph shows the estimated steel consumption in China which is backed out by other [nations] [ph]. Looking at the margins, even though commodity prices have been rising, steel mills have been able to keep their steel margins profitable except for a period towards the end of 2016 if using imported coking coal, using Chinese domestic coking coals there was still a positive steel margin in that period. The effective steel margins are keeping up on rising input factors and the steel consumption is keeping up at higher steel prices is viewed as a positive sign for the fundamentals of the demand in the market. Looking at the exporters of iron ore; Brazil and Australia are still keeping up and increasing their market share. This year we expect that increase in volume mainly will come from Brazil which should improve the ton mile. As the current very strong iron ore prices in the range around $90 per ton, oil producer are incentivized to put as much volume out as they can. Looking back at 2015 numbers, start of 2016 the miners had strong coke focus and efficiency focus and they have kept the cash breakeven levels during that period. The factors have reduced the cost of means that they should be able to be profitable at lower levels than what we see today and the drop in the iron ore price alone should not necessarily have a significant effect on the volumes. A concern related to iron ore is high stockpiles in China. This means that we can potentially see periods of draw downs from of the stocks that will reduce the volumes of seaborne trade at that time, that's our temporary [effect] [ph]. Coal was the other major commodity that has the strong end to 2016. As it's well known, China cut in the domestic production combined with a dry summer let increase in the import of coal. As well as Europe turned positive in the second half of the year to balance for outages in nuclear power as well as to compensate for a colder winter. As supposed to iron ore, coal is more diversified in terms of importing countries, the China has been a more important swing factor. And we believe the coal will be a swing factor in the dry bulk market in 2017 as well. It's been a strong start of the year which has proven good for the Panamax rates and we see that due to low stockpiles in China and still need for thermal electricity, we expect the next months to be strong, but how the development is after the summer is more dependent on weather related factor and is also fair to say that quality changes will affect that market. Another positive sign for a healthy growth in the market is stronger than anticipated growth in electricity production. The production as such has been growing as well as, as I mentioned hydropower output has been lower. So the electricity production based on thermal coal has been higher in 2016. The governments managing the coal prices and the supply led to overreactions in terms of prices and volumes and we believe that they will continue to try to manage this by adjusting the domestic production but based on experience that they again may try to soften the changes a bit more. At the moment as mentioned there are low stockpiles of coal it's also a recent ban on imports from North Korea that may add to the import in the short-term. Before moving to the supply side, I'd like to say that the grain has had strong start of the year holding Panamax rates up with volumes out of South America and also seems to be a good activity on the minor commodity. Looking at the fleets growth as expected start of 2017 has been heavy on delivery, January alone there was $9 million deadweight tons delivered out of a gross order book of $77 million deadweight ton at the start of the year. Indications so far in February, that's $2 million deadweight ton additional volumes being delivered. Due to better rate, the scrapping has been lower year-to-date is indicated in the range of 3 million to 4 million deadweight ton being scrapped. We are not seeing so much new ordering surface yet although; there are some rumors of a few orders here and there. Without any new ordering, the order book as a percentage of the fleet is dropping very fast, currently it's around 15-year low, but assuming the order to the R&D -- order book this year will be delivered and no new ordering added, the order book would stand at 3% at the end of the year. There will of course be some new ordering and I also believe that there will be some reduction or postponement in the delivery. But, comparing that with the older part of the fleet whereby 16% is above 15 years and combined that with new regulations coming into force, we should expect to see some more scrapping over time. We also see that the U.S. coastguard are getting stricter on the consumptions in relation to ballast water system and this may have an affect on the sizes typically Supramax and Panamax calling those ports. Looking at the growth order book at the start of the year as mentioned $77 million deadweight ton at the time around 10% of the fleet. However, it's realistic that actual deliveries will be lower. Looking at the growth for the first half of 2017, you can see the split of vehicles that are scheduled for delivery in this period, 48% was launched at the start of the year, 7.6 million deadweight ton was under construction and 10.1 million deadweight ton was not even commenced. The vessels that are under construction, but not launched is likely that a lot will be delayed. For the vessels that are not even commenced, it's most likely that they will not be delivered at all at least a significant part of that. Of the vessels being launched at the year end, 19.2 million already approximately 11 of those are delivered and we can expect those vessels to be delivered, either now or later. Therefore, it is likely that the order book is lower than the gross numbers being reported. Another example is, if you compare the order book in October and in December and adjust for deliveries 7 million deadweight ton was taken away from what was reported in the order book. For 2017, the gross order book is 53 million deadweight ton, I think it's more realistic in the range of 30 million to 35 million deadweight tons being delivered. I mentioned the sentiment change and that also tied into asset values which have continued to increase slightly and we see a positive sentiment among buyers. There has also been more activity in the one-year time charter market in addition to our time charters, other owners have started to fix out a few vessel and that's normally also linked improvement in the time charter rates to improvement in asset values. Modern quality tonnages of priority, but we also see that the spread between older vessels and the private to newbuilding are narrowing. If there is something negative about this is that the spread particularly on the smaller sizes is narrowing to watch newbuilding cost, but there is still some spread on the gate. So to summarize, there has been a lot of positive factors likely and we are still cautiously optimistic on the market development. It is the factor, however, that is market is oversupplied and we see that single events impact rates in the short-term. We expect to see volatility and we will take advantage of that through the trading of our vessels and utilizing periods of stronger market. There are several potential positive factors, less deliveries unanticipated, stronger global growth and scrapping that maybe triggered by regulation. On the risk side, I think it's fair to say that coal is a political thing factor and there is a risk for downturn growth and lower steel production. Scrapping which is slow at the moment we expect to pickup, but it should not that will also sort of increase the fleet growth over time. So I think the most important factor at the moment is the limit of new orders, so as we don't get a new 2013 when new orders are [killing] [ph] and anticipated upturn once again. If that part is under control, we are positive to see improvements in the market. The market in the fourth quarter and so far in the first quarter has proven the sensitivity Golden Ocean has to a right upswing and that is significant. This is illustrated by the cash sweep that Per mentioned and that we will expect to pay down after the first quarter. I think this is also fair to say that it's earlier than anticipated also [wide open] [ph] and by the lenders and it allows us to start to delever the balance sheet. As mentioned we have utilized some opportunities to take some cover on the few vessels at good rate as we will play this opportunistically and only take additional cover where we think good levels are to be achieved. We want to maintain the majority of our fleet in the spot market at the current level to take advantage of potential market recovery. And with this, the presentation is concluded and we would like to open up for Q&A, if there are any questions.

Thank you. [Operator Instructions] We shall take our first question from Fotis Giannakoulis from Morgan Stanley. Your line is open. Please go ahead.

Yes. Hello and thank you for the opportunity. Birgitte, we saw that the market has been performing much better than we previously expected as you mentioned that you charter two vessels above $14,000 for 12 months. I was wondering if you think that was in one-off deal or there is an increase interest from charters to provide contracts of these levels for more vessels. And how do you explain also the fact that the one-year rate is so much higher than what we have seen in the last few days being the sport market.

Yes. We have seen particularly last week, I think I saw at least 8 or 10 one-year time charter contracts being concluded on the Capes. And I think it's fair to say that we are now at levels where owners find it interesting to take cover. From the chartering side, the sort of the sentiment shift that we have seen lately, I think it's what reason why some of them are starting to chartering in vessels. I also think some that have commodity have a smaller fleet than what they had in the past. But there are also players that hedge with the derivatives and in a way is indifferent to the market levels but would like to have the physical vessel to trade with. When it comes to pricing, I think when you look at the forward curve and you adjust for vessels specific on your -- at the optionality premium at the end period, I think the pricing is fair relative to the forward curve but it's harder than the spot as now.

Thank you. I will point out, you mentioned all the improvements in steel demand and steel products in China, I want to point out the fact that inventories iron ore at least Force they have recently increased. How much of a concern this is or you think that as a steel production has increased and as profitability of the steel mills is higher using these levels of iron ore inventories are appropriate? And how do you view the fact that on the one hand we have seen an improvement in inventories for iron ore -- an increase in inventories for iron ore but the coal inventories are still at quite low levels? Is there any diversion between ship from Capesize rates to -- from raising Capesize rates to rising Panamax rates?

I think it's more supply differences -- domestic supply consumption differences, I think the freight rates are such whether it's Panamax or Cape is relatively very low compared to the commodity price. So, I don't think that is the reason for the difference instead of playing the stock price. When it comes to iron ore, there are different type of speculations why they are so strong, one is that the iron ore on the stockpiles have lower FE content and with the high met coal prices it's more advantageous to import cleaner iron ore because you use less met coal. And the other is, if China is willing to sort of start to build to strategic stockpile because they don't have as much on their own. Whether it's a concern, I mean you could -- I think you could see a period where they will draw on the stockpile. The pricing with our expectations that you will see volatility in rates going forward. It's a temporary adjustment potentially.

Thank you, Birgitte. And one last question about the fleet supply, you mentioned that order book is likely to drop later this year at around 3%. Do you see that…

Because of those calculation though.

Yes.

Yes.

I was wondering, do you think that with the increase in prices in the second hand values and the fact that ship yards are struggling to keep employment of -- to keep employment. Do you think that there might be a further reduction in newbuilding prices to the level this can trigger more newbuilding orders, or we are still far away from that?

I think the gap is narrowing between second and newbuildings. And I think the yard will push prices as much as they can. On the other hand, steel prices have been increasing as well which is increasing their cash break even. And I think they have more controls from banks and others to make sure that they don't sell too many orders which are loss making. But, I think you will see some ordering, the question is the magnitude. Then you also have other factors that may influence which is availability of financing. You have also the regulations coming into Force, one thing is balanced water, but the other is also in terms of low sulfur requirements and what is the best technical solution. So there maybe some owners that would like to see that come into play. There will always be some orders. The question is volume in mind.

And when you are talking about orders, do you think that we can see an increase in activity this year or you are talking about 2018. And when this potential order since they come, when are they going to reach the market, when these vessels will be delivered, is this something that we have to worry for the next couple of years or this is further down the road?

Yes. I think, I mean that there will be some orders placed during 2017, yes. Normally, I mean the yards have capacity to start to build today. But, you need the engine and the equipment and you also needed the sign et cetera. So, you would say at least 1.5 to 2 years. So, I would say doing an order today likely the earliest, it's fourth quarter 2018 but probably also into 2019.

Okay. Thank you very much Birgitte.

You are welcome.

[Operator Instructions] There are no questions in the queue at this time.

Okay. Then, we would like to thank you all for listening in. And have a nice day.

That will conclude today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.