Birgitte Vartdal - CEO Per Heiberg - CFO

Magnus Fyhr - Seaport Global Fotis Giannakoulis - Morgan Stanley

Good day and welcome to the Q3 2017 Golden Ocean Group Limited Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Birgitte Vartdal, CEO. Please go ahead, ma'am.

Thank you. Good morning and good afternoon, and welcome to third quarter conference call for Golden Ocean Group Limited. My name is Birgitte Vartdal, I'm the CEO of Golden Ocean Management. And together with me, I have Per Heiberg, the CFO of Golden Ocean Management. Golden Ocean returned to profitability in the third quarter with a profit of $0.4 million, up $12.4 million from the second quarter and within EBITDA of $40.4 million, up $10.7 million from the second quarter. The third quarter was another busy quarter where the Company took delivery of the last three vessels from the Quintana transaction and one Capesize newbuilding from Newtown [ph]. In addition, we entered into an agreement to sell six Supra's at an unblocked price of $142.5 million. Three of these vessels are currently unfinanced and the expected net proceeds from the sale is around $100 million upon delivery of all the vessels. At the start of the fourth quarter, the Company raised $100 million in capital through a combination of an equity offering of $66 million and $34 million in equity in-kind related to the acquisition of two 2016 Cape's. One of these vessels have been delivered to the Company and the other is expected to be delivered in January of '18. These transactions significantly strengthened our balance sheet and allowed us the flexibility to terminate the waivers from our lenders on our recourse debt. The Company is now back to normal covenants and amortization schedule on these debt and we'll come back to that later. The next slide illustrated changes we have made to our fleet throughout 2017. Over the course of the year we have increased the size of our fleet from 57 vessels at the start of the year, then excluding new bills to a fully delivered fleet of 78 vessels with our remaining newbuilding expected early next year included. At the same time we have increased the focus of our fleet towards the vessel classes where we believe there is more leverage to an upturn in the dry bulk grades. And we have further enhanced our exposure to the Capesize. Recent market developments have been supportive of the strategic decision as rate for larger vessel classes have shown the strongest improvements over the last quarters. Then I will hand over the word to Per, who will take you through the results and more details of the Company.

Thank you, Birgitte. I have to get the third quarter company reports, a net profit of $400,000 for the quarter. The time charter equivalent or the TCE revenue increased by $21.3 million compared to last quarter. $9.8 million of this increase relates to an almost full quarter of trading for the vessels acquired from Quintana earlier in the year. Further, the net revenue improved following higher market rates and more vessels taken in for short-term trading. More vessels on short-term trading lead to higher shorter expenses, as well and net of expenses, this activity had a very limited effect on the P&L for the quarter. Ship operating expenses increased by $5.9 million compared to second quarter and the majority of this increase relates to the newly acquired fleet. Net interest expenses are also up over the quarter by $1.8 million, mildly related to debt assumed on the newly acquired fleet. And the Company booked $1.5 million in gain on derivatives for the quarter, this relates to profit on FFAs and bunker hedges to get a bit of small gain on U.S. interest rate hedges. Further, the sale of Golden Opus and related results from associate companies contributed with $4.1 million in profit for the quarter. The Company achieved a TCE per day of $12,958 which is about the Company's long-term cash breakeven including full debt service. And then moving onto the balance sheet which show $190.3 million in cash which includes cash booked as restricted. This is in line with what we have in previous quarter. During the quarter, the Company generated $26.2 million in cash from operations and in addition received $7 million in cash following the sale of Golden Opus. The Company prepaid $4.2 million of debt in relation to delivery of the last three vessels for Quintana, and also in relation to these deliveries the Company issued $2.85 million on new shares and assumed $43.3 million of new debts. A delivery installment for Golden Nimbus of $29.6 million was paid in September but the related $25 million in used debt was drawn early in October and is therefore not included in the balance sheet at the end of third quarter. The current portion, our long-term debt consist only of the debt due under the non-terminated cash view mechanism, on the company's recourse debt. Debt related to the six Supramaxes that are held for sale is still classified as long-term at the end of this quarter. And the book equity at the end of the quarter was approximately 50%. Then we have put up a small overview of the transactions that influence going forward. The company answered in December transactions over the last month that they will significantly impact the cash position and balance sheet upon completion. Last quarter we entered into agreement to sell six Ultramax vessels to an underlying third-party at a total gross price of $142.5 million. Three out of six of these vessels are free for any depth and following completed deliver, it will pre-ump approximately $100 million in cash after debt repayment of $40 million. In October, the company completed an equity offering with a net proceeds of $64 million in cash against issuing 7.8 million shares at the price of $8.5 per share. In conjunction with equity offering, Hemen Hoding, the Company's largest shareholder contributed with $34 million in equity in-kind at partial consideration for two modern 2006 build Capesize vessels that the Company acquires. The purchase price for the vessels is $43 million each, $86 million in total; and the remaining consideration for the vessels is $9 million in cash and $43 million in that sellers credit from affiliates or Hemen. Both motion have already taken delivery of one of these vessels, the CB High Care [ph] and [indiscernible]. The second vessel is expected to be delivered in mid-January 2018 upon completion of its present voyage. Following the equity offering, the Company decided to terminate the waivers and to entry in the first quarter of 2016. For the reconstructed cash generated in the current market environment for receipt from sales of assets, limited CapEx commitments and the equity offering give the Company a strong balance sheet visibility which was an important consideration in the Company's decision to terminate the favors. Following the termination, the Company gained significant financial flexibility enabling us to make further investments and add new debt and potentially pay dividends. This financial flexibility is more important than preserving the downside protection these waivers gave for the coming 12 months. Following the termination, the Company paid in full deferred amount of outstanding debt in October and will resume ordinary debt repayment during fourth quarter of this year. Ordinary debt repayment for the recourse debt is approximately $14.8 million in the current quarter which will increase to $16.7 million in the first quarter of 2018 following additional debts on the five remaining newbuilding. Moving onto the fleet overview; following the recent transactions and upcoming deliveries, both sale purchase and newbuildings, the Company will owe and control a fleet of 78 vessels. In late September, we took delivery of one of the newbuildings from New Times to Gold Nimbus, and following this delivery the total CapEx for the remaining five newbuildings is $145 million, and related available debt is $125 million. Net cash requirement is then only $20 million and this will complete the Company's current newbuilding program, the expected delivery is early in first quarter of 2018. During the last several months, the Company has taken some cover for the coming year and secured a gross average rate of $16,850 for 7 Capesize vessels; this is above the Company's cash breakeven level including full debt service and give a certain protection against potential low markets. Still, the Company maintains significant leverage to a strong market across its fleet. Looking at the OpEx of the Company; reported operating expenses include fully burdened cost including dry-docking and management fee to third-party managers. From the graph we see; in the slide we see that the cost has maintained at a stable low level over the last year. Further two vessels completed dry-dock in the third quarter which hold the same number of vessels as for both, first and second quarter of the year and we have no planned further dockings during the rest of the year. At one completion of all vessel transactions, we expect the Company's G&A, net of received management fees to be approximately $400 per day per vessel in 2018. And by this, I hand over the work to Birgitte, who will take us through the current outlook for the dry-dock markets.

Thank you, Per. Moving on to the first slide on the market outlook, regarding utilization. This continue to improve during the third quarter, is on the back of strong growth and demand observed in the quarter. The utilization was around 84.5% in the third quarter on average, and at these rate we ranged around our cash and P&L breakeven rate as we have communicated earlier. Strong growth in the third quarter resulted into highest quarterly volume transported of dry bulk commodities ever, this followed a record high in the second quarter as well. All the major commodities had the positive trend in the quarter. In addition, which is not displayed here, ton miles added to the increase in transportation volumes for several of the commodity. The trend of positive global growth continues and this is also reflected in strong worldwide steel production. Looking at this graph, there is continued year-over-year growth of third, both in China and in the rest of the world. Some unregulated production of steel in China which previously has not been reported was banned this year and the change observed in the numbers early in 2017 for Chinese steel production is therefore probably a bit on the high side. However, adjusted for this growth still continues in Chinese steel production. This is also supported by the apparent steel demand in China which is shown on the next slide. The demand continues on the high side and the prices for rebar is also keeping up. This happens at the same time as steel margins continue to improve which can be seen on the bottom graph, and is a supporting factor for continued strong production. Iron ore prices have dropped lately and this has further supported an increase in steel margins. The widely reported cap on steel production in the winter month to car pollution is reported to be concentrated to northern China. As current steel margins and given the available capacity to produce steel, you may expect that kept in productions in one area will be compensated by increase in production in other areas which are not limited by the regulation. This is however an area with uncertainty and linked to political decisions and regulation. Looking at the seaborne transportation of iron ore, this also continues with strong numbers in the third quarter. Australia and Brazil is the major exporters, and this is also where the best quality iron ore comes from; in particular from Brazil and from certain Australian miners. The spread on various grades of iron ore has widened as can be shown in the bottom graph on the page, and the steel mills clearly prefer the iron ore with the highest ferrous content which should be supportive to this trend on dry bulk transportation of iron ore. Looking at the miner's guidance for production volumes, most of the increase in volumes for next year should come from Brazil supporting ton mile story. Moving onto coal; transportation of coal has also been positive during the quarter. Most areas increased their imports and also coal had a positive support from increased ton miles. In the last few weeks there has been a drop of coal imported to China, some ports have imposed restriction on import saying that there are full import quotas for the year. The coastal trade however, from north to south has peaked with high rates showing that the demand for the coal is there but at the moment this is serviced by domestic coal. This is part of the stop and go politics that we have seen historically in China, and that we expect will continue going forward. Looking at stockpile data as provided by Commodore [ph] Research, they are below average in China but at critical low levels in India. As Coal India, the major domestic producer of coal has not been able to keep up their production during the monsoon season to match their required demand. We therefore expect to see continued good imports of coal to India in the short-term. Looking at Chinese coal demand going forward, it's of course important to look at the electricity consumption and in combination with how much hydro power production is available. A drop in electricity consumption was observed in October which is normal, and also combined this year with Golden Week, but the thermal power plants have reported an increased production again, so far in November. Hydro power production has been strong this autumn but going into the winter season, less precipitation and less hydro power production should be available. If combined with the cold winter, these conditions could lead to higher need for thermal driven electricity production in the common months. Moving onto grain; top transportation of agri products [ph] has also been good in the quarter. The South America season has had a long year than expected, and the weak grail [ph] has supported higher exports from Brazil; this has partly displaced volumes from other exporters. The market has also expected a strong season out of U.S. Gulf with large crops, this has delayed but seems to be picking up and should give support to the Supras and Panamax and maybe have a longer but flatter season than in previous years. Soybean export has increased steadily overtime, import to China is increasing following their increased demand for meat and then, hence feed. And as domestic soybeans are more expensive to produce than imported soybean, this trade has had a positive front. Moving onto the supply side and deliveries; deliveries slowed down in the third quarter, net of scrapping the fleet grew with around 3 million dead weights on during the quarter which is less than 0.5% of the fleet on water. Scrapping has been relatively modest but around 55% of the gross deliveries, and modest scrapping will continue as long as we see spot rates at levels we are observing now. Although the number of newbuilding vessels which are delayed are reducing, there is still a potential for delay and some cancellations in the remaining order book. Looking at the latest breakdowns, still 2.3 million dead weight ton scheduled for delivery in the fourth quarter has not even commenced, and 4.1 million dead weight ton scheduled for delivery in the first half of '18 has neither commenced. Those volumes should at least have a potential for delay or potentially a cancellation as well; that also go for vessels under construction, not key lead that are scheduled for delivery this quarter. We expect as normal to see low deliveries during the fourth quarter as most [indiscernible] slightly, we want to push delivery into 2018. Looking at the order book as a percentage of fleet, it stood up 8.5% at the end of October. Despite that we have seen new ordering reported, the order book is still low in a historic perspective. Often the yards have been able to fill-up the first lots, new ordering is likely to be added to the very end of 2019 or even into 2020; so for the next few years the order book should be close to complete. Fleet growth of approximately 3% is expected in each of the next two years, this is gross order book before any scrapping and as the order book stands today. There seems to be ongoing discussion with yards for new owners but this has slowed down a bit compared to earlier in the open. Third quarter was another active quarter in the S&P markets and asset prices stabilized at higher levels. Many transactions have been reported in the various segments, also in this quarter demonstrating the good liquidity there is in the dry bulk markets. Further improvements in second half values need to come on the back of improved time charter rates as today there is a spread between spot rates and forward rates, and we need to see a lift in the forward rates that will also assumingly trigger at least in the second hand prices. At least the newbuilding prices that also have started may support an increased second hand price. Summarizing the markets outlook; we continue on the same view as we had in our last report. We believe on an improvement in utilization and rates, but knowing the seasonality in the market and the volatility on various commodity, we still expect volatility also in rates going forward. On the downside risk, this relates to new policy implementations in China which we cannot foresee today affecting coal imports or steel production, more negatively than anticipated, and potentially leading to low requirements for steel by this lower activity. In the longer run, continued ordering may also dampen the increase in risk. On the positive side though, growth in global GDP is normally a very positive factor for dry bulk trade and the world economy is still on a positive trend. Combining this with quality differences between domestic and imported ore and positive steel margin, this is seen as positive for the dry bulk. Environmental regulations and associated cost should also be positive of scrapping in the medium to long-term. As we already see, U.S. coast guard is strict on their regulations regarding balance water treatment system, this will put some pressure on some owners in their decision to upgrade or scrap on the part of their fleet, even before the IMO deadline in 2019. Combining all these factors together, we believe average rate will continue to improve going forward. And this ends the presentation today, and we are open to answer questions that you may have.

[Operator Instructions] We can now take our first question, it comes from Magnus Fyhr of Seaport Global. Your line is open, please go ahead.

Good afternoon. Just a question on your capital allocation policy going forward; I mean you removed some of the restrictions or the restrictions on the debt with expected strong cash flow in 2018. Can you shed some light on what are your thoughts on potential dividends and buybacks?

Yes, I think once we have sorted our deliveries of newbuilding etcetera, we will not have any remaining CapEx. If the market is there to support cash flow above -- sort of cash breakeven including debt-free payment, then I think we will strongly consider dividends but this of course -- with the spot exposure we have, it depends on how the market develops.

And do you -- I mean, you've locked in a couple of ships for 2018; do you see more opportunities to do that or I mean spot rates are still higher, what appetite is it for more long-term contracts?

I think we would prefer to see -- we will continue to add cover if we also see rights moving up but we will not add a significant amount of cover at the current rates. But as always we are opportunistic and looking at how the market develops.

Okay. And just one last question on the markets; you highlighted government policies in China having an impact on both, iron ore and coal imports. You know, India has been historically big importer of coal, I mean they have some pretty restrictive policies as far as imports going forward, trying to become self-sufficient; what do you see there as far as their appetite as far you see it dealing with the coal import into India?

Well, I agree with you that they are working on becoming self-sufficient but as it looks now they have very low stockpiles and they will need to import to compensate but that says, they haven't been able to keep up the production but we haven't seen any long-term change in their policy but I think they will import whatever surplus they need above what they are able to produce and we've also heard that some contracts have been sold already for next year on coal which should also add of course the transportation demand on that. So I guess in addition to the requirements, physical requirements, they will also be a pricing question.

And just one final question on -- there has been a lot of queuing at [indiscernible], what -- do you see that improving going forward or how is the situation down there; we're hearing a lot of waiting time for chipping [ph]?

Yes, in general, I would say waiting times are on and off weather related, suddenly there is a queue. It's -- more volume should give more congestion but I don't have a specific trend on that particular port.

We can then move along to our next question; it comes from Fotis Giannakoulis of Morgan Stanley. Your line is open, please go ahead.

I want to ask you about the policy used to slowdown in China; if you have seen any early [indiscernible], then what is your expectation of the market development in the next three months and also in the next year, overall? And if you can also comment, how long do you think that this upward shipping cycle for the dry bulk market is going to be?

If you look at policy of the short-term, I think on the coal as I mentioned, we've seen some stuff for a few weeks but looking that it's sort of starting again with a few cargos. On the iron ore side, we haven't seen much impact. I mean volumes being fixed now, today -- if it's a Brazil cargo, with loading in December it will be in China in February/March; so -- and this activity has been going, so there is not much signs on the short-term of the policy effect. For the long-term, of course with sort of some careful slowdown on the credit, you can see that total demand is going down but I think still the substitution story is there and volumes available from the international producers are definitely there.

Regarding the dividend that you mentioned earlier, how do you view your potential dividend policies? Is there something that you have thought about it or is it going to be a fixed dividend policy or floating dividend policy?

The current policy is very wide, it says that we will payout free cash flow subject to commitments and other investments, so it's not a very fixed policy communicated. This is a decision taken by the Board every quarter. I think if there is free cash flow to support the dividend, you will see some payout that we haven't set as fixed percentage for instance.

And also to add on that, we have a fixed dividend policy in a volatile market, that's the experience -- and also with large spot exposure, it's very difficult to set up this policy.

Yes, that's understandable. I just wanted to make sure that whenever the market goes higher than what it is, we will see this reflecting to your dividend. And one last question in regards to your capital allocation as a follow-up to the previous question; how many opportunities do you see for larger acquisitions, Quintana type acquisitions, vis-à-vis individual vessels, do you see this consolidation signs that you have managed to show to the market they can expand even further? Are there any private equity controlled fleets that they can be potential acquisition targets for a company like yours?

Yes, there are various fleets around and we are looking at ideas from time to time but there are lot of boxes to be ticked to sort of match. So -- I mean there are opportunities but it's not plenty every week but there is possibility but it has to be the right match at the right time and the right fleet.

Thank you. We have no further questions at present. [Operator Instructions]

Okay. If there are no further questions, thank you for listening in to our conference call today.

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