Golden Ocean Group Ltd (GOGL) 2015 Q2 法說會逐字稿

Thank you very much and welcome to those listening in to the second quarter 2015 Golden Ocean presentation. We do it as we normally do, that Birgitte Vartdal will take us through highlights, recent developments, financials, fleet information, and then I will share a few macro slides with you, and finally we do Q&A. So then, Birgitte, the floor is yours.

Thank you. As you are all aware of as of now, the merger between the former Golden Ocean and Knightsbridge was concluded on March 31, 2015. This means that the effect on this quarter is that the results reflect the full quarter of our operations for the merged company and the whole fleet.

As previously advised, the Company concluded various transactions in April and I will provide you an update later on on the status of the progress of various transactions. Based on these transactions, currently the fleet consists of 40 owned vessels, 11 vessels on charter in or in a joint venture, and 23 newbuildings, of which four have been sold and will be delivered to new owners once completed from the yard.

Most of the transactions in the second quarter was already covered in our Q1 release end of May. We took delivery of two vessels this quarter, the Supramax Golden Taurus and the Capesize vessel Golden Aso. It's worth noting that the Capesize was delivered at the last day of June, so the corresponding depths will be drawn during the third quarter or have been drawn during the third quarter of 2015.

Otherwise, we delivered Alliance and Navigator to new owners in May and June and we re-delivered Golden Sakura, the last vessel in the portfolio that was named the [dress-up] deal, was re-delivered in June.

Also in the second quarter, the long story with Jinhaiwan came to an end. We received the final $40.1 million in installments and interest, and in total we have received refunds of $215.8 million for nine vessels that we canceled at the yard. For the transaction, which we financed, we have so far during the third quarter delivered seven out of eight vessels and taken them back on the 10-year charter contract. We expect to deliver the last vessel to Ship Finance during September, so that's all -- the whole transaction is closed during the third quarter.

If you look at the income statement, Golden Ocean obtained a net operating loss of $20.8 million for the second quarter. If you look at the underlying operation, the vessel earnings were in line with or slightly above the average spot market rate for the vessels that were trading in the spot market. In addition, the vessels on long-term time charter contracts contributed positively, with rates far above the current market.

However, it's worth noting that at the time of the merger the value of these time charter contracts were included as part of the value of the former Golden Ocean, and therefore we have amortized a net cost of $8.1 million in the quarter.

The administrative expenses of $4.8 million are slightly higher than what our target is for a normal quarter and this is related to costs in relation to the work with the merger, mainly.

Finance costs also include interest expenses and an amortization element on the convertible bond between the difference between the nominal value and the fair value of the convertible bond. Also, in finance, we have an adjustment to the bargain purchase gain booked in Q1, which is negative with $[2] million.

Based on the rates that we have obtained so far in the third quarter, we expect to see improvements in our third-quarter results. Part of the fleet is still spot exposed, so the final results will depend on the market developments during the last part of the quarter. But what we have fixed so far is clearly at a higher level than the rates obtained in the first half of 2015.

If we look at the balance sheet, the cash position also include the long-term restricted cash of $58 million. This is a classification under US GAAP, explained by our financial covenants in the loan agreement where we have a minimum cash requirement. Also, our cash end of the quarter includes the final installment on Golden Aso, but no debt was drawn in Q2.

We took delivery of two vessels in the quarter and paid predelivery installments of a total of $117 million.

If we look at the liabilities, the current portion of the long-term debt has increased. This is due to one of our loan facilities, the $175 million facility from former Knightsbridge that has a final maturity in May 2016. This facility financed five of the vessels that are sold and delivered in Q3 to Ship Finance. So when we report Q3, we expect the current portion to come back to a normal one-year debt repayment level.

As I mentioned at the time of the merger, the fair value of the long-term time charter contract was included in the calculation of the bargain purchase gain and also included in the balance sheet as other assets. Therefore, this value is now amortized over the remaining period of the various contract. And in the second quarter, we reduced our net income with $8.1 million for these amortizations.

Going forward, we will also reduce the income correspondingly, and the numbers in this slide gives you a guidance of the quarterly amounts to be deducted. But from 2022, there will be a small income per quarter. It is important to be aware that this is an accounting matter and it does not have any cash effect on the Company.

When it comes to the newbuildings, we have 23 newbuildings left, of which four will be sold on delivery from the yard to new owners. There are no significant changes here since the last quarter. There is a possibility for some further delays on some deliveries. We still have five unfinanced vessels, three Supramaxes and two Capesize. The first Supramax is to be delivered mid-end first quarter 2016 and we will work on the financing prior to that.

It's also worth noting in our report, we have commented on the net -- the gross amount that we will receive for the four vessels that we have sold, while the CapEx includes the CapEx from these vessels.

When it comes to the exposure going forward, we are still pretty spot exposed, except for the six long-term time charter contracts on our Kamsarmax and ice-class Panamaxes. The numbers are from the date of this report, and as you can see, what we have fixed is mainly the next voyage and the rest is spot exposed.

If we look at our vessel operating expenses, for the second quarter these came in at $4,700 per day for Supras, $5,900 per day for Panamax, and $5,400 per day for Capesizes. It is worth noting that these numbers include cash spent on drydock, in accordance with our US GAAP accounting policies. This differs from the former Golden Ocean accounting policy whereby this cost was activated as part of the asset and depreciated to the next drydock. In Q2, we have added drydock costs for three vessels. This is part cost of the dockings as some of the dockings were between two quarters. We expect four vessels to dock during the second half of 2015.

Thank you, Birgitte. Then I will take you through a few macro slides or market slides. I will focus again on the iron ore and coal, and obviously again related to China, and also discuss a little bit about the order book and the supply side of utilization.

It was quite encouraging what we experienced in the month of July. I mean, the Cape market moved over a fortnight or in a few weeks from $4,000 or $5,000 per day and almost touched $20,000 per day. And a question we are asked, whether the supply/demand or the supply side was structurally damaged. That was -- those questions were raised frequently during first and second quarter there, and then in July, people got quite optimistic, and obviously $18,000, $19,000 per day should not be reflected in the utilization rate of less than 80%.

And again, fundamentally, should the market have been that weak in first quarter or that strong in July? At least what we have seen is the numbers that came out in July were quite strong. The China imported 86.1 million tons of iron ore for the month, and by the end of July, the total import was 539 million tons, which is unchanged compared to the same period last year. It's flat.

Coal again was -- have been disappointing, but China imported 21.3 million tons in the month of July, which was almost 5 million tons up from the previous month. But they are still down quite a lot from last year, and year to date they are down 34%. I'm not saying year to date. It's based on end of July. Down from 122 million to 183 million in the comparable period last year (sic - see Presentation - "Year to date, coal imports totaled 121.8 million tons, down from 183.2 million tons (-34.5%) in the comparable period last year.").

Coal, I think steel is the biggest uncertainty and I will come back to that a little bit later. Also, grain was quite -- came out quite strong. Year to date, imports of soybeans are up 7% compared to the same period last year.

Then, what happened after that, we all know. We were still kind of optimistic a few weeks into -- one or two weeks into August. Then we had this three-step devaluation in China and all the negativism in the equity markets, particularly in Shanghai, which kind of took -- may have resulted in that the commodity prices again have fallen, coal prices in particular, and the activity is not high at all at the moment.

Having said that, this -- we are still at fairly low levels when it comes to stockpiles, both on iron ore and coal in China. I think it's about 17 days now, the port stockpiles of iron ore, which is fairly low in a historic perspective. Coal in India is, however, the stockpiles are still fairly high.

The next slide is from Clarkson Platou. We have used two sources for this presentation. It's either Lorentzen & Stemoco, Nicolai Hansteen, or Bjorn Bodding in Clarkson Platou. The next is Clarkson Platou's assumption based on a very moderate or zero growth demand steel production growth this year and a tiny growth in 2016 and 2017 of, say, about 3% per year. That's their base case.

But as you can see that, and I will also show that in a couple of slides later here, is that the domestic production has really taken a hit in China and the substitution effect is really materializing right now. So we -- I guess some of you heard or saw the press release from BHP, their CEO yesterday, that in spite of all the difficulties and uncertainty related to Chinese steel production, their production plan remains the same. They intend to increase the production with something like 16 million, 17 million tons next year. And I will show you what the plans are for a few others. But in the fairly flat steel production base case, the substitution factor will lead to a higher increase in iron ore demand.

The next is from Lorentzen & Stemoco. They are slightly more bullish, but again showing the substitution effect. But again, based on the very flat or relatively flat steel production in China, they are assuming, Lorentzen & Stemoco, an annual increase -- not this year, but in 2016 -- of close to 50 million tons.

And if you look at the cost situation for the various companies, I again am referring to what BHP said yesterday. They have today a breakeven cost which excludes royalties and freight at $17 per ton. And if you look at their $31 per ton, including freight and royalties, it should mean that the royalties should be around $10 per ton. And the target is to reduce the production to -- their cost of production to $15 next year, and there is no doubt at least in my mind that the whole strategy for the major producer is to focus on increased production more or less regardless of price. Obviously, new plans for production is -- or new capacity, which have kind of not been taken account for in the past, will not materialize with these prices, but there are quite a few projects that will rematerialize over the next two years.

What we see here is what is expected from Vale in 2016 and 2017, BHP, Rio Tinto, and FMG. So FMG is presently running up through capacity. But what is happening in September, October is that Roy Hill will start their production within a [near] capacity in 2016 or 2017 of close to 50 million tons. So there is no doubt there is at least not capacity -- enough capacity out there, and I think the domestic producer will struggle even more in the coming two years.

Lorentzen & Stemoco is forecasting -- I think that's a little bit too bullish, but they believe that they will end up at 1 billion tons, which means that we need to really see a ramp up in Q4, but I'm not ruling out that they will be very close, say at least 980 million.

Then coming to electricity production, and I think the big change in 2014 and so far in 2015 has been hydropower capacity in China. Most of the hydro -- new hydropower capacity is in place right now and there is limited investments foreseen for the next two years. So it is expected, and this is according to the national energy board of China, that coal needs to pick up in 2016 and 2017.

That's the big -- the $1 million question is obviously where do they take sources from. Given that only 6% of Chinese coal consumption is covered by imports, there is a massive sensitivity here. And I think it's very difficult to kind of predict where they will take it from, and kind of our base case is that coal imports to China will stabilize at around an annual pace of 200 million tons and not increase that much. While on the other side, which will by far surpass China as the biggest coal importer this year, that they will continue to have a decent increase in the coal imports.

Then over to the fleet and what is on order, existing fleet and order book. According to Clarkson Platou, the official order book in deadweight capacity is 17.7% of the official order book -- no, of the existing fleet, sorry. In reality, I think it's fair to say that it's more like 13% to 14% and that is the smallest kind of order book in percentage we have seen for the last 15 years, since the beginning of 2001.

And obviously it's off a much bigger fleet, but given the latest freight environment, there is absolutely no new orders being placed. I think after the monsoon, scrapping will again pick up, and in a way the worse the market is, the faster it will repair itself. And kind of the way I see it or we see it is that the market over the next two to three years will be more supply driven than demand driven.

This is just showing a monthly fleet growth on the various segments, from Handysize up to Cape, and both Capesize and Handysize have zero growth so far this year. And all in all, we believe that the total fleet growth -- net fleet growth will be much less, I will say 3%.

The next is just again showing it's more or less the same, but here's the breakdown from Clarkson Platou on the various slices month on month with the deliveries and scrapping. If you then just look at the Capesizes, over 70 Capesizes have been sold for demolition in 2015, which is a run rate of 10 vessels per month. So far, I mean, it's quite impressive. 3% of the Capesize fleet has been scrapped.

As I said, it's been a monsoon since the beginning of June and I think it will -- if the market remains weak, I think we will see scrapping again. In spite of the weaker scrap prices, I think scrapping will pick up again in end of September, beginning of October. So Cape on the standalone basis will, I think, end up with zero growth in 2015.

Platou is just showing their base case. In a way, it shows what I said that the difference between the actual order book, which I think is overstated. You see so far this year we have a delivery ratio below 70%. You see the red is the actual and estimated deliveries. And the removals is based on a slightly firmer market than the prevailing FFA market, so even that market condition, which is Capesize, that's $14,000, $15,000 per day. You could -- we will still have removals.

The next slide is just -- it's quite interesting. It's been a lot of focus on the Valemaxes. There are, I think, today about 42 Valemaxes sailing. But there has been, I would say, limited -- little focus on those conversions that were converted from VLCCs to VLOCs. That's a total of 57 assets.

And this is just a timeline. All of these vessels are running on long-term contracts, and this is a timeline when the vessels are terminating or ending their contracts and they are going to be scrapped, all of them. They are not economical. They were -- the cost at the time in 2006, 2007, 2008 was -- including conversion was between $65 million to $80 million. And they are heavy on consumptions.

And so, that's a lot of scrapping potential here which kind of almost -- even though the Valemaxes are twice as big as the VLOCs, at least this will be helpful.

Then, the final slide because it is just people are asking, where do you think the newbuilding prices will go over the next couple of years? It's -- this is something that was done by Lorentzen & Stemoco after they had just recently visited a few yards in China. The interesting thing is that this is on the VLCC. And according to, say, an average observation made by Lorentzen & Stemoco, the total shipyard cost is about $90 million and they are presently quoting $94 million.

And I think if you look at the Capesizes, I think it's very similar to what we have been told on the Capesizes, that today I think the cost for a good Chinese yard breakeven cost is around $46 million, $47 million. So I doubt personally that you will see a big downside risk to newbuilding prices.

And what has really happened, which is particular for China, is that even though steel prices are much lower, their labor costs have exploded. So they haven't really been able to lower their shipyard costs by having, say, lower steel prices. But it's just -- I thought it was quite an interesting breakdown on VLCC, which is, I would say, just double the cost of a Capesize.

That kind of concludes our presentation, and then we leave it to you if you have any questions. And we will try to answer the best possible. Just one thing, I would say, to give them -- it's a lot of uncertainty right now, and in fact, I have said a few times there are so many views on China and there are so many experts on China that we still are very dependent on what's going on there.

What we also -- what I said a couple of months ago was that we should expect a lot of volatility and that the highs will be higher than the previous highs, and as I say, the small -- the dips not grave as the previous dips. But right now, it's -- we are hit at least short term by what is all the uncertainty we are reading in the press and it's a lot of psychology out there. I don't think the fundamentals really have changed that much over last month or so. So, then it's up to you if you have any question.

(Operator Instructions) Fotis Giannakoulis, Morgan Stanley.

Good morning and thank you. I want to ask about if you have seen the impact of the Chinese slowdown demand on the amount of fixtures that you see from China, and what kind of -- is it just in iron ore? Or you see it only in coal? And I'm not talking about the year over year. We all know that there has been a steep decline. I'm talking about compared to the previous quarter, excluding, if you can, the restocking that we saw for the last -- for the month of June and early July.

Fotis, thank you for that question. You know, we have a sneaky feeling that it was fairly brisk activity this week, in spite of the fact that markets have come down, and sometimes it's the -- we should pass on appreciations to the ship brokers who sometimes talk the market down a little bit.

But because we have asked the six biggest Cape brokers what they have done this week and the activity has been, in fact, slightly higher, number of fixtures they have done this week, which tells me that it's so much psychology out there. I mean, more than reality fundamentals.

So the coal, we feel that it's very slow right now. And coal prices I understand out of South Africa, as an example, have taken quite a hit, so people are holding back. And as I said, the Indian -- India seems to have a fairly high stockpiles. And then, on the other hand, we saw that rainfall in certain important areas in China was lower in July this year than compared to last year. And even though they have increased the capacity, the uncertainty is more related to the weather.

But right now, I think it's more dominant negative on coal than on iron ore.

Thank you, Herman. Very helpful.

You have this very interesting slide at the end of your presentation from Lorentzen & Stemoco. You said that the picture is very similar for dry bulk vessels. I'm wondering whether despite the fact that the shipyard seems not to make any money if you think that there might be some further price deflation since steel prices are coming down, they have come down a lot, and I wonder how much of the steel price in this presentation is based on inventory costs rather than the current steel prices. And also, whether the shipyards might even try to give up part of labor and overhead costs, which are, as we know, fixed costs, and try simply to cover their variable costs.

I think some yards -- I think Japanese yards are usually quite clever to reduce productivity. But they have always been helped by domestic orders, which are not that many these days.

On the Chinese yard, I guess you saw that [Yongsuisstan], which I think is listed in Singapore, was filing for protection the other day, two or three days ago. I think Oldendorff has the few orders of drybulk vessels there.

I think the problem today -- apart from the government yards -- is that they are really struggling to get refund guarantees on lossmaking projects. But again, it will be a little bit speculation from my side, but we -- it's the -- I think there is -- at least it's very limited downside on newbuilding prices. So I fail to see that even the Chinese say a good yard is backed by the government will be willing to offer a Capesize, say. We ordered, I think from 2012, ordered at 46 -- 46.5 or something like that at good Chinese yards. And I don't see much downside from that, maybe 5%, 6%, 7% max. But I've been wrong before.

Thank you, Herman. Can I ask you also about your view on the market, and also if you can combine that with an overview of the period market? Obviously, the period rates, the one-year contracts, they remain below the cash breakeven for Capesize and Panamaxes.

What would need to take for the market to see the period contracts becoming profitable again? Is it just a supply-driven recovery? Do you expect the demand will stay pretty much the same? And is the fleet growth that has a decline, as you said, below 3% a good number in order to allow, based on the current demand in the market, to recover? And also -- or if you believe that there are some risks of this fleet expansion will accelerate as scrapping comes down?

I think it's -- my view is that the most important thing on the demand side is Brazilian iron ore because that has such a strong -- it means quite a lot on the ton mile. So, I'm still fairly optimistic on Q4 and Brazilian iron ore imports -- exports.

But then I think Q1 could be slightly difficult because I think there are quite a few vessels that are delayed that will be delivered January, February. But if you look a little bit further out on the line, the order book, now we are talking very, very small order book beyond, say, if you will, just 18 months out on the timeline. And we saw -- and again, the order book, I will tend to continue to say that -- for example, this Vogemann order. I don't know if you saw that, but Vogemann has ordered eight new Kamsarmaxes, which have been accounted for, which Vogemann went out this weekend said it's not there. We haven't done any and I think there are quite a few in particular domestic.

But the upside is twofold, I think. On the smaller sizes, I think you have a fairly -- from what I understand is that the grain season out of northern Pacific is not as good as it has been in the previous years. But it's much better on out of, say, Mississippi Delta, which means more ton mile, and that should -- when that season really picks up in a month's time from now, it should be helpful for, say, Supras and Panamaxes. And then, the upside on the Cape is really Brazil, and if Brazil doesn't happen, then Q4 will be -- not -- be a nonevent, basically.

Yes, I think that's basically -- and on the period, period market is there is no liquidity right now. But we need to see -- we need to see a Q4 that -- if the Q4 delivery is higher than the present FFA market, I think you are able to take decent cover, at least about all our breakeven costs.

Thank you, Herman. One more question for me. Obviously, the prospect of the Brazilian exports can change the course of the market. Given the fact that even with the latest correction, the rates are much better than they were at the beginning of the year and the fleet growth is at a low level, so asset values, they have declined a lot, do you think that it's the time or we are close to the time to start buying assets again and try to capture the appreciation of asset values that is likely to come in the future? Or it's still too early?

And if you can give us also some overview of your liquidity, and how are you planning to use this liquidity? Is this as a buffer for the weak market? Or you might think of expanding?

I think -- I mean, just quickly on the asset prices, I think after June 30, we have seen a certain appreciation of asset values, which I think now has kind of fizzled out a little bit. But we saw immediately when -- how fast the buyers reacted to the stronger spot market.

So at least I think the September 30 values will be at least in line with June 30 and I think values have bottomed out, unless we see kind of a very bad Q4. Then I think some people will really give up anyway.

But I think it's time to buy. In general, I think timing -- as I said, asset values react very fast to the spot market. About liquidity, and then I think we should leave that -- we will also need to have others given the chance to ask some questions, but Birgitte, if you could just quickly say something about liquidity.

Yes, we announced a few transactions, as you know, back in April, which have freed up some funds. At the moment, we are comfortable with the situation. Obviously with our spot exposure, we're very dependent on how the market develops, whether it's $9,000 or $20,000 on the Cape. But we feel that we are in a strong position. We have ample time to take any further actions, if needed.

Thank you very much both.

(Operator Instructions). We do not have any further questions at this point, so I'd like to turn the call back over to Mr. Billung for any additional or concluding remarks.

I think Fotis kind of asked all the questions. So that was helpful, and I just would like to thank you all for listening in and we firmly -- at least we are doing our utmost for our shareholders to be -- that we will be the best driver of that going forward. That's for sure. And we have a good team. I wish you all a pleasant Thursday evening.