Q2 2017 Golden Ocean Group Ltd Earnings Call

Aug 17, 2017 AM CEST
GOGL - Golden Ocean Group Ltd
Q2 2017 Golden Ocean Group Ltd Earnings Call
Aug 17, 2017 / 01:00PM GMT 

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Corporate Participants
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   *  Birgitte Ringstad Vartdal
      Golden Ocean Group Limited - CEO of Golden Ocean Management AS
   *  Per Heiberg
      Golden Ocean Group Limited - CFO of Golden Ocean Management AS

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Conference Call Participants
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   *  Fotis Giannakoulis
      Morgan Stanley, Research Division - VP, Research
   *  Herman Hildan
      Clarksons Platou Securities AS, Research Division - Co-Head of Research
   *  Magnus Sven Fyhr
      Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst
   *  Noah Robert Parquette
      JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst 

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Presentation
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Operator   [1]
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 Good day, and welcome to the Golden Ocean Group Ltd. Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded.

 At this time, I would like to turn the conference over to Birgitte Vartdal. Please go ahead.

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [2]
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 Thank you. Welcome to the Golden Ocean Group's Earnings Call for the Second Quarter of 2017. The last quarter has been a busy quarter for us as we took delivery of 16 newly acquired vessels, increasing the size of our fleet from 60 to 76 vessels at the end of July. This growth has occurred in an improving market that has met or exceeded our expectation so far this year.

 We will start with the company update about recent developments and financial results, which will be presented by Per, and then move on to comments on the macro outlook before we round off with Q&A and we welcome any questions you may have.

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 Per Heiberg,  Golden Ocean Group Limited - CFO of Golden Ocean Management AS   [3]
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 Thank you, Birgitte.

 The highlights for the quarter can be summarized as follows. We report a net loss of $12 million in second quarter, which is an improvement of $5.9 million compared to first quarter this year and an improvement of $27.2 million compared to second quarter 2016.

 Adjusted EBITDA was $29.7 million for the quarter compared to $7.5 million (sic) [$17.5 million] for the first quarter.

 During second quarter and into July, we completed the acquisition of 16 vessels that was announced in the first quarter and we are now taking delivery of all these vessels. We have drawn related debt and issued a total amount of 17.8 million of the shares to the sellers.

 At the end of June, the joint venture holding the Capesize Golden Opus agreed to sell the vessel for $28.9 million, with an expected delivery at the end of this month. After the delivery, we expect cash proceeds from the joint venture of approximately $6 million.

 We move on to the P&L.

 We report the time charter equivalent revenue increase by $14.9 million compared to last quarter. $5.4 million of this increase relates to our newly acquired fleet of vessels. But the full effect of these vessels was not felt during the quarter due to the timing of the vessels' deliveries. And the increase in operating average -- revenue was primarily related to the higher rates achieved during the quarter.

 The achieved TCE per day of $12,237 is in line with the long-term cash breakeven of the company, including full debt service, and we are in excess of our cash break-even levels through the end of the current waiver periods.

 Ship operating expenses increased by $4 million compared to last quarter, of which $3.7 million relate to the newly acquired fleet. We experienced some higher costs in dollar per day terms related to start-up and takeover cost of this vessel but expect this impact to be reduced over time.

 Interest expenses are up over the quarter. This is mainly related to debt on the newly acquired fleet.

 During the quarter, long-term U.S. interest rate dropped, and we had to book a loss related to our portfolio of U.S. dollar interest rate swaps. Following this, the loss for the quarter came in at $12 million, an improvement of $5.9 million compared to last quarter.

 In the balance sheet, I will focus on the main changes since last quarter.

 At the end of the quarter, we had $191.3 million of cash, including cash booked as restricted. The decrease compared to last quarter of $74.9 million mainly relates to down payment of $54 million of the deferred debt, which is according to our cash sweep agreement with the banks. We also paid down $14.5 million of debt related to the Quintana Fleet, and this was a part of the agreements at the time of the transaction. We also paid $9.8 million in newbuilding installments. This was related to 2 of the Capesize newbuilding vessels and was also a part of the renegotiated deal that we reported last quarter. On the newbuildings, no further installments are expected until delivery of the vessels, which is scheduled for first quarter next year.

 Cash flow from operation in the quarter was positive at $6.1 million.

 13 out of the 16 newly acquired vessels were delivered during second quarter, and we issued 14.95 million shares in the second quarter as stand alone. And we assumed $241.9 million debt on these vessels. This is prior to the down payment of $14.5 million. Net long-term debt following this increased by $230.3 million, of which $227.4 million relate to the newly acquired vessels.

 The book equity increased by $82.8 million over the quarter, of which $97.3 million is the value of the 14.95 million shares issued, and this is offset by the loss in the quarter.

 If we look at the vessel operating expenses, we see, as I mentioned briefly, that the cost in dollar per day terms had a small increase over the quarter. This is primarily related to start-up and takeover cost on the newly acquired fleet, and we expect this to decrease towards historical averages going forward.

 As for 2 -- as for first quarter, 2 vessels completed dry dock in the second quarter, and we -- at the end of the quarter, we commenced dry-docking of 2 more vessels, and this has been completed in the beginning of third quarter. So following the completion of those, we have no further dry-dockings scheduled for the remainder of 2017.

 Looking at the G&A per vessel. The indication about -- or in the graph of $400 per day is based on a full year operation of the entire fleet, including the new vessels, and intermediate variances will occur from quarter-to-quarter.

 Looking at the fleet development. Obviously, the main change is the takeover on the delivery of the 13 -- of the 16 newly acquired vessels. 11 of these 13 vessels were delivered from Quintana and 2 from companies related to our largest shareholder, Hemen Holding. As all deliveries currently are completed, we have issued the full number of shares to the sellers, 14.5 million shares to Quintana and 3.3 million shares to Hemen, and we must say that we are very pleased with the way these deliveries were performed, and we did not experience any significant difficulties during the process.

 The status for the newbuildings is the same as reported last quarter, and the remaining 6 newbuildings are all scheduled for delivery in the first quarter of 2018. The remaining CapEx is linked to the timing of the delivery, and each vessel is financed with $25 million. Given this, net cash outlay for the company is $24 million in aggregate at the time of delivery.

 At the end of June, the joint venture owning Golden Opus agreed to sell the vessel to an unrelated third party at the price of $28.9 million. We expect the vessel to be delivered at the end of this month, and as this is the only asset in this joint venture, we will close down the company and cash contribution of approximately $6 million to each of the current partners is expected.

 Looking at the fleet overview. We see that following the sale and delivery of Golden Opus, the total fleet consists of 82 vessels, of which 76 vessels are currently on the water. As you can see in the table we show, we have a high exposure towards Capesize markets. But after the recent acquisition, the balance has shifted slightly and close to 50% of the fleet consists of vessels from Ultramaxes and [ultra] post Panamaxes. Of the total fleet, 10 Capesizes are fixed on long-term indexing contracts and 4 of the Panamaxes are on long-term contracted fixed rates. Apart from this, the remainder of the fleet is either trading in the spot markets, are in pools or are on short-term time charters that expire within the next 6 to 9 months. We do participate in the Capesize chartering pool, as reported earlier. And in addition to that, all our Supramaxes have joined a Supramax pool run by CTM, and those vessels are exposed to the spot markets through these pools.

 With that, I hand over the work to Birgitte, who will give you an update on the market environment.

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [4]
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 Thank you, Per. Moving on to the markets.

 The trend we have seen over the last year continued through the second quarter, with slightly improved utilization over the quarter as an average. Second quarter had an average utilization of 83.3% compared to 82.8% in the first quarter and 80.5% in the second quarter of last year. Currently, we should be at utilization rates above those levels based on the rates we observed in the market.

 In the second quarter, rates started strong but ended weaker. In particular on the Capesize started at $18,000 in April and ended at $8,000 in June. But now, rates are back up, and today the index was just above $19,000 per day.

 For the smaller sizes, the rate environment has been more stable, although we could see a dip in the summer period, particularly in the Atlantic. Markets have, in general, better caught up and been more stable on those sizes.

 Seaborne trade for the second quarter was a record for this quarter of the year and follows the highest first quarter on record as well. All commodity groups are up relative to the second quarter of last year. And with the exception of coal, all commodities are also up from the first quarter of this year. Iron ore and coal are still the 2 most important commodities for the dry bulk market, and iron ore has increased its market share over the last 2 years and are now 34% of the total volumes transported.

 China has also increased its share of total imports from 38% to 41% over the last 12 months and has an impressive activity at the moment. This is not only seen in the dry bulk market. If you look at oil imports, this has also increased 14% year-to-date, and this goes for LNG, LPG, et cetera.

 Looking at steel production. It has continued to grow over the last quarter, although the growth has kept better off in China than in the rest of the world.

 Looking at the Chinese steel production. July numbers have just been reported and had another record month. China produced 74 million tons of crude steel in July. This is 800,000 tons more than what was produced in June and 7.2 million tons more than what was produced in July 2016. This also marks the second straight month where production has set a record.

 Chinese steel consumption is holding up, and peak steel that was identified by analysts in 2013, 2014 have now been surpassed by the latest numbers. Steel exports are still lower than last year, and steel inventories are at low and stable levels. So the steel that is produced is clearly being consumed. On top of that, the price of steel is holding up which we view as a positive sign. The Chinese government have reduced capacity of steel mills in order to curb overcapacity. This is typically related to older steel mills and illegal mills, and some of those have been based on scrap steel. Use of iron ore as input has therefore increased as well.

 With higher steel prices and cuts in capacity, steel margins have strengthened, even on stronger iron ore and met coal prices over the last month. The margin using imported or domestic coking coal are now more or less aligned. Thus, there should not be a significant incentive in using domestically produced met coal versus imported met coal. Of the total consumption, 20% to 25% is imported, mainly from Australia and the U.S., and domestically sourced met coal is still a majority.

 Looking at the sourcing of iron ore. Australia and Brazil are holding up, although there was a small dip in the second quarter, explained by vendor-related issues and an accident at CSN terminal in Brazil. A new development lately is that India is back as an exporter of iron ore as well. Mines continued to increase output following the government's cut to iron ore export tariffs in early '16, and output has increased by 21% during 2016. Higher iron ore prices supported increased output and export, and projected output is expected to double in 2017.

 The second half of the year is normally seasonally stronger on exports, and volumes out of Brazil is expected to ramp up. Right now, with iron ore prices coming back up, we also see many of the smaller producers pushing increased volumes in the markets with a higher frequency than normal as they want to push out as much volumes as possible at these prices.

 Looking at seaborne trade of coal. It is the Asian markets that are increasing while Europe is declining lately. Higher coking coal prices have also led to American producers ramping up production, and we've seen increased volumes out of the U.S. supporting long-haul trades. China's imports dropped towards the end of the second quarter and into July on higher domestic production and some import restrictions on smaller ports. But looking at data from July, the domestic production were also down, and stockpiles of coal are reported to be at pretty low levels. Combining this with the strong increase in electricity production and lower hydropower at [per hour], it's likely that additional demand for coal will need to be imported in the short term, and transportation of coal should therefore be supported in the next few months.

 Another factor that was strong in the first quarter but slowed down a bit towards the end of the second quarter was the grain export. The data is not updated for the last few months as it takes some time to get in all these data. But following the season out of South America, we have a slowdown before we expect to see exports to pick up from the Northern Hemisphere. And there are some signs that some players have started to position vessels for the autumn already.

 Looking at the soybean exports. We still expect strong volumes from Brazil and Chinese imports are keeping up.

 Looking at the supply side. Deliveries in the second quarter is almost half what was seen in the first quarter of this year, when a larger number of newbuildings were delivered, as is normal for the first quarter of the year.

 With a better market at the start of 2017 than the start of 2016, scrapping has been relatively modest. So therefore, we have seen positive fleet growth also for this period.

 Looking forward, we expect to see a further slowdown for the rest of the year. Year-to-date, 28 million deadweight tons have been delivered, while the order book for the remainder of the year is now gross around 19 million deadweight tons. Of this, 4 million have not even commenced production and 8 million have status of under construction. So we would expect lower deliveries, and maybe in total, somewhere between 12 million to 15 million deadweight tons for the second half of the year, which then would mean full-year delivery of a range of 40 million to 43 million.

 For 2018 onwards, it's still too early to conclude on the construction progress. But note that the total order book for 2018 stands at 24 million deadweight tons now, including some orders that have already been postponed from 2017. And this is compared to an order book of 53 million deadweight tons at the start of this year.

 We have seen many new orders being reported, but the order book has not had a significant increase as of yet. Some orders have not materialized due to missing refund guarantees or owners' financing. Orders have been delayed and, of course, some of the orders have been placed. Owners have been there to place orders at these current low prices. But as soon as the yards have tried to inch up the price, the interest has disappeared. The development in this area in the next few months is very important as to see how 2019 will play out. But for 2018, it will be difficult to add a lot of new orders to the order book.

 The final graph on the supply side shows the fleet growth for each year, historic marks with deliveries in mid-blue. As you can see, deliveries were significant in -- both in tons and in percentages in the period from 2010 to 2013 but have eased off after that. And adding the current order book, the fleet growth per year will be much slower in the years to come. This graph assumes no new ordering but also no new scrapping. Obviously, we will see some new ordering, but we also expect to see some scrapping.

 On the values, following the improvement in the spot market and the activity in the chartering market on contracts, asset prices appreciated at that time across all segments. This trend continued into this second quarter, but the transaction market eased off towards the summer, where also the chartering markets were slower.

 Prices have been stable or increasing on the Supramax and Kamsarmax levels, while the small drop we observed on the Capes was linked to the drop on the rates there. With the last hike in rates, we expect to see further activity, and we see more transactions and more interest in India [certain key] markets. And we believe that an increased rate environment will also support asset prices.

 Summarizing, we would say that the market has developed as expected so far this year, maybe a bit better on the rates in the beginning of the year but with improving fundamentals, though with rate volatility, as had been demonstrated over the summer. What we see right now when rates have improved again is that the Atlantic activity is back in the market, stronger commodity prices is supporting additional cargoes, as I mentioned, and you see also long-haul coal cargoes. These are some of the same drivers that you saw in the busy period in March/April, and you need all commodities and all areas of the markets to be strong at the same time. Then you will see push in rates. While if some fall away, you will see a bit more lack of activity. And this is linked to where we are on the utilization and indicates that we are moving towards an improved market but still with volatility, as we have been expecting.

 The bullish factors from where we stand today is clearly still strong imports of iron ore and coal to China as well as that the general GDP growth in other countries are supporting general trade levels. Combined with, at least until now, relatively limited new ordering and a lower order book for 2018 than 2017, this is positive.

 The regulation on Ballast Water Treatment System have been postponed for a few years. We did not expect a lot of scrapping from the beginning as owners were delaying with certificates and found other ways around. But clearly, a postponement on the regulation will buy everyone time and postpone the decision. However, the U.S. still has their regulations in place. So if there are vessels trading on the U.S., owners still need to consider how to adapt.

 On the negative side, the downside risk linked to more or less the same factors. If you see a slowing of activity or limitations of import to China, this will obviously be negative for our market.

 Stockpiles have been high for a while but flat or slightly declining for the last few weeks. A drawdown may come at some point and will, of course, be negative for the market but timing on this is difficult to predict.

 You should also believe that with the volatility we have seen on iron ore prices over the last 6 to 7 months, this should trigger some drawdown on the stockpiles, but these price movements have not had a lot of effect. So maybe the higher level of stockpiles is the new normal based on the higher consumption the Chinese have at the moment.

 All in all, we continue with the market view that we have had, believing that we will see gradual improvements, but we are positive to the next few months based on the activity that we see on the cargo side. And with rates currently observed above cash break-even levels, we are generating positive cash flow. And as a reminder, every $1,000-per-day improvement in rates will result in $28 million in additional cash flow per year for the company. And given the large size of our fleet, the competitive break-even levels and the spot market exposure, we have significant sensitivity to any upside improvement in the market.

 And with that, we conclude the presentation, and we would like to open up for Q&A if anyone should have any questions following our presentation.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) And we will take our first person from the queue, Magnus Fyhr from Seaport Global.

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 Magnus Sven Fyhr,  Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst   [2]
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 Just had a couple of questions. First, you mentioned with rates moving up here recently, you're generating significant cash flow. I mean, at Capesize rates of $18,000, $19,000 a day, that's quite significant. Could you give us some thoughts on your capital allocation going forward with significant cash flow generation? I mean, you have some debt coming due in 2019, but it looks over the next 1.5 years, you don't have much capital commitments.

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [3]
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 Yes, I think we need to see the rates at these levels for a bit longer. But right now, it's to see positive cash flow being generated up to a level where we are comfortable for the long-term cash flow situation, I would say, is...

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 Per Heiberg,  Golden Ocean Group Limited - CFO of Golden Ocean Management AS   [4]
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 Yes, and also looking at the short term, yes, this rate increase needs to last for a while in order to give significant cash inflow. But the positive thing is at the current level, we are able to kind of repay debts or the cash support the kind of ordinary debt repayments. So that is kind of the first step for us. And then the next is to see, if this lasts for the -- for a longer period, then, of course, it's significantly impact the cash flow and the availability to pay down debt, as we say, in '19.

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 Magnus Sven Fyhr,  Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst   [5]
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 Okay. And, I mean, if rates stay at these levels, I mean, does your chartering strategies change at all? I mean, you have most of your ships in the spot market. But, I mean, if rates, let's say, come over $20,000 a day and time charter opportunities develop, is that a level where you would start fixing ships? Or would you stay spot?

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [6]
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 Yes, we are slowly starting to considering at levels that we see now, and it would be a stepwise process. You have to do -- to build a portfolio. So you will start and then increase exposure it -- if and when rates are increasing. So for next year, we are -- except for the -- for long-term charters, we are more or less both exposed. So to slowly start to add some cover? We will, yes. But we are still talking low percentages.

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 Per Heiberg,  Golden Ocean Group Limited - CFO of Golden Ocean Management AS   [7]
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 And it's important to also mention that the cal '18 is still at $14,000. So it's not -- you can't certainly expect the spot level for a year. So you need to see long end of the curve.

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 Magnus Sven Fyhr,  Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst   [8]
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 Right. Have you seen time charters -- yes, have you seen increased interest over the last few weeks on the time charter side? Or is charter still maybe staying on the sidelines?

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [9]
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 Yes, I would say -- no, the period market is sort of slowly coming back following better spot trades. Seems like some cargo owners will try to position them for the autumn. So yes, activity is there, better than what we have seen during the summer, definitely.

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 Magnus Sven Fyhr,  Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst   [10]
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 Okay. And just one last question on the fleet composition. Very focused on the Capesize market. But as you mentioned, you've sort of added exposure to the other markets here with recent acquisitions. Do you feel like you have the right fleet now? I mean, but going forward, I mean, you've done some acquisitions here and you had a big newbuilding program. Are you in the harvest mode now? Or are you looking for more opportunities?

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [11]
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 At the moment, I think where you see the volatility is on the Capes. The smaller sizes will follow, but clearly Capes is the first mover here. We are happy and have just built a significant fleet. So at this time, we are more in a harvest mode, call it that. But as a company, we are always sort of looking at any opportunities that may arise. But we are happy with the scale and with the quality of the fleet at the moment.

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Operator   [12]
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 And now we'll take our next person from the queue, Herman Hildan from Clarksons.

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 Herman Hildan,  Clarksons Platou Securities AS, Research Division - Co-Head of Research   [13]
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 Just kind of follow-up question on the capital allocation question that Magnus posed. And as we have moved out of a, call it, dreadful markets, the question is, do you have a target leverage? Or how do you kind of allocate on the balance sheet? Are you happy with your absolute leverage ratio? Or is there -- or are you kind of thinking about leverage in the context of breakeven? Obviously, it relates to kind of also at what stage? You did mention that you kind of are still in a -- it sounds a bit early for you to start paying dividends. But the absolute leverage ratio, are you happy about that or not?

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 Per Heiberg,  Golden Ocean Group Limited - CFO of Golden Ocean Management AS   [14]
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 Yes, I think as you know, we have the convertible bond maturing in Q '19 -- or Q1 '19, which is important for us to kind of secure and to deal with that. And going forward, in the longer run, I would say that -- yes, it's -- the leverage, although a little bit will vary with the market value of the vessel, right? So we will -- I don't think it will come back to a level where we kind of have 75%, 80% leverage on the vessels. I think the long term sort of may be lower than that, but it's -- we haven't done any plan for where it should be going forward.

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [15]
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 Your point to cash break-even levels, which is just as important as the leverage, and I think the long-term cash break-even levels are pretty comfortable sort of. It's not the -- although significant adjustment is required on the long-term cash break-even levels, remember, on most of our newbuildings, we currently have a 20-year profile. So it's acceptable sort of implication from the cash breakeven.

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 Herman Hildan,  Clarksons Platou Securities AS, Research Division - Co-Head of Research   [16]
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 So kind of outside of the building payments here, quite comfortable about your existing cash break-even levels? So once you have more, call it, confidence in the sustainability of the driver of recovery, it's, call it, more like that we will see capital being returned to shareholders rather than deleveraging, to put it that way?

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [17]
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 Well, it will be some deleveraging first based on our agreements with the bank.

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 Herman Hildan,  Clarksons Platou Securities AS, Research Division - Co-Head of Research   [18]
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 Oh, of course, of course.

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [19]
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 But yes, I think we have shown in the history that we will pay dividends if that is sustainable, yes.

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 Per Heiberg,  Golden Ocean Group Limited - CFO of Golden Ocean Management AS   [20]
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 I think it's important to say that we will try to see as low as possible cash breakeven, and -- which is the most important number for us, that it's sustainable in a normalized market. And then yes, we will see if the dividend come back after that. That's the most important, have a low cash breakeven.

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 Herman Hildan,  Clarksons Platou Securities AS, Research Division - Co-Head of Research   [21]
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 And also just a final quick one on the Golden Opus. I mean, it's a 7-year-old ship. With a positive outlook, it's historically been not a bad trade in a rising market. Could you provide some color on why you decided to take -- to sell Golden Opus?

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [22]
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 Yes. As we mentioned, it's a joint venture, and it was an agreement between the joint venture partners basically. And the sale was, as you probably are aware, executed or done a while ago. So we view the price as good at the time and I think still at these levels today.

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Operator   [23]
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 And now we'll take our next person in the queue, Fotis Giannakoulis from Morgan Stanley.

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 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [24]
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 Birgitte, you mentioned earlier about the very high volatility in the market and the fact that you are considering chartering some vessels. Can you clarify for what period would you be looking to charter part of your fleet? And also, if you can comment about the latest meeting of the China Iron Ore and Steel Industry Association (sic) [China Iron and Steel Association] and reports that they -- there is an effort from the Chinese government to try to reduce speculation in the steel market. How would this affect the shipping volumes?

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [25]
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 Yes. For the first question, we look at the combination of periods. I mean, the markets that is available is typically up to 1 year-plus. So it's -- there is still no market to do like 3 years' time -- 3-year time charter, which are at levels that owners are willing to take, and I haven't seen much activity on that. So we are talking short periods up to 1 year. When it comes to the speculation, I think it's important to look at the underlying steel prices as well and the fundamentals, which are currently strong. Of course, with the futures, you can see positive margin based on the derivatives in ore market and steel margins. But I think for the more long-term production, you need to see the underlying markets being strong. So of course, this will add to the volatility in the short term. But the underlying fundamentals, I don't believe that it will affect.

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 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [26]
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 Regarding the recent increase in Capesize rates, they have gone from $5,000 to $19,000, as you mentioned, in a very short period of time. How much is attributed to an increase in volume because of the underlying -- strong underlying demand from China? And how much is attributed to the expansion of routes because of the ramp-up of Brazilian exports?

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [27]
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 Ton mile versus tons is what you are...

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 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [28]
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 Exactly.

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [29]
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 It's -- I would say...

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 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [30]
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 What I'm trying to see is if Brazil has started ramping up exports, if you have seen any notable change in Brazilian exports?

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [31]
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 There has been more activity on that route as well, and that has been one of the rates lagging behind. In the past, the Pacific route has sort of been the stronger market and Brazil has been lagging. Also, it seems like the players there are going more into the spot market but have had sort of more cover. So they are more exposed on the spot at the moment. But in addition, you see some long-haul trades on call out of the U.S. You see the minor producers adding trades from Brazil. So I think the important part here is that you see many additional factors, and it's the Atlantic and the round voyage from Brazil that is supporting. So I would say yes, more is long haul, but it's also more volumes. To give a percentage split, I don't have a number on that. What you see in historic data is that typically, the ton demand is the major driver, but then you can see an additional effect on the ton mile, yes.

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 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [32]
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 That's very helpful. I want to ask about, but how do you view the sale and purchase market? I've been hearing that the last few days, there is an increased activity from people who are willing to buy ships. What type of ships are they looking? Is it still young, Japanese-built vessels? Is it Panamaxes, Capesizes? And this improved interest in buying activity, do you see that expanding also to newbuildings? And if you can also comment about the availability of capital, both for secondhand and newbuilding vessels.

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [33]
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 Yes. I would say that it's always the younger and the better vessels that have interest. But when there is more activity, that this has also widened out. I think what I heard so far from our people is more that it's generally included -- it's too early to sort of have a clear trend on which segment. This will, of course, at some point also filter into newbuildings if the market is stronger. But we have seen many orders being talked about, and part of them have materialized. But we also see project financing that are not able to raise capital. So -- and the current owners, at least the [lister] players, have limited availability based on their current financial common structure, and I also think that goes for a lot of private owners.

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 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [34]
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 And one last question. It's more of a modeling and a follow-up over Magnus' question. Regarding the second quarter, I saw that you repaid a lot of debt. I'm trying to understand, was this part of the cash sweep? Or you decided to pay down extra from cash on hand?

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 Per Heiberg,  Golden Ocean Group Limited - CFO of Golden Ocean Management AS   [35]
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 No, this is just according to the cash sweep mechanism, that this is measured semiannually after Q1 and after Q3 every year. And as long as the cash balance and also the projected cash balance shows that the -- we have enough cash to -- above a certain threshold, we repay the debt. And this was the full deferred debt up till end of Q3 this year -- or not Q1, this year.

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [36]
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 And it was reported in Q1 report.

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 Per Heiberg,  Golden Ocean Group Limited - CFO of Golden Ocean Management AS   [37]
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 Yes, yes, this was -- we told the market already last quarter.

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 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [38]
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 Can you remind us this cash sweep? How long it will last? If after the drop of the lever is below a certain level, if this goes away? Can you just remind us how it works?

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 Per Heiberg,  Golden Ocean Group Limited - CFO of Golden Ocean Management AS   [39]
------------------------------
 Well, the cash sweep will -- the waiver period, you have -- we currently have that in place and lasts until end of Q3 '18. But the cash sweep will -- so after that, we will go back to ordinary debt repayments. But the cash sweep as such will then last until the full deferred amount is repaid. But as I said, currently we are in a position that we will pay down -- I'm not saying that we will pay that in full but then also for the next period. But that will last until all deferred debt is repaid or until the facility matures.

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 Fotis Giannakoulis,  Morgan Stanley, Research Division - VP, Research   [40]
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 So how far away are we from this level? How much it -- still has to be repaid of the deferred amount?

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [41]
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 Well, we're going to follow up after the call, Fotis. It's been widely disclosed in our previous documentation, so we are more than happy to help later on, okay?

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Operator   [42]
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 And now we'll take our next question from the queue, [Lars Austin] from ABG.

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 Unidentified Analyst,    [43]
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 I have just one question, and that is something you mentioned in the report. You say that you expect less, let's say, speculative ordering going forward. Could you please give me some color on that?

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [44]
------------------------------
 It's related to the last order boom where you saw a lot of private equity money going into the markets and the funding of those orders. We believe that there will be less such projects at the moment. We also see now that asset prices and newbuilding prices are moving more or less towards the same level. You don't have a lot of cash burn by buying a secondhand vessel at these levels. So the benefit of ordering a newbuilding versus the current secondhand prices is not the same as it was previously where you could get a discount on the newbuild side.

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Operator   [45]
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 (Operator Instructions) We take our next person from the queue, Noah Parquette from JPMorgan.

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 Noah Robert Parquette,  JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst    [46]
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 I was just curious, you mentioned G&A about $11 million per year. It's going to be about $400 per day once the Quintana ships are delivered. Can you give us any guidance on that number after ship newbuildings in 2018?

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 Per Heiberg,  Golden Ocean Group Limited - CFO of Golden Ocean Management AS   [47]
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 No, we don't expect any significant increase in the G&A. So I think that's a level that we are comfortable with also going forward.

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 Noah Robert Parquette,  JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst    [48]
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 Well, expect [that G&A] number to come down a bit, too. And then on the OpEx...

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [49]
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 That's on a fully delivered [saving].

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 Per Heiberg,  Golden Ocean Group Limited - CFO of Golden Ocean Management AS   [50]
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 That's on a full -- yes, that's on a -- the $400 is on a fully delivered fleet, all saving.

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 Noah Robert Parquette,  JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst    [51]
------------------------------
 Okay. And then on the OpEx side, I noticed the Panamaxes are a little higher. Is that just a function of age? Do you expect that to normalize? Also the Capes or...

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 Per Heiberg,  Golden Ocean Group Limited - CFO of Golden Ocean Management AS   [52]
------------------------------
 No, no. No, what we'll see is that -- we have a fleet of ice class Panamaxes. They go in pretty harsh trades. So we have seen over time they have slightly higher OpEx but also a higher revenue and earnings potential. So it's more like compensated from the earnings side. But it's -- that's very -- yes. No, that's the reason that they are more expensive, not the age as such.

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Operator   [53]
------------------------------
 Thank you. And as there are no further questions in the queue, I would like to hand the call back to our host for any additional or closing remarks.

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 Birgitte Ringstad Vartdal,  Golden Ocean Group Limited - CEO of Golden Ocean Management AS   [54]
------------------------------
 Okay. Then we would like to thank you all for listening today and also coming with questions. It's pretty exciting week at the moment for us based on where the rate development is, so we look forward to speak to you again in 3 months from now.

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Operator   [55]
------------------------------
 Thank you. So ladies and gentlemen, that will conclude today's Golden Ocean Group Ltd. Second Quarter 2017 Earnings Conference Call. Thank you for your participation. You may now disconnect.




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