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Executives

Herman Billung - Chief Executive Officer

Birgitte Ringstad Vartdal - Chief Financial Officer

Analysts

Frans Hoyer - Jyske Bank

Hans Klaas - Private Investor

Isaac Arnsdorf - Bloomberg News

Bjørn Røed - Danske Bank

Golden Ocean Group (OTCPK:GDOCF) Q1 2013 Earnings Call May 28, 2013 9:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Q1 2013 Golden Ocean Group Ltd. earnings conference call. Today's conference is being recorded.

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

Herman Billung

Thank you very much and welcome to the first quarter web presentation of Golden Ocean. As usual, we will take you through highlights, financials, operation and then we will share to you graphs and thoughts around the market situation. Then we will open up for some questions afterwards.

So then I leave the floor to Birgitte.

Birgitte Ringstad Vartdal

Thank you, Herman. Golden Ocean Group Ltd. obtained a result of $6.8 million for the first quarter of 2013 and EBITDA of $20.6 million and an earnings per share of $0.0015. This was as expected and slightly down from the fourth quarter. The company has been active on doing acquisitions since last report. Two supramax newbuildings was concluded at JMU in Japan. Company has also bought a 2009 built cape in a joint venture and also announced yesterday the purchase of two ice class panamax vessels.

I will come back to a bit more details after going through this quarter's report. Moving on to the financials. The revenues for the first quarter was slightly down from the fourth quarter, while the expenses was up. This reflects that owned vessel had lower revenues for the quarter, mainly due to lower spot rates on our open cape type vessels, some vessels that were off charters during the quarter and during last quarter and discount given to one charter due to the prepayment of $25 million in December

The trading activity is up but there is both higher revenues and higher expenses on the trading and that is the reason why the revenues are more or less in line with the fourth quarters. Operating profit of $11.5 million, and a net profit of $6.8 million. No particular items related to the financial items this time.

If you look at the balance sheet, this reflects that the company took delivery of Golden Brilliant in Q1 and the vessels and thus equipment, net have increased. At the same time, vessels under construction have decreased by that reason. Plus the reclassification

of Golden Nantong to refundable installments for cancelled newbuildings. This vessel or this construction contract was cancelled in January.

Cash and cash equivalents stood at $89 million at the end of the quarter. This was down from year-end due to down payment of loan agreements extraordinary on minimum value as well as repayment of one facility. In addition, the cash that we received upfront for the five charters is not now reflected in the P&L. That cash is also received.

Equity as payable increased by retained earnings to $545 million. The long term debts are down and short term debt is up. The reason for the short term debt being high this quarter is that one of our loan facility is due in January 2014 and this is approximately $80 million. In addition, the $41 million in debt related to the five count newbuilding is classified as short-term. On top of that, is the ordinary repayment. These are of course the same reasons that the long term debt is down.

(inaudible) there has been higher activity in the last quarter in the company. We see that asset values have bottomed out and the company was able to change the focus from lower asset value (inaudible) risk to more focus on new investment. We also see that the bank are positive and willing to give us good terms on financing.

As mentioned last time and also earlier, we took delivery of Golden Brilliant from Pipavav in January 2013. We also entered in two supramax newbuildings contracts at universal in Japan Marine United at the very high specification including (inaudible) with most of the payments at the back end.

Earlier this month we announced that the company has bought a 2009 built Cape (inaudible) together with a partner and the price of that vessel was $33.76 million. We expect to take delivery of the vessel in the second half of June and currently we are working on financing and believe we should be able to get financing of 65% to 70% of the purchase price.

Then the company announced yesterday that it has entered into agreements to buy two ice class Panamax vessel built at Pipavav and at resale from third party. The first vessel is ready to be delivered pretty soon while the second vessel will be delivered during the second half of 2013, potentially September.

In connection with the financing, we have received a seller's credit of 30% and then 65% bank financing at attractive term. The vessels will be named Golden Pearl and Golden Diamond but it is not the same vessels that we previously had optional contract, although they have the same name.

Then the company has agreed with the charterer of Golden Saguenay and Golden Opportunity to expand the charter through the winter season of 2013 and 2014. The current hire rate is running until mid-October and then the new rate of approximately $12,000 net will run for five to seven months.

Then our trading company Golden Ocean Trading is chartering three vessels, Ocean Libra, Ocean Virgo and Ocean Scorpio with a minimum period of 14 months and maximum period of up to 22 months but then also an optional year starting after 22 months, up to a maximum period of 36 months from the start.

The company cancelled the capesize Golden Nantong in January 2013 and there has been no further cancellations since the last report. The arbitration is ongoing on the five canceled vessels and they are progressing according to expectation.

We enclosed an overview of the installments paid and the loan drawn on the vessels that are canceled as well as the remaining vessels at Jinhaiwan. This is the same as in the last quarter due to no change in the number of cancellation.

Then, as mentioned, the asset value has bottomed out during the first quarter and no further extraordinary down payment was required in April. We also expect, based on the recent transactions seen in the second hand market that the values will be stable or slightly up after end of Q2 and therefore we don’t foresee any extraordinary down payments in July either. Then the company has taken on some further interest rate hedges for the period starting two years forward and up to seven years forward.

You may recall that the company had two vessels on charter to Korea Line. The company still holds the debt to the company. Korea Line has been through a second restructuring and the original debt is now reduced to 3.7% of the start debt but in addition the company has received shares and will receive new shares after the second restructuring. We expect to record a profit related to the freely tradable share which is 20,000 shares at the end of Q2 and based on the current share price this is seven to eight times in U.S. dollars. The last lot of shares will have to be freely tradable before we book any profits related to those shares.

For the exposure, the only amendments since last time is that we have included Golden Magnum on capesize and we have included Golden Pearl and Golden Brilliant on the Panamax. Then there has been minor changes to that fixtures in 2013 as some of the spot wages obviously have ongoing charters as of today but otherwise the open position and the average rate should be up as earlier indicated. Our counter parties are still performing according to plan.

Finally the vessel operating expenses was slightly up for the Panamax just this quarter but we expect it to average out over the year while the capes were at 5,450. Our budget for 2013 is cape at 5,600 and Panamax is at 5,300. We expect so far to be able to target that budget.

There will be two five year dockings during 2013. Two of our ice class vessels will have docking in the summer period and we expect the cost of around or less around $1 million per vessel.

Herman Billung

Thank you very much, Birgitte. So we can all agree that the spot markets for dry bulk vessel is still sluggish. We have received with interest however observed that as Birgitte said that asset value has at least bottomed out. There has been some transactions done recently for fairly modern Japanese built panamaxes (inaudible) which have pick up from Q1 but as I said, the spot market does not look good at all.

For quite some time, we have been struggling with quite a substantial oversupply leading to the utilization of the dry bulk fleet at the moment in (inaudible) at 5% ad for capes even lower. However, we are now through the worse, definitely and on this slide, because you are able to read it. You can see that the present order book is shrinking and I think if you do a proper addition, I think the total order book including those newbuildings placed on order, say last quarter, should be in the neighborhood of maximum $100 deadweight.

We have seen, over the last couple of years that there has been considerable or what you call it, slippage or cancelation or restructuring or you name it, and I think the order book for the remainder of the year, it may be maximum $45 million deadweight, may be $50 million. Then we will end up with deliveries in 2013 at around may be $65 million. If you then deduct scrapping, which could end up at around $30 million deadweight. We think that we could see supply growth or may be even lower than 5% this year and the two coming years even lower maybe at around 3% to 4%.

This is also shown in the next, for you just repetition, just in a graph where you also have difference among the segments with capes, panamaxes and handys and for handy 5, 15 in particular, I think it's fair to say that they are not going to stay, the next fleet growth at all over the next two to three years.

Looking at the age profile. About 10 of the current fleet is more than 21 years old, which amounts to around $65 million deadweight. Which again shows that the other much more balance supply-side between the order book and all due for scrapping and if you add both vessels older than 16 years old then we are up to around 20% of the total fleet while the total order book at the moment is around 15% of the total fleet. Why I am mentioning vessels older than 16 years, if we are still facing a week dry bulk market for another six months or so, I think our chance is that also as owners of vessels newer than 20 years will consider scrapping also in taking in to account new regulations that will come in to force in the coming years.

Looking into what are happening in Q1. The next graph is just showing the strong correlation between what is being transported (inaudible) in or out of Brazil and the cape spot market done. Its been a really shortfall in Q1 although the vessel in iron ore exports and on top of that there have been probings or severe weather in Australia which we are used to and also strikes in Colombia which in combination explains the weak cape market.

In the longer term perspective, I think most analysts and I just want to tell you that those contributing to the macros are Edouard Baldini, RS Platou and Nicolay and then also Pareto. We also are using other analysts which are more or less in line here and the overall view is that we still see a steady growth of dry bulk transportations over the next two to three years.

China, again, and we have been talking about China for the last 10 years basically and there are people out there today, equity analysts who are bit more skeptical about the sustainability and the Chinese growth. Listening today to the speech given this morning in Germany by the Chinese Premier, I just saw the highlights. He is still predicting a 7% growth in the years to come and its for a country that’s almost at a two digit growth figure for the last five years. It cannot just be straight ladder into heaven. So I think this 7% growth is fairly realistic which should mean that maybe another 500 million tons of dry bulk commodity will be transported in to China over the next three to four years

Next graph is showing the correlation and also some sensitivity and correlation between steel consumption and economic growth. You see numbers back from 1996 and even in the 6% GDP growth, it is the same pattern. It fits the same correlation. We will have still decent growth also in steel consumption and also to the right you will see the dry bulk imports, obviously, correlates well given the high importance of the steel production in dry bulk transportation.

Even in a scenario with a not as high as the production growth as we have seen over the last few years, I believe that there are still reasons to be fairly optimistic because of the weak, first of all the price of the Chinese iron ore. Also next graph, what is happening on the quality which is on a steady decline. The Fe content is today, on average, maybe 16.5% which means that even in the say not too bullish steel production scenario or steel consumption scenario, there are many reasons to believe that China will continue its strong demand for iron ore of high quality from Australia, from Brazil, from West Africa and (inaudible) coming in to the market and with the downward say, turn iron ore prices, I think, there are many incentive for Chinese steel makers to import instead of using domestic production.

You also note at the moment that the Chinese inventory, right now, are low. Steel inventories are supposed to be quite high but iron ore inventories are low and with the declining iron ore price sooner or later the Chinese will enter the market and buy into this and hopefully that will also mean that it will buy more iron ore from Brazil which means a lot for the cape market and as a consequence we should see some strengthening in the cape market in the coming three to six months.

India being the importance of the Indian coal story for the coal imports it is increasing in the next file it is showing what investments Indian companies have done in Australia, Indonesia and Mozambique. It will be coming operational from 2014 onwards over the next four years. That could easily add another 150 million to 160 million tons of new capacity available both for Indian steel makers and for cooking coal and steam coal for utilities.

Finally, just to summarize in two graphs. We believe, or our analysts also believe, that utilization will slowly, slowly pick up and by the end of this year and through 2014 and 2015 should reach, come back to say around 90%, which result in higher freight rates and the same is then illustrated on the next graph. All in all, I mean, we feel that it is still is good for the dry bulk market that we have a weak spot market next three to six months because it will constructing, it will refrain owners from placing new orders and it will also be more difficult to obtain financing. So, all in all, we welcome a fairly weak market over the summer which we believe is going to happen but then I think slowly, slowly utilization will turning in to owners favor and particularly the end of '14 and '15 looks reasonably bullish market outlook, say for '14 and '15.

So thank you so much for your attention and then we kindly ask you to ask questions if you have any.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question now from Frans Hoyer from Jyske Bank. Please go ahead.

Frans Hoyer - Jyske Bank

I wanted to ask about just a very short particular question regarding the deal for the to ice class panamax vessels. You didn’t disclose the price but may be you could let us know whether the deal was struck at an uptick in prices, as you mentioned? So there has been some higher or some deals at higher prices since Q1 perhaps this one too represented an uptick? Then also on the same deal, the 30% seller's credit, whether you could let us know what sort of terms? Is an interest rate charged on that credit or not?

Herman Billung

Okay, on the price it is as you correctly said, we have not disclosed the price and we feel it in line with has been, obviously this is an ice class panamax. So there are not many kind of quotes or what is the relevant market but normally for this type of vessel you could add $1.5 million to $2 million on top of a regular panamax without any ice class and then I would say to reflect the market as it is today.

On the seller's credit, I don’t think we want to give further details than what we have already said in our press release. So if you could excuse us for doing that.

Operator

Thank you. We will now take our next question from Hans Klaas who is a private investor. Please go ahead.

Hans Klaas - Private Investor

I have just one question for you. What is going on with Jinhaiwan yard? You still have four remaining vessels that are supposed to be delivered to the fleet by now. It just does not seem that the yard is building these of vessels. Can you elaborate please?

Herman Billung

Yes, what is happening at the yard, I would rather say, what is not happening at the yard, its not much happening at our end. Nothing is basically happening with our project. We have said that in previous quarterly presentations that the high likelihood of cancellation is high and that remains the same. I think within a fairly short timeframe, we will be in the position to also cancel four last remaining vessels which will take place and also even though you didn’t ask, what we are, as Birgitte mentioned, we are in the arbitration process with the yard and as a consequence, we are a little bit cautious of what we are saying but the process itself is absolutely going according to plan and we have no signs whatsoever that we will not recover our money within fairly medium term timeframe.

Operator

Thank you. We will now take our next question from Isaac Arnsdorf from Bloomberg News. Please go ahead.

Isaac Arnsdorf - Bloomberg News

I was hoping you could elaborate on something in your report this morning. You mentioned new regulation that would come in to place in the coming year, should make owners of older tonnage more hesitant to take their vessels through special service. Could you elaborate on what that regulation is and what are the issues that that would present for older tonnage?

Herman Billung

Yes, first of all, the banker price itself does something with older vessel having a higher fuel consumption. Having said that, particularly two regulations that will happen, one has to do with emission on smokes which is happening step-by-step. There are countries or areas that today have regulations that mean that you have to use diesel instead of heavy fuel oil. That will be expanded from say, Baltic, North Sea to also to United States waters within short.

Then further out we are talking about but that is much further out on the timeline. We will be forced to use gas oil or say within 2020, as it looks today. Which means that you either have to install a scrubber or you have to use something which costs today more than $100,000 per ton compared to the heavy fuel oil of $600 per ton. That is one thing.

Another thing which is that is ballast water treatment. You need to have most likely within beginning of 2016. They will be given exemptions, I guess, because the process has been delayed but you need to have a ballast water treatment system not allowing you too deballast vessels with whatever ballast water that you are taking from other areas in the world.

So I think, all in all, there will be more and more regulations. If not owners are able to agree on this and I think the regulation will be forced upon the shipping community but EU regulators or U.S. government or whatever. So I think, and we welcome these regulations, in a way, because we think that will be an advantage for serious owners. We are seeing stupid excuse to saying that the shipping industry is not polluting if you look into it, whether pollution per ton because obviously we are carrying big lots of cargo but realistically the commercial fleet, the passenger fleet, the shipping industry in general, is a big polluter.

So I think that would be helpful and if you are on the edge of making a decision you know that there are new regulations that will come into force should you then take the vessel through the next special service, take her through the docking which in itself could cost maybe $1.5 million to $2 million and then on top of that, invest in something which doesn’t really have a future.

Isaac Arnsdorf - Bloomberg News

So does that suggest that older tonnage will be driven out and that will help speed the market's recovery?

Herman Billung

I mean this is longer term. This is not going to happen in this year. But there are constant move towards new regulations which longer term, I think will be very beneficial for the dry bulk industry.

Isaac Arnsdorf - Bloomberg News

Great. thank you. I also just had another question about your outlook graph. I noticed the lines for iron ore and coal are crossing and do you expect that to happen this year and why is coal growing faster, trading coal?

Herman Billung

I mean, first of all, just to say, it is not my graph. Its is as we use this is a plateau as far as I remember. Generally, for quite some time we have seen that what is happening in the coal world is quite has been very strong growth over time. We have a little hiccup right now which, obviously has maybe a shorter term we will have a short term negative effect but we don’t really know the outcome yet.

It looks like at least the Chinese are threatening of banning Indonesian coal due to sulfur content. The effect of that it maybe 60 million tons but what, I think, will happen is that the Chinese will import more from longer distances in bigger ships which will be most likely beneficial for capes and also beneficial for the panamaxes. But then, I think, the Indians would buy into Indonesian coal. So overall, we believe that effect is minimal but it is, have in mind that China is the world's, by far, biggest coal consumer and producing 3.5 billion ton. They have gone from being a net exporter, say three or four years ago to become the next importer.

Then, on top of that we have India and then it is going to be over quite exciting. I read today again another article about what is really happening with the U.S. coal. That’s also something. It is limited but it also, with the new energy situation in the U.S. and coal-fired power plants being closed, what is going to happen. I think there is room for more coal also going in out of U.S. and coal is cheap. There are new coal fired power plants being built, both in India and in China in particular. It’s a fairly non-political commodity as compared to oil. But obviously it has to do with pricing and what's happening with the prices in the future.

Operator

(Operator Instructions) We will now take the next question from Bjørn Røed from Danske Bank. Please go ahead.

Bjørn Røed - Danske Bank

Could you fill us in on what your chartering strategy will be on your newly acquired vessels?

Herman Billung

The chartering strategy?

Bjørn Røed - Danske Bank

Yes.

Herman Billung

Usually, when the market is low when we purchase outfits, we would not really take over at the same time. So, at this stage, I mean, we keep them in the cupboard until further notice. When the market is high we could charter out but right now it is countercyclical. So we see, if we purchase assets that means that we, on purpose, don’t charter them out.

Bjørn Røed - Danske Bank

Okay, so you would be looking to increase your spot exposure then from 2014? Will that be correct on your future acquisitions?

Herman Billung

Yes, we already have quite a substantial spot exposure particularly in '15 but we feel or we believe and we hope that we are right that the timing of that is quite good. So you are correct. The spot exposure will definitely increase.

Operator

Thank you. There are no further questions in the queue at this time.

Herman Billung

Okay, thank you so much for all of you for listening in and taking the time and then we hear about in a quarter from now. Thank you.

Operator

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

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