Eagle Bulk Shipping Inc (EGLE) 2021 Q1 法說會逐字稿

Greetings, and welcome to the Eagle Bulk Shipping First Quarter 2021 Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Gary Vogel, Chief Executive Officer; and Frank De Costanzo, Chief Financial Officer of Eagle Bulk Shipping. Mr. Vogel, you may begin.

Thank you, and good morning. I'd like to welcome everyone to Eagle Bulk's First Quarter 2021 Earnings Call. To supplement our remarks today, I would encourage participants to access the slide presentation that is available on our website at eagleships.com.

Please note that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and are inherently subject to risks and uncertainties. You should not place undue reliance on these forward-looking statements. Please refer to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties that may have a direct bearing on our operating results, our performance and our financial condition.

Our discussion today also includes certain non-GAAP financial measures, including EBITDA, adjusted EBITDA and TCE. Please refer to the appendix in the presentation and our earnings release filed with the Securities and Exchange Commission for more information concerning non-GAAP financial measures and a reconciliation to the most comparable GAAP financial measures.

Please turn now to Slide 5. Dry bulk rates saw continued and significant upward momentum in Q1 as trade demand continued to increase, thanks to both the ongoing reopening of economies and general restocking of inventories as well as the effects of unprecedented amounts of fiscal and monetary stimulus getting put to work around the world. The Baltic Supramax Index averaged $16,633 in the first quarter, up almost $6,000 or 55% as compared to Q4, representing one of the best historic quarterly increases on both a dollar and percentage basis. Asset prices have followed suit, where as an example, values for 10-year old Supramaxes are up about 35% on the quarter. This represents the third highest percent quarter-on-quarter increase in the last 20 years, the first 2 being in early 2004 at the beginning of the 2000s dry bulk super cycle.

I think it's important to highlight that values are moving higher on the back of a significant increase in the volumes of sale and purchase transactions as well. Year-to-date, over 115 Supramax/Ultramax vessels have been bought and sold, implying an annualized run rate of almost 400 ships. If maintained, this would be, by far, the largest amount of ships transacted within a year. Notwithstanding the dramatic increase in asset prices over the last few months, the chart on this slide would indicate significant potential upside remains. Spot rates are around 10-year highs, but prices remain well discounted to 2010 levels when spot rates were similar. Assuming a return to 2010 type levels, we could see further upside in secondhand values of around 50%, which would, of course, translate to increased NAV.

Please turn to Slide 6. As mentioned in our last earnings call, we purchased a total of 7 vessels between late November and early February. These acquisitions appear to be well-timed with current values up 35% on average or around $34 million basis recent transactions. To date, we've taken delivery of 4 of these ships with the remaining 3 expected to deliver between late May and June. Pro forma for pending deliveries, our fleet now totals 52 ships, 87% of which are scrubber-fitted and overall averaging 8.9 years of age.

Please turn to Slide 7 for a review of the quarter. Eagle generated a net TCE for the first quarter of $15,124, the highest level in more than 10 years. As we've discussed in previous calls, it's challenging to catch and beat a rapidly rising market as a percentage of days are fixed in advance. I've often said, I'd love to have to explain why we didn't beat a market that shot up $10,000 over a few months. And that's exactly what has happened. Looking ahead, the strong upward momentum in the market has continued into Q2. Given our short duration exposure and our active management approach to trading our ships, we've been able to successfully capture this move up. As of today, we fixed about 71% of our available days for the second quarter at a net TCE of $20,100 per day.

Please turn to Slide 8. In terms of operating performance, we generated $31.5 million of EBITDA, representing a 40% improvement over the prior quarter. I believe this increased performance really underscores the significant operating leverage inherent in our business.

With that, I'd now like to turn the call over to Frank, who will review our financial performance.

Thank you, Gary. Please turn to Slide 10 for a summary of our first quarter financial results. The continued improvement in the chartering market and our short duration profile drove our top line growth in Q1. With revenue net of both voyage and charter hire expenses totaling $61.5 million, an increase of 23% from the prior quarter. Net income came in at $9.8 million for the first quarter, our most profitable quarter in more than 10 years. Earnings per share or EPS for the first quarter was $0.84 on both a basic and diluted basis. Adjusted EBITDA improved in Q1, coming in at $31.5 million as compared to $22 million in the prior quarter and $18.8 million for the first quarter of 2020.

Let's now turn to Slide 11 for an overview of our balance sheet and liquidity. Total cash, inclusive of $4.5 million of restricted cash was $80.7 million at the end of Q1, representing a decrease of $8.1 million as compared to the year-end. The decrease in cash was primarily a result of the $7.8 million principal payment on the Ultraco debt facility and the repayment of $15 million for the Super Senior revolving credit facility. In addition, we paid $47.7 million for the acquisition of 3 vessels, plus a further $4.7 million for advanced deposits on 4 vessels expected to be delivered in the second quarter of 2021. The outlays were offset by cash provided by operating activities of $14.3 million and $55 million drawn from the Ultraco revolving credit facility.

Total liquidity remained strong at $119.7 million at the end of Q1. Total liquidity is comprised of total cash of $80.7 million and $39 million in undrawn revolving credit facility availability, $15 million on Shipco and $24 million on the Holdco RCF. As previously reported, we have funded the acquisition of 1 vessel with restricted cash. In addition, we have secured new debt facilities totaling $51.5 million for 6 of our newly acquired vessels. We intend to draw down on these facilities as the vessels are delivered to us. And as of the date of this earnings call, we have drawn $29.5 million against 3 ships.

Total gross debt, excluding debt issuance costs at the end of Q1 was $507.7 million, an increase of $32.2 million from the prior quarter. The increase is due to the $55 million we drew down on the Ultraco revolving credit facility, offset by principal repayments of $7.8 million on the Ultraco Debt Facility and the repayment of $15 million on the Super Senior revolver.

Please now turn to Slide 12 for an overview of our cash flow from operations for the first quarter 2021. Net cash provided by operating activities was $14.3 million in Q1. Cash flow was strong in the quarter on the back of improving charter hire rates. The chart highlights the timing-driven variability that working capital introduces to cash from operations, as depicted by the difference between the dark blue bars, which are the reported cash from ops numbers, and the light blue bars, which strip out changes in operating assets and liabilities, primarily working capital. As the chart demonstrates, the volatility caused by working capital largely evens out over time.

Please turn to Slide 13 for a Q1 '21 cash walk. This chart lays out the changes in the company's cash balances during the first quarter. The revenue and operating expenditure bars are a simple look at the operations. The net of these 2 numbers is positive $33 million, which is close to our adjusted EBITDA number. Moving to the right, we incurred $5 million of drydock costs in the quarter. The $53 million for Vessel S&P represents the acquisition of 3 vessels for $47.7 million, plus deposits of $4.7 million paid for 4 additional vessels and vessel improvements of $300,000. We repaid $15 million drawn from our Super Senior revolving credit facility and drew down $55 million from the Ultraco debt facility revolver and we paid $12 million in debt principal and interest in the quarter.

Let's now review Slide 14 for our cash breakeven per ship per day. Cash breakeven per ship per day came in at $11,101 for the first quarter. Vessel expenses, excluding certain onetime nonrecurring expenses related to vessel acquisition and sales came in at $4,894 per ship per day in Q1. We continue to face higher operating expenses related to the COVID-19 pandemic as we are incurring higher lodging and transportation costs related to crew changes. Drydocking came in at $1,148 per ship per day in Q1, $364 higher than prior quarter on an increase in the number of drydocks completed in the quarter.

Cash G&A came in at $1,626 per ship per day in Q1, down $198 from Q4. It is worth noting that our G&A per ship calculation is based on our owned vessels, whereas we operate a larger fleet, including our chartered-in tonnage. If we were to include the chartered-in days in our calculation, G&A per ship per day would decrease by about $221. Cash interest expense came in at $1,573 per ship per day in Q1, which was marginally higher on a decrease in ownership days in the quarter. Cash debt principal payments came in at $1,860 per ship per day in Q1, $813 lower than prior quarter. The decrease is attributable to amortization repayments on the Norwegian bond debt, which are only paid semiannually in Q2 and Q4.

This concludes my comments. I will now turn the call back to Gary.

Thank you, Frank. Please turn to Slide 16. As I indicated earlier in the call, spot rates are at the highest levels in over 10 years. During Q1, the Atlantic Supramax market averaged $20,398, outperforming the Pacific by over 35%, but roughly in line with long-term historical averages. The strength in the Atlantic market was broad-based, but in particular, robust grain shipments to China, pet coke from the U.S. and manganese ore from West Africa helped drive increased demand.

More recently, it's interesting to note that the Pacific market's been outperforming the Atlantic since late March and is now about 25% higher. Although Pacific outperformance occurs from time to time, it tends to be during weaker markets. The fact that we're seeing this phenomenon in a robust rate environment is due to a confluence of events. Firstly, I think it underscores how strong trade volumes within this subregion is with Chinese steam coal imports being a significant contributor. With coal prices reaching multiyear highs and domestic demand elevated, Chinese loosened the import quotas in order to bring in seaborne imports. And with the Chinese effective ban on Australian imports still ongoing, exporters such as Indonesia and Malaysia have been benefiting, which is positive for Supramax and Ultramax tonnage, which tend not to participate in the Australian trade.

In addition, as a result of the booming containership market, the Pacific has been supported by spillover trades typically carried on container ships. For example, we recently carried cargoes such as bag cement from China to Guatemala and bag fertilizer to Peru and Chile. While Pacific loading is a front haul market for container ships, these trades represent backhaul routes in the dry bulk world, which has helped to push rates to levels above those in the Atlantic. These factors notwithstanding, we do expect the Atlantic market to strengthen over the next month or so as South American grain export season comes fully online with robust South American exports forecasted.

Please turn to Slide 17. Fuel prices continue to trend higher on the back of increased demand for oil products. Higher fuel prices tend to be positive for spot rates as ships slow down to become more efficient, effectively taking capacity out of the market. In addition, and as can be seen on the chart, there's a strong correlation between underlying crude prices and spreads between high sulfur fuel oil and very low sulfur fuel oil. Current spreads are around $110 with forwards for CAL-22 trading around $130 per ton. As mentioned earlier, 80% of our fleet is scrubber-fitted, so widening fuel spread is particularly beneficial to Eagle. As the global economy continues to recover, we expect further upside pressure to both fuel prices and spreads, both of which should be beneficial for our business.

Please turn to Slide 18. Net supply growth increased slightly in Q1, a total of 121 dry bulk newbuilding vessels were delivered during the period, up about 37% quarter-on-quarter, but down 8% year-on-year. Partially offsetting this, a total of 35 vessels were scrapped during the same period. In terms of forward supply growth, the overall dry bulk order book now stands at a historic low of just 5.6%. For 2021, dry bulk net fleet growth is expected to come in at 2.8%. This assumes scrapping of roughly 10 million deadweight tonnage, which would be 33% less than last year, primarily as a result of a stronger rate environment.

A total of 47 dry bulk ships were ordered during Q1, down by roughly 28% as compared to the quarterly average for last year. In addition to reasons we've discussed previously, such as higher cost of financing and uncertainty of future emissions regulations, 2 notable factors have entered the mix, which should be helpful to limit ordering and future fleet supply. Firstly, newbuilding prices have increased meaningfully in the past few months with Chinese Ultramaxes now seeking $27 million to $29 million for delivery primarily starting in mid 2023 and beyond.

Prices have increased due to rising costs for imports, including steel, but also due to a lack of shipyard capacity that has shrunk quickly due to the pace of ordering in other shipping segments. As an example, orders for large container ships hit a record over the past few months with more than 200 ships ordered totaling over 21 million deadweight. This, combined with announced orders for other large and complex vessels such as dual fueled VLCCs has helped to fill yards order books with ships that take considerably longer to construct and typically are more attractive for yards to build.

Please turn to Slide 19. Global growth expectations have been revised upwards since our last earnings call, reflecting a normalization and activity, thanks to the expected impact of vaccines and increased stimulus. The IMF is now estimating that global GDP contracted by 3.3% in 2020 and is projecting a recovery of 6% in 2021.

Please turn to Slide 20. Dry bulk demand growth's been revised significantly upward as well with 2020 now estimated to have contracted by just 1.6%. For 2021, forecasts are indicating trade demand growth of positive 3.8% as compared to last year. Notwithstanding significant challenges in some regions with COVID-19 and lingering uncertainty, we remain optimistic for the continued normalization of trade demand and see our market being a beneficiary from stimulus measures, which are already being put in place around the world.

With that, I'd like to now turn the call back over to the operator and answer any questions that you may have. Operator?

(Operator Instructions) Our first question will come from the line of Omar Nokta from Clarksons Platou.

Nice results, obviously, for the quarter, and definitely looks like some really strong ones coming up here. And just wanted to ask maybe about the fleet. Here at -- at Eagle, here in the past several months, you've been fairly active fine-tuning the fleet. You sold some of the older ships a while ago, and you've been replacing them with these 7 newer vessels. And as you highlight, those have turned out to be very well timed, especially considering what the S&P market's done since. I think you spent just under $100 million on those vessels and then probably worth closer to $140 million. And so you were pretty active in the fourth quarter and into February. But over the past 3 months or so, at least from our side, from the outside, it looks like you've kind of quieted down the acquisitions. Where are you at the moment in terms of the fleet? Do you still expect to be busy on the acquisition front here in the coming months?

Yes. Well, thanks for that. I mean, it's funny. We don't feel like we've been quiet. But you're right, we haven't acquired any more ships since February in the last few months. As I said in our -- in the prepared remarks, we think that asset values are trailing based on the current market. And really, the most important thing for that is the forward curve, which continues to push up. Next year is now trading close to 15 and 2023 is moving up to mid 12. So as people get more confidence in the forward market, we think asset values have potentially considerable upside. So we are looking -- as we always do, we're looking at further acquisitions. We feel comfortable where we are with our 52 ships. We only have 3 ships remaining that are over 15 years old. Ultimately, those are sales candidates as the other older ships have been, but really, in our mind, it's about obtaining fair value based on where we think the cash flow generation is for those ships in the forward curve. So we're not there yet, but ultimately, those ships likely will be monetized. And very likely, we'll continue to acquire ships on a targeted basis.

That makes sense. And you brought up the FFAs. And I think it's interesting, given rates overall in the spot market are much stronger, the FFAs are much more liquid, and we're seeing a bit more time charter activity, so liquidity there. And as I look at the results, it looks like your trading business, you had an average charter-in cost of, say, just under $13,000 a day, but you earned $15,000 -- a little over $15,000, fleet-wide. So call it a $2,000 a day spread, and that looks like it compares to something in a few hundred dollars per day in several quarters in the past. Maybe first thing -- first question just off of that is, is that a good way to think about the performance of the trading business? I'm just looking at the TC in average rate versus kind of the overall average you've gotten for the fleet?

Yes. I would actually caution that because -- it's a very dynamic model, and it includes derivatives that we use to hedge away market risk and keep optional periods. And based on market development, obviously, in an upward rising market, you tend to declare options and keep ships longer. Conversely you don't in a falling market. I think if I were to be trying to figure out the premium, I would look at the historic and apply some percentage of that, that I was comfortable with going forward. But on a specific number of ships and margin, I think there's too many variables that come into play.

Yes. That makes sense. And I guess do you think because of all the liquidity that we are seeing in the market, do you think that this trading piece is going to start to become a much bigger element for Eagle going forward? Do you think you'll ramp that business up?

For us, it's always about risk reward, every position. We're always looking to arb between a physical ship, a cargo potentially using a derivative. But it's really about risk reward where we see the value of that trade. So given the volatility, there's more opportunities to trade. But again, it also depends on, as I said, what the risk profile is of that. So likely, I think we'll get back to levels we saw in terms of charter in pre-COVID, we're still not there yet, and that was really hampered last year when it was all about just keeping cargo and keeping your own ships moving.

I think you will see some growth, but it's not growth for growth's sake. Just for the benefit of -- I know you know it, but for the benefit of others listening, we don't value from our chartering business based on volume at all. Ultimately, it's about a net P&L that gets applied to our own fleet. So only doing it, not for volume sake, but if we can trade that around and increase the overall value of our own tonnage. And we do think that people own Eagle because we're an owner of Supramax and Ultramax vessels, and then we try and build on that earnings over and above index returns. But we're not going to build a separate operating arm that becomes, call it, outsized to our owning position.

Our next question will come from the line of Randy Giveans from Jefferies.

So I guess following up on that. With the forward curve being pretty robust, obviously, you've given pretty strong quarter-to-date rate guidance at a 10, 11-plus (inaudible) high. For that 71% for 2Q, were there any short-term or medium-term time charters locked in? And then obviously, with the forward curve still elevated, will you look to do any of those 6 to maybe 12-month time charters?

Yes. So we don't typically disclose our charter in book and charter out. It's all part of our mix. As I've said before, we prefer to operate our own vessels on voyage basis and what have you. Having said that, if we're paid fair value for reletting a ship on time charter for a short period versus selling an FFA to lock in a revenue stream, then we'll do that.

I mean, as an example, I'll give you one, we fixed one of our ships recently, Singapore Eagle, for minimum 6 to about 8 months to try and limit the redelivery window to a minimum 6 instead of about at $24,000, but if it redelivers in the Pacific, it's $27,000. So just to give you an example, we do relet our ships as part of our portfolio approach. But it's not our go to move. So it's a combination of voyage business, time charter, mostly short FFAs and the mix of all of those. But we're definitely -- with an elevated forward curve, we are managing the book going forward and locking in certain cash flows. But at this point, beyond that, I'll leave it to the quarterly guidance within the quarter that we've provided.

Got it. Okay. And then obviously, on the balance sheet front, continuing to improve. You've added some new debt. You've closed on that, I think it was $35 million credit facility. So is that building liquidity solely for more kind of acquisitions? Or at this point, are you looking to further delever the balance sheets or paying down debt? And if the latter, do you have any kind of net debt to loan kind of leverage ratio target?

Yes. Well, I mean, the answer is, we come in every day asking ourselves what's the best allocation for capital. And as you mentioned, given the guidance, there's significant positive cash flows at the moment. So I mean one thing is definitely delevering. We were positive going into 2020, and then we had COVID. And fortunately, having a stance with undrawn revolvers and unencumbered assets, a couple of Ultramaxes that we put bank debt on, enabled us to go through the pandemic without taking extraordinary measures or anything that was expensive, detrimental. We put leverage on LIBOR plus 250 onto those Ultramaxes.

We want to get back to that kind of defensive stance. And I say defensive in the sense that having that dry powder against what I think is what we deem to be an appropriate measure of leverage. But as we go forward, we're looking at opportunities. As I said, we think there's upside in asset values, and we look to opportunistically continue to renew and now grow the fleet. But delevering is definitely something we want to do. You will note on the last 3 Ultramaxes, the debt that we brought on as a revolver. And so I think long term, you would see -- not long term, but I think aside from our traditional revolver we had, I think you'd see us look to pay that down. And once we did that on those 3 ships, you would end up with unencumbered assets, which is something that in my experience in dry bulk, it's always good to have unencumbered assets. They're essentially a performing proxy for cash in many respects. And I think that's a good thing to have in a business that sometimes surprises to the downside.

Our next question will come from the line of Liam Burke from B. Riley.

Gary, you mentioned in your prepared comments that there had been some offsets or positive offsets with taking some container cargo on the dry bulk. Is that a meaningful shift? And is that sustainable?

Yes. Well, I'll start with the latter part. It's a good question. And I think I would defer to the comments from the container -- like Maersk saying they believe that this will continue, I believe, into the fourth quarter, was the statement and other players. That's not our arena. Having said that, it's definitely meaningful. I mean, when you see ships fixing from the Far East into the Atlantic at $25,000 in our size, those are numbers that historically trade at sometimes, call it, 40% of the market, even less. So you're seeing a total shift in that. The positive is it's not to the detriment of the Atlantic. It's simply that the Pacific market is elevated, and I gave some examples of those. So I think it's sustainable as long as we see this dislocation in the container market. But how long that goes, like I said, not really our area, but I'm an interested reader of everything that comes out of the container world in that regard because it is having a profound effect on both our rates, but also our trading patterns.

Great. And on the operating expenses, I think Frank mentioned that there was some COVID-related increases. Do you see -- once those correct, I know it's difficult to continue to drive down operating costs, but do you think you can continue to manage down on those operating expenses?

Well, the answer is yes. I mean, unfortunately, the COVID expenses are -- they continue. And in fact, I would say some of it is, not most of it, but some of the incremental expense on that is self imposed. When the ships now are roughly $1,000 an hour to run a ship. Having off-hire because of crew has an issue in terms of a crude change and holding a ship back for 1 day, 1.5 days is really meaningful, much more meaningful than the incremental cost of a couple of days of being (inaudible) and making sure the crew is tested and ready to go. So we're taking steps to ensure that the ships keep moving, especially now because they're generating significantly more, which means of higher cost, significantly more as well. So going forward, yes, we're taking initiatives to cut OpEx, and that's an imperative. I've said before, OpEx is an output. It's not a target. We can get to a target number very quickly. But the most important thing is to run ships that are safe, compliant and also reliable. So -- but we absolutely are looking to improve on the OpEx numbers, but I'll leave it at that.

(Operator Instructions) Our next question will come from the line of Greg Lewis from BTIG.

Gary, I was kind of curious and I think you touched a little bit on it in your prepared remarks, around the coal trade. I mean, clearly, we're reading a lot of headwinds around India in terms of some of the slowdown, that they're having issues around COVID. Has that -- what is -- has that been creating any kind of disruptions, dislocations in the coal trade in that -- in Southeast Asia?

Yes. I mean -- well, the answer is -- getting a little feedback here. Can you hear me?

Yes.

So Q1, not at all impact. India coal was back to pre-COVID levels. Having said that, with, obviously, the humanitarian crisis that's going on there now, we absolutely expect that there'll be a reduction in coal consumption and coal trades. But we haven't seen it in a measurable way yet. But we expect Q2 will be impacted to some extent. The one thing about the coal trade in the Pacific is it's a short-haul trade, right? So it doesn't have the same impact. All of the volumes in terms of numbers for us. It's about 14% of what we carry, coal in general, the majority of that being to China, but it's shorter haul. So it doesn't have the same impact on a ton mile.

One interesting thing I mentioned in the prepared remarks that we don't participate in the Australian coal trades. But we have seen an example where we're actually finalizing terms on a trade at the moment for met coal from the U.S. Gulf to China on an Ultramax vessel. That is definitely not a trade we typically would see that we're benefiting from. And clearly, that's a long-haul trade. So there are dislocations in the market at the moment. And for the first time in a while in dry bulk, they're not all negative. We're seeing some positive offsets to those negatives.

Absolutely. And then just real quick, I mean, we're tracking, as is everybody, the fuel differentials. Just as economies, I guess, India side have started to open up. Has that created any problems around sourcing back pre IMO days (inaudible) Is there going to be high sulphur fuel available? Is there going to be low sulphur fuel available? At this stage now that economies are starting to reopen, have you noticed any potential sourcing issues on the fuel side?

Absolutely, the answer is no. We have not. And I think the fuel spread has continued to widen, and we believe, as air travel and particularly long-haul international travel comes back, then aside from crude pricing overall that, that spread should -- will likely widen, which is why we reversed our 2021 hedges earlier at the end of last year. So we're comfortable where we are. Today, it's around $110 next year, around $130, but we think there's upside to that as things open up. But from an operational standpoint, fuel availability, no issue whatsoever.

(Operator Instructions) And I'm not showing any further questions in the queue. I'd like to turn the call back over to the speakers for any closing remarks.

All right. Thank you, operator. We don't have anything further today. So I'd just like to thank everyone for joining us, and wish everybody a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.