Eagle Bulk Shipping Inc (EGLE) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2005 Eagle Bulk Shipping Inc. earnings conference call. My name is Jackie and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference Mr. Sophocles Zoullas. You may go ahead, sir.

Thank you. I would like to welcome everyone to Eagle Bulk Shipping's second quarter 2005 earnings call. Eagle Bulk's first as a publicly traded company. The formats for the call will be as follows. After my opening remarks I will pass the call over to the Company's CFO Alan Ginsberg who will discuss the Company's financial performance. I will then discuss the dry bulk market and close the management discussion before opening the call for questions.

Before I proceed however 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 risk and uncertainties. You should not place undue reliance on these forward-looking statements. We refer all of you 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.

The second quarter of 2005 which of course included our successful public offering on June 23rd was very active for the Company, and it underscores this management teams focus on execution and maximum utilization of our assets. During this period we took delivery of nine ships and all nine ships were immediately put on medium to long-term time charter contracts. This is consistent with Eagle Bulk's strategy of chartering the entire fleet on one to three-year contracts to limit volatility and ensure cash flow stability and visibility.

Since June 30 we have taken delivery of ship number 10, the Sparrow, a 48,000 deadweight Handymax built in 2000. The Sparrow has also immediately gone on charter for $22,500 per day until November 2006, February 2007. We are pleased to report that the average time between delivery to Eagle Bulk and putting the ships into service has been only 24 to 36 hours. Eagle Bulk is expecting delivery of ship number 11 within the next few weeks. Upon delivery of our 11th ship Eagle Bulk's fleet will have a $540,000 deadweight cargo carrying capacity and an average charter rate of about $23,700 per ship per day.

All the events in this period are consistent with Eagle Bulk's strategy to grow a dry bulk company with the following four differentiating attributes. First, Eagle Bulk intends to focus on and invest in the Handymax sector. We strongly believe that this asset class is the most stable and in-demand ship type in the dry bulk market. With the delivery of our 11th ship which is scheduled for later this month, Eagle Bulk will own seven super maxes, a type of Handymax and four other Handymaxes.

Second we will focus on chartering the entire fleet on one to three-year contracts. We strongly believe that this is the best way to ensure long-term visible and stable cash flows and dividends for our shareholders. This strategy is consistent with our focus of generating stable cash flows in what has traditionally been a volatile spot market driven industry.

Third, Eagle Bulk will own and operate a fleet of modern ships with an average fleet age well below the dry bulk world fleet average. Our current fleet is only about six years old compared to a world fleet average of over 15 years of age. This reduces operating costs and increases the desirability of our fleet to our customers.

Fourth, we intend to maintain a very low all-in cash breakeven on our fleet. Eagle Bulk currently has one of the lowest cash breakeven costs in the industry. This will ensure the Company's ability to exploit market opportunities and down cycles and maximize returns in market up cycles. I will now turn over the call to Alan to discuss our financial performance this quarter.

Thank you Soph. I am now going to go through the numbers with an eye toward stripping out the nonrecurring items from the ongoing ones. Vessel ownership days for the second quarter were 490 days. As Soph mentioned earlier we were very efficient in turning the vessels around and needed only eleven days before eight of our vessels went on to their respective charters. Available days therefore were 479 days. Our fleet utilization was 99.6% reflecting approximately two days of operational or higher on the fleet for the quarter.

For the third quarter we will have nine vessels in operations for the full quarter and the remaining two vessels for part of the quarter. Therefore we anticipate that in the third quarter we will have just over 92% of our fleet on an available day basis and that the fourth quarter will be our first full quarter with all vessels in operations. As Soph spoke earlier all of our vessels are on period charters ranging from one to three years.

Gross time charter revenues for the second quarter totaled $11.5 million. Commissions were 700,000 and we amortized 200,000 in non-cash, prepaid charter revenues on charters which we took over. Taken together, net revenues for our initial period of operations ended June 30 were $10.6 million.

Going forward, there have been no changes to either the charter rates or the expiry listed in our prospectus. We would encourage analysts and investors to continue to use a 5% commission rate. We will have a small non-cash amortization charges to revenues for the next several quarters until the last of our inherited charters lapses next year.

Our total vessel operating expenses of $3.1 million break down between 1.5 million in ongoing vessel operation operating costs, 400,000 in costs associated with initial onboard inventory stocks and nonrecurring costs of $1.2 million consisting of delivery and preoperating costs associated with the takeover vessels acquired and concluding providing the newly acquired vessels with initial provisions and stores. We feel that it is important for us to reconfirm to you that our cost assumptions continue to remain valid. We estimate that our per vessel per day operating costs approximately 3500. Included in the $1.5 million running costs figure mentioned before is $274 per day for technical management fees paid to V (ph) ships. Total delivery and preoperating costs have averaged 150,000 for the first eight vessels which we consider to be reasonable for the final three deliveries.

Our total general and administrative expenses of 700,000 consist of recurring administrative costs of 400,000 and 300,000 in nonrecurring costs relating to the formation of the Company. Going forward, we maintain our budget of $1000 per day for G&A costs, a figure which we believe will go down over time as we acquire vessels.

EBITDA as adjusted for exceptional items under the terms of our credit agreement was $7 million for the quarter. Reflecting the inclusion of $6.2 million in onetime fees paid to affiliates and 7.6 million in nondilutive, non-cash compensation expense. The company incurred a net loss for the quarter of 12.1 million. There will be no more fees paid to any related parties, period. The non-cash compensation expense is nondilutive because it occurs within the Eagle Ventures LLC shareholding structure. To repeat there is no dilution to our shareholders. If the September 30, 2000 (ph) stock price is the same stock price as June 30th, the total non-cash compensation charge for the third quarter for profits interest will be approximately $800,000.

With respect to maintenance CapEx we maintain our drydocking cost estimate of $276 per day. In our 10-Q we have enclosed a table detailing the expected number of days that our vessels will be off hire while we put them through their drydockings. We intend to disclose the number of anticipated off hire days per quarter on a rolling four quarter basis. We will also disclose our expected drydocking costs. We do not expect to drydock any of our fleet in the next two quarters. We do expect to drydock two vessels in each of the first two quarters of 2006, and we anticipate that each drydocking will take 15 days including repositioning time to get back on charter.

Finally, with the delivery of the Osprey we will have drawn a total of 150 million on our revolver of which we have hedged $130 million at a weighted average all in rate of approximately 5.2%. On that basis one can estimate that our per vessel, per day interest cost would be just under $2000 a day. To recap, taking each cost component which I have discussed, we hope to achieve an all-in cash breakeven of $7050 per vessel, per day.

On to the balance sheet. Our cash on hand at June 30th was $11 million with an additional $4 million in restricted cash deposits maintained at the bank for loan compliance purposes. In the third quarter we have used part of this cash to pay down our accounts payable which included the majority of our IPO costs, to pay the balance of the $1.2 million arrangement fee for our new revolving credit facility, and to complete our acquisitions and to further buildup restricted cash deposits.

Our cash buildup is on track for our first dividend of $0.53 in October which will reflect available cash from operations for the third quarter less reserves for drydocking. At June 30th we owed 88.5 million under our term loan; in early July we refinanced that amount under our new $330 million revolver. We drew down 30.6 million to complete the Sparrow purchase and we intend to draw down an additional 30.9 to complete the Osprey purchase. At that point we will have a total of 150 million in debt and most importantly, we will have no principal payments for the next five years.

With that I turn it back to Soph for his market commentary.

Thank you Alan. Although Eagle Bulk is fully insulated from current spot market volatility, all market indices have moved down in the second quarter this year with the Handymax market demonstrating the least volatility. The Baltic Handymax index has moved from 30,233 on March 30 to 19,486 on June 30, which represents a decline of 35%. This compares with the Baltic dry index which has moved from 4,653 to 2,521 in the same period representing a decline of 46%. By further comparison the Capesize index has moved from 5,877 to 2,987 which represents a decline of 49%. And the Panamax index has moved from 4,719 to 2,406 which represents a decline of 49%. We attribute this decline to the negative effects of four anticipated factors.

First, the seasonal global holidays at Easter and Golden Week. Second, Chinese inventory depletion. Third, heavy new building deliveries. And fourth, negligible scrapping. Since June 30 the dry bulk indices have continued to slide in July but have subsequently been posting gains recently. The BDI Cape and Panamax markets have all posted gains in August, followed by the Handymax and Supermax markets which have also posted gains as of last week. In fact every market has posted consecutive gains every day since August 9th. We expect that this will bode well for the rest of the year and that we have reached the bottom of the seasonal market.

Of significant note, the Baltic index announced the creation of the Supermax index which began as of July 1 this year. Supermax ships are Handymaxes in excess of 50,000 deadweight, typically with larger 30-ton cranes as opposed to 20 or 25 ton cranes on smaller Handymaxes. They typically have 2 to 12,000 tons more deadweight and have approximately 500,000 cubic feet more cargo carrying capacity than typical Handymaxes. The new Supermax index will run in tandem with the Handymax index until the end of this year and then the Supermax index will replace the Handymax index on January 1, 2006, as the dominant tracking source for investors.

It is of course important to note that all the Baltic indices track the spot market and are not directly correlative to the one to three-year time charter market that Eagle Bulk operates in. But it does give some guidance. This index supports our strong belief on the growing importance of the Supermax ship class and the trend in the market to follow this ship type and move cargoes increasingly in Supermax ships. Eagle Bulk's 11 ship fleet currently is comprised of 7 Supermaxes and 4 other Handymaxes. The current spread in the spot market between Handymaxes and Supermaxes is between $1500 and $2000 per day.

We believe the sharp decline in the market is expected and temporary in nature. The fundamentals for healthy trade demand are still in place as China is growing at 8% to 9% and India is growing at 6% to 7%. According to Clarkson's global GDP growth is expected to remain steady to slightly up from 4.3% in 2005 to 4.4% in 2006. However a key factor is also that raw materials are being sourced from further and further distances, so that the effect is the actual ton mile demand which is increased every quarter for almost three years is expected to have increased 6% during the last year. The specific underlying factors for continued long-term trade growth are still present in the market.

In a recent Australia China coal summit, it was reported that by the year 2030 about 1/4 of all energy needs will be serviced by coal. China's industrialization is still in its early stages where current capita GDP is only $1250 per capita versus estimates of a future potential of $3 to $6000 per capita. Chinese steel consumption only currently stands at 20% of comparable per capita consumption in Taiwan and Singapore. Iron ore world seaborne trade is expected to be 636 million tons this year and is projected to be 686 million tons in 2006 according to Clarkson's. This equates to an 8% year-on-year increase.

The grain market continues to demonstrate strong global demand with increases in wheat, maize and barley. Global wheat and wheat flour forecasts in 2005, 2006 have been raised by the International Grains Council by 1.1 million tons to a five-year record high of 107.8 million tons. IGC's crop forecast for the Northern Hemisphere remain favorable with a very large surplus to meet global demand of 3 million tons above last year. The minor bulk trades are also exhibiting steady trade growth. Estimates indicate that minor bulk trade will be in the region of 785 million tons this year with the trade trend to be in the 2% to 3% growth similar to 2004.

On the supply side, there are currently 81.6 million tons of capacity trading worldwide in the 35 to 60,000 deadweight Handymax market. In this sector there are 15.1 million tons on order expected to deliver through 2008. This represents an order book equal to 18% of the current Handymax fleet over the next 3.5 years. This favorably compares with the Panamax market that has a 23% order book and the Cape size market that has an almost 30% order book.

At the end of the quarter on June 23rd, Eagle Bulk Shipping successfully listed on NASDAQ. This event had a significant positive effect for Eagle Bulk by lowering our per ship, all-in cash breakeven to about $7050 per ship, per day. This number is inclusive of vessel operating costs, G&A, maintenance CapEx and debt service. We are very pleased to have one of the lowest breakeven levels in the dry bulk industry. Eagle Bulk is well positioned now to take advantage of any market opportunities to grow its fleet and act as a consolidating force in the Handymax market.

As we are at the midpoint of our third quarter the Company is on track with its strategy of taking delivery of its final ship. And as we wrote in our IPO prospectus we expect to pay a third quarter dividend of $0.53 a share with a 92% buildout fleet and the fourth quarter dividend of $0.57 a share with a fully buildout fleet. I would like to now open the call for questions. Thank you all.

(OPERATOR INSTRUCTIONS). Your first question comes from Rick Patterson with UBS.

Given the recent fall in the spot market and also the one to three-year charter market, you have never contracted well above the market. How secure are those contracts? Is there any risk of them being renegotiated by the charter?

Rick, I would like to say and there is always that risk, however, I would just like to affirm that all of our charters, all of our contracts have paid on or ahead of time off when their billing schedules have been and we maintain good relationships with all of our charters. So we feel confident that it is not a risk for our Company.

Second question is with regard to vessel acquisitions, in the past we have discussed these things, we get the sense that we should expect fleet growth from you and you just stated that you're looking to be a consolidator. How aggressive should we expect you to be? And when?

I would like to say that we are currently looking in the market. We have about 8 to 12 ships that we're looking at currently. I think the important thing is for Eagle to be opportunistic buyers and as Alan discussed, we have tremendous acquiring ability with our ten-year revolver in place, and with a very low all-in cash breakeven of about $7000 per ship per day, we are well positioned to grow. But I think the key thing is to grow opportunistically. And we will track ships, make sure they fit within our operational and commercial criteria, but we will look to acquire probably one or multiple ships at a given time. So acquisitions could be lumpy probably more than say one ship per quarter. It will probably be more lumpy acquisitions over time.

Justin Yogamin (ph) with Bear Stearns.

Soph, when you -- on the call just now you basically said that we were at the bottom of where we have been in the downturn in the dry bulk market right now. I just wanted to follow-up on that and if you could explain some of the different dynamics right now that you're seeing as catalysts for that change. And whether it is something that has been going on in the physical market as well as in the paper market, because we have had very few fixtures over the past couple of weeks given that it is a slow time in the market.

That's a very good question Justin. I would like to explain something for all the callers today. First of all, we tend to focus exclusively where we give the weight of our importance is on the physical market, because even though there is growing focus on the FFAs or the future market, the paper trade, that is very sentiment-driven and it is not really as much for us an indicator of the future of the market. What we see in the physical market currently are the following factors.

First of all, in the last I would say one to two months, there has been very little if any period of long-term charters reported. This would be consistent with most owners feeling as we do that this is the seasonal low point in the year, and most owners would not want to put long-term contracts on their ships at this time. However, what we have seen in the physical market literally in the last almost ten days, is increasing inquiry by charters, increasing volume of inquiry for ships by charters. It initially started with iron ore requirements we're seeing coming back into the market. And we are seeing again more and more inquiry by charters again starting for one, two-year charters. Just starting now.

That is very interesting. I guess just following up on the question Rick just asked rather, when looking at the acquisition market, what do you currently think -- I mean I'm assuming you probably would be focused on looking at Supermax vessels as opposed to traditional Handymaxes given the premium that they have been getting in the market. What would you be looking to pay for one of those? What do you think given current rates right now a Supermax should be worth maybe versus what they are being offered at in the current market?

First of all, I would just like to say you are right, we are very focused on the Handymax sector obviously, but we really believe the future is in the Supermaxes because that is where all our customers are asking for, that is where all the inquiry is. I think what is very important is to identify pricing between, say charter free ships and ships that either come with legacy charters or charter back deals. I think we will very consistent with what we told everyone today, we will not look to buy ships and have them be sort of naked to the market. It is inconsistent with our policy. We want to put all of our ships on one to three-year charters. So I would say to answer your question we will look to Supermax ships. Ideally our sweet spot would be five years or younger, so 2000 or younger. Probably like a 50, to 52,000 tonner today probably like a four or five-year-old, you would be looking at the region of 30 plus million. But with a charter if you could get a good charter for one or two years you would add a couple of million on that as a premium for the charter.

Just to refresh our memories how many of the 11 ships that you guys are going to have by the end of this month came on with charters when you purchased them?

We had 5 with charters and 6 we put charters on prior to delivery. So by just to clarify by the time we took delivery of all of our ships they immediately went into service on contracts that were put on place before the deliveries took place.

Add I guess lastly as you get to a fully buildout fleet, how much more is that cash reserve that you currently have on your balance sheet going to have to grow to?

Our requirement is $500,000 per vessel so it will grow to 5.5 in total. Therefore another 1.5 million in the third quarter.

5.5 in total, great, thank you so much guys.

John Kossanis (ph) with Citigroup.

One question that drives you going forward, I have a couple of vessels rubbing off next year, early next year, will you be willing to trade them spot if the bank charter market is not what you expect or immediately be willing to time charter them for one to three years?

We have the capability to trade them spot and even on voyage charters if we chose to. However we really would prefer probably John to put them on very short period charters until we got out of a slump and were able to put a one to three-year contract on them. But we have the capability for the voyage charters but we most like prefer not to.

Now also on a technical question on your interest expense, you have about 1.2 billion of amortized financing cost. Is it something that you are going to have in your next two quarters or that is a onetime off.

That relates to the initial arrangement fee for our initial term loan; as that loan has now been paid off in full it has been written off. The new facility of 1.2 will be amortized over ten years.

(OPERATOR INSTRUCTIONS). Seth Glickenhouse from Glickenhouse and Company.

My only question is looking out and this is just speculative in three to five years where do you fellows see yourself as compared to your present size?

Hi Seth. Great question. I would like to just reaffirm also that we have done a lot of sensitivity analysis on what the current company, the current management structure can handle up to what fleet size. Because as I would like to emphasize growth is a very important factor of our five-year strategy. And we are comfortable in saying that we can more than double the fleet to say 25 ships, without adding significantly to our G&A expense. So in other words firstly every additional ship that we buy will have a meaningful reduction in our fleet expense. And secondly I think three to five years depending on market conditions, of course, we could easily be more than double today's size.

Thanks ever so much, and thanks for a very good quarter.

At this time you have no further questions. So I will turn the call back over to management for closing comments.

Okay. Well I would just like to again thank everyone for attending Eagle Bulk's first earnings call. We look forward to speaking to everyone again in our third quarter earnings call. And enjoy the rest of the summer everyone. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.