Eagle Bulk Shipping Inc (EGLE) 2009 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q2 2009 Eagle Bulk Shipping Inc. Earnings Conference Call. My name is Steve and I'll be your coordinator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Sophocles Zoullas, Chairman and CEO. Please proceed.

Thank you and good morning. I would like to welcome everyone to Eagle Bulk Shipping's Second Quarter 2009 Earnings Call. To supplement our remarks today, I encourage participants to access a slide presentation that is available on our website at www.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 any 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.

Please note on slide two that the agenda for the call will follow our usual format. After my opening remarks I will discuss our second quarter 2009 highlights and provide a company update and a summary of recent events in the dry bulk market, both with regard to demand and supply, before turning over the call to Alan Ginsberg who will review the company's financial performance. I will then end the management discussion with some concluding remarks before taking questions.

Please turn to slide four for a review of our second quarter 2009 results. During the quarter our net income was $13.3 million or $0.26 per share. Our net time charter revenues were $53 million, up 42% year-on-year. EBITDA was $33.8 million also representing a year-on-year increase of 22%. We also maintained stellar operating performance in the quarter as underscored by a fleet utilization rate of 99.7%. Finally, we successfully concluded $100 million equity raise during the quarter, at only a 2.5% discount to market and an average share price of $6.74. As a result our cash position significantly increased from the prior quarter and now stands a $142 million.

Subsequent to the close of the quarter, we also successfully negotiated an agreement with all of our lenders whereby our revolving facility is no longer subject to market value fluctuations. This change helps insulate Eagle Bulk for years to come from volatility in asset prices and significantly improves secured funding for our fleet growth. Lastly, we signed a management services agreement with Delphin shipping with benefits accruing to public share holders through ship management and purchase opportunities.

Please turn to slide six for an update of our charters in three distinct areas. First, as we announced last week, we've placed four vessels on charters that tie revenues to the Baltic Supramax Index, which currently stands at approximately $21,000 per day.

We believe our high degree of contracted revenues, which is currently approximately $1 billion, combined with our expanding fleet allows us the flexibility to enter into innovative charters that create upside spot exposure for improved revenues. The structure of the four chapters on the Skua, the Kittiwake, the Redwing and the Goldeneye are similar in that all four ships have upcapped upside based on the BSI index, while maintaining floor rates in case we experience unanticipated dislocations in the market.

As with our profit sharing contracts, these new charter structures clearly demonstrate the company's focus on capturing market upside balanced with revenue stability. Secondly, we expect to have open capacity of up to an additional five vessels for the balance of this year as the Cardinal, Jaeger, Kite, Osprey I and Crowned Eagle conclude their current charters.

Lastly, we expect to have three vessels, the Bittern, the Canary and the Thrasher deliver into our fleet before year-end and commence long-term charters. We estimate that the contracted revenues from only these three vessels will be over $180 million excluding any profit-sharing for all three contracts Market sharing for all three contracts which would only increase revenues further.

The message on this slide is clear. Our growing fleet and dominant position in the Supramax market allows us to enter into innovative charters that give a 100% revenue upside potential to the fleet while at the same time maintaining floor rates. These charters combined with five additional open vessels for the balance of the year and three new buildings delivering into the fleet by year-end with over $180 million in contracted revenues provides a balance of upside spot exposure with long-term charter stability.

Please turn to slide seven for a review of our new building program. As an initial matter, I would like to highlight a critically important but perhaps overlooked fact about our new building program. Contracted revenues on 19 of the 22 new build vessels provides over $700 million of additional revenues as the new vessel deliveries ramp-up starting in the second half of this year. The contracted revenue represents a key feature of our new building program and further revenue upside is possible as this figure does not include profit sharing on any of the 17 charters that have such arrangements. We also anticipate future additional revenues from three open vessels that delivered to us during 2010. We expect to use existing cash, undrawn capacity from our revolver and operating cash flow to fund the new builds that will add significant revenues to the company as they deliver into the fleet.

Slide eight is an update of our fleet deployment for Q2 which highlights how well the Supramax asset class adjusts to cargo flows in volatile markets. As we've said in the past, the Supramax advantage is that these ships are the most flexible dry bulk vessel type and quickly benefits from changes in trade flows of the commodities that are most in demand.

As grain benefited Supramaxes in the first quarter this year, the message for the second quarter is that coal was a prime cargo in the Supramax trade. Later in this presentation, I'll specifically discuss the improvements in the coal market and how coal is important for India where the Supramax is the workhorse for the Indian dry bulk trade. The flexibility to move to the cargoes that are in demand partially explains our high utilization rate for the fleet.

Please turn to slide 10 for an update of the dry bulk market. During the second quarter, China continued its recovery as the stimulus programs continued to provide the dry bulk market with upside surprises on demand.

Recent data confirms this trend as faster than expected loan growth of $1.1 trillion in the first half of this year creates demand for raw materials, and the PMI index also points to expansion and stays above 50 since March.

Increased sales of residential homes and autos continue as China's auto sales surpassed the U.S. for the first half of 2009. More directly, iron ore became an important driver for improved charter rates as China realized record imports for the first six months, which were 29% up year-on-year.

Steel production which I will discuss in further detail on the next slide also improved on the back of improved steel pricing. Lastly, coal also hit record levels in June as imports reached $16 million tons.

Please turn to slide 11 for a discussion of the Chinese steel market. To varying degrees all of the major steel products experienced an increase in price from April to July, which helped create demand for iron ore, coal and nickel ore which is a Supramax cargo used to create stainless steel. The message here is simply the increased demand for steel products created demand for major dry bulk commodities, which in-turn improved charter rates during the second quarter.

Please turn to slide 12 for an answer of where a lot of this steel that is being produced is going. Increased expenditure in China for infrastructure projects has boosted demand for steel, iron ore, coal and other hard commodities necessary for these projects. The two maps on the right show projects for bridges, expressways, magnetic levitation suspended train systems and other rail projects that showed China's recovery that started earlier this year is gaining momentum. This has been a targeted, well funded stimulus approach. Much of it directed to the types of infrastructure projects that fuel demand for our cargoes.

Please turn to slide 13 for a discussion of the Indian market. As I have said previously, we believe India is a very important and perhaps underappreciated market, particularly with respect to the Supramax market. We believe that part of this reason is because the larger Capesize vessels due to their size cannot service most of the Indian ports which limits the amount of information that comes to market about developments in India and their impact on smaller dry bulk vessels.

That being said, Indian power plants are currently facing a coal shortage as 31 power stations have critically low inventory of less than seven days and ten of these plants have inventories deemed super critical, because their inventories dropped below four days. The low coal supplies are coming on at the same time that India's power requirements are increasing and the country plans to add 79 gigawatts of power generation by March 2012.

To put this in perspective, each gigawatt needs approximately 3 million tons of coal, which represents an additional requirement of over 200 million tons of coal. As a patch to India's current critically low supply of coal, the National Thermal Power Corp of India estimates an extra 4 million tons of coal will be required this year due to a shortage in domestic coal production. The NTPC which currently generates approximately 30 gigawatts of electrical power plans to increase to 50 gigawatts by March 2012 and 75 gigawatts by 2017.

In fact one of the reasons for the recent pickup in Supramax charter rates in the Pacific region has been an increase in the transportation of coal in the very same region. Please turn to slide 14 for an update of the dry bulk order book. The key message on supply is that now that we have reached the midway point in 2009, order cancellations and delayed deliveries continue to rebalance demand and supply.

Recently one of the major classification societies Det Norske Veritas estimated that 325 bulk carriers totalling 28.2 million tons have been removed from the order book. For the first half of 2009 statistics show that only one quarter of the ships that were supposed to deliver this year were actually delivered. We think this trend will continue.

As we predicted, the Sub-Panamax sector benefited the most from slippage since many Greenfield and expansion yards were not building larger ship types. The six-month missed dry bulk deliveries were also confirmed by DVB Bank that cited a 40% slippage rate in the first five months of this year.

Lastly, constrained financing should continue to put pressure on new dry bulk supply coming into the market in 2010 and 2011 as less established yards struggle to secure funding to build ships.

Please turn to slide 15 for an update of scrapping. The key message on this slide is that even though the dry bulk market has improved, primarily from modern ships, older vessels are inevitably continuing to be scrapped. First half 2009 demolition statistics support our view that old ships will continue to leave the market over the next two to three years as we experienced three consecutive quarters of historically high scrapping despite an improving dry bulk market.

Although 6.8 million tons have been sold for scrap in the prior six months, there are still over 100 million tons of currently trading bulk carriers that are over 20 years old which stands as a lead indicator of the potential for continued high levels of scrapings the next two to three years.

I will now turn the call over to Alan who will review our financial performance.

Thank you Soph. Slide 17. I would like to offer a brief recap on our second quarter results of operations. Let me state that operationally this was not an exciting quarter.

Net revenues for the quarter were $53 million, 42% increase over the second quarter 2008 figure of $37.2 million. All vessels were on time charter during the quarter. Our fleet utilization rate for the quarter was a top notch 99.7%.

EBITDA as adjusted for exceptional items under the terms of our credit facility was $33.8 million for the quarter, an increase of 22% over the second quarter 2008 figure of $27.8 million.

Finally, net income for the quarter was $13.3 million, or $0.26 per share, down from $14.9 million, or $0.32 per share for Q2 '08.

Slide 18 onto our balance sheet. Two quick comments, I wish to point out again that our total cash and cash equivalents have increased to $142 million. We did not take delivery of any vessels this quarter and as Soph mentioned we expect to take delivery of three vessels during the fourth quarter.

Slide 19, during the quarter Eagle successfully negotiated with our lenders significant improvements to our revolving credit facility that further supports our new building program and removes market volatility from funding. The major amendments are as follows -- collateral covenants which were based on market values are now based on book values; collateral covenants will revert to market value only when the provisions of the original credit facility are met for two consecutive quarters.

The EBITDA to interest coverage ratio has been reduced to 1.2 times until June of 2011 and then to 1.3 times until provisions of the original facility are met for two consecutive quarters. The interest rate on the facility will be LIBOR plus 2.5%. The non-amortizing facility has been amended from $1.35 billion to $1.2 billion with maturity in July of 2014. Finally, half the proceeds for any equity issuance are to be used to repay debt and reduce the facility.

With that I'll turn it back to Soph to complete the presentation.

In conclusion, slide 21 reviews the key improvements that occurred during the second quarter at Eagle Bulk that greatly enhances the company's position going forward. Our larger fleet continues to generate steady cash flow from fixed rate charter contracts while we have increased the upside potential for revenues with four vessels now placed on index-based charters with uncapped upside and floor rates.

In addition, we still have up to five open vessels to take advantage of improved charter rates for the balance of the year. Importantly, the second half of this year will mark the ramp up of our new build vessels delivering into the fleet, the vast majority of which are already secured with time charters worth $730 million and therefore will contribute significant additional revenues to the company. This growth is funded through a significantly improved amended bank facility that supports our new build program and takes funding risk due to volatility and asset values out of the equation.

I believe these factors coupled with our continuous solid operating results of a growing fleet positions Eagle Bulk very well for years to come and I would now like to turn the call over to the operator for questions.

(Operators Instructions) .Your first question comes from the line of Doug Mavrinac of Jefferies & Company. Please proceed.

Thank you operator. Good morning Soph and Alan.

Good morning Doug.

Good morning. I just had a handful of questions for you guys this morning. First Soph, in your prepared comments, you had discussed some of the shifts that you'd seen and changes in demand for commodities ships such as coal and what not. My question is kind of maybe looking at from a geographic standpoint, China is clearly been a big importer of commodities in recent months. In recent weeks have you seen any interesting shifts towards demand improving perhaps in regions like Japan or Korea or anywhere such as that?

Our feeling is it still early days Doug, but what we experienced in Q2 really was and I didn't touch on this in the slide presentation, but its worth mentioning now, is not only has demand for commodities picked up, but because of the trade patterns and because of the geographic regions involved that you just mentioned, we are seeing a longer haul trade patterns that are creating high utilization rates on the world fleet. So you are seeing for example congestion which was a prime driver in keeping vessel supply off the market, also pushing charter rates up. Now our view going forward is that at some point, the U.S. is getting their house in order. Europe hopefully, Japan the other regions. China seems to come out of this first and India is also as I said partly because of their electrical needs starting to import more coal, but if you have this kind of demand already in place and as call it the Atlantic market which really hasn't been buying commodities, but once they start buying again, that's a real recipe for a healthy market.

All right, fine.

So I would say its early, but we are seeing as we all read in the papers daily things in the U.S., we're seeing light at the end of tunnel and once that kicks in and what was driving the market when we had a very high market two years ago, the U.S. was importing a lot of raw materials, because they were growing. So once that kicks in, once Europe is back on track you are going to have a very nice dry bulk market.

Okay great thank you. And then just one other macro question this time on the supply side. Clearly we've seen a lot of cancellations and slippage among others as you also alluded to. My question is kind of two-fold. As far as the shortfall of deliveries year-to-date in 2009, is it possible to distinguish between of the slippage, how much of it is related to just logistical issues such as in the past you guys have talked about the unavailability of parts and what not. Is it possible to say well X percent of the slippage is related to those sort of logistical issues versus financing and then the second part of the question just relates to you guys -- I means just any interesting anecdotal data points that you've come across that you find interesting as it relates to perhaps future deliveries and slippage and what not.

Well what makes it challenging and this is for anyone trying to find out the statistics on what's going on with vessel supply in the shipyards is over 90% of the dry bulk fleet is owned by private ship owners not public. So what private owners do with their shipyards for their new building contracts is kept under wraps and usually doesn't come to market until much later. So it's very hard to disseminate that.

Now we obviously have a pretty good handle on the pulse of supply partly because you know we have Eagle people working for us in China and Japan and I think what's going on now is supply of parts that was a restricter call at 18 months ago is no longer as much a restrictor to deliveries because basically no one is ordering ships any more, so the manufacturers of component parts now have capacity to produce parts for ships. And also there is extra capacity because of what's already what I think I mentioned in my remarks of 325 ships have already been canceled. So that's not a restrictor. Look, what we see is the restrictor to supply is frankly just shipyards having to deal with cancellations because ship owners don't have funding primarily, but also that from the shipyard's standpoint, primarily in the 40% of the world's shipyards that are Greenfield or expansion yards, they are having troubles with their banks. There is so much written about the banking system in call it the Western Hemisphere, but there are issues with the banking system globally and we believe that lesser established yards are having problems with their supply because of funding more than component parts.

Okay got you. That all makes sense. And just one more question before I turn it over. One interesting thing in your release or announcement yesterday that I thought was interesting was the agreement that you guys struck with Delphin. Can you share with us or expand on that agreement and how you see it benefiting Eagle?

Sure. I think it's a very interesting sort of step forward for Eagle in that the agreement that we signed gives a couple of different benefits to the company. First and foremost, we are able to leverage our significant operating platform that we have at the company. As we've said to the market over the last fifteen months, with an office in China and an office in Japan and obviously a much more robust operating platform here in New York to take care of an expanding fleet of new build program, the Delphin agreement is a way for us to utilize our robust infrastructure to effectively get management income through our relationship with Delphin. The other significant benefit is that Eagle will get a first view if you will on all deals dry bulk not just Supramaxes and what the structure is to actually give Eagle right of first refusal on all purchases of Delphin and right of first offer on all sales. So there is exciting potential purchase opportunities with the Delphin agreement also.

Okay perfect, thank you very much Soph.

Thank you Doug.

Your next question comes from the line of Scott Burk of Oppenheimer. Please proceed sir.

Hi good morning, Sophocles and Alan.

Good morning.

I wanted to ask you about your equity -- the equity here during the quarter obviously contributed to the cash you have on the balance sheet. I wondered does half of that eventually go to repaying the debt and does that account for $50 million of the reduction in your credit facility?

I think what we look to do is and I think this is obviously an important thing for investors to focus on is we will always look to manage our balance sheet effectively and the extra cash that we raised both through the conclusion of the equity raise and through the free cash flow from operating cash flow is what is the correct balance, how much of the cash on the balance sheet goes to pay down debt and how much of it goes for opportunities and other things. And we feel the correct balance is about 50%. So going forward, look for us always to use about half of either equity or free cash flow to pay down debt and the other half to take advantage of other opportunities. And I think that's what we put out in the press release and we think that the 50-50 split is the perfect balance for Eagle.

Okay. And so in terms of the facility reduction, the debt facility reduction, $50 million of that is going to be from that equity you just raised?

Correct.

I was wondering kind of along the same lines is there any restriction with the new covenants regarding the new buildings, in other words can RBS require that only 50% of the new building be funded with debt or is it just you guys can put in whatever equity is it deemed necessary?

No. I think one of the important things about this enhanced facility is that there are none of the restrictions you just mentioned. In fact there are no restrictions on vessel acquisitions either. We think it not only gives us significant improved financial flexibility, it gives us significant strategic flexibility for opportunities going forward. The bottom line on the bank agreement is the facility is no longer subject to market value fluctuations for the next five years and we think that gives the company tremendous advantages.

Great. I think that was a tremendous or a good deal for your guys. And then finally I had a kind of an industry question; we've seen some closure between Capsize rates which were really the first ones to take half earlier this year and then the smaller classes Panamax and Supermax rates and I was just wondering what drove the relative upside for Handymaxes. Was it just kind of moving up into the iron and coal trades or just the iron ore trades or was there other cargo that you are starting to see move that helped close that gap between Supramaxes and Caps?

Well, I think part of it -- I mean traditionally I'm not saying that this always is the case but there is a bit of a lag effect that the bigger ship pickups, they tend be a lead indicator of dry bulk demand and then the smaller ships usually pickup after the bigger ships benefit. So I think what you are seeing now is partly that phenomenon.

In addition to that and we started to see it with the grain trade which was a bit of a seasonal thing in the first quarter, but what's really I think been the biggest hallmark of Supramaxes closing the gap as you say and really coming into their own is the Pacific markets really picked up because of coal and also iron ore and we are starting to see a more balanced demand for our ships. Before Q1/beginning of Q2 was mostly the Atlantic market, there is a huge demand for Supramax in the Atlantic market. Now we are seeing the disparity between the Atlantic and the Pacific market tighten because of coal and iron ore and nickel ore and all these other things that are moving through Supramaxes in the Pacific market that is pulling up charter rates for our ships and that was part of the driver why we think these index-based charters on four of our ships is such a, call it an evolution in our chartering strategy going forward.

Okay and actually one question about those charters. You mentioned this last quarter, but you are comfortable having a little more spot exposure since you do have all these longer-term charters, but is there -- with those four charters, do you have any options to convert those to fixed rate charters at any point in the charter life or will they just be a regular kind of index-based charters for the full life of the charter?

They are index-based charters with the call it additional benefit that they also have a floor. So that's the sort of added benefit to what would otherwise just be an index-based charter. And I think Scott, you hit the nail on the head that the reason we're very comfortable with this is that we wanted to create a structure given that we have a $1 billion of contracted revenues on both the operating fleet and the new building fleet that creates upside revenue streams for the company and this vehicle does that.

Okay. Thanks Sophocles.

Thanks Scott.

Thanks Scott.

Your next question comes from the line of Chris Wetherbee of Merrill Lynch. Please proceed.

Great. Thanks, good morning guys.

Hi Chris.

I guess if I could touch on the vessels you have coming up charter. You mentioned some of the activity that you are seeing on the smaller-sized vessels particularly coal and Indian opportunities there. Are there any opportunities or have you made any progress on the potential charter out of those vessels and when you think about the charter terms that you would be looking for, what are you thinking? Is it time now to go a little bit longer or do you continue with the short strategy?

I think right now we are seeing the fundamentals in the dry bulk market primarily demand driven. Demand is coming back into market after a six-month hiatus in call it mid way through Q4 through Q1. We are comfortable having some ships on a shorter profile. Remember the new builds that are coming online in their earnest now in the second half of the year have minimum contracted revenues of over $700 million. So our view going forward is we have a lot of fixed revenues. Let's build in some upside variability into our business model and we think the deal we announced last week is the signal to the market that that's what we are doing.

So maybe hold off and just kind of stay closer to market rates with these vessels as they are coming off of charters so there is no need to jump out in front and try to secure some longer term revenues on those vessels?

Very good point and I will tell you why because usually when you are in an improving dry bulk market, a ship has more value closer to when it is available to be charted by a charter. So if you hold back closer to when the ship is actually going to be charted, you would usually able to get a higher charter rate. We are in that kind of a market right now.

That makes sense. I guess when you think about capital structure and obviously the reamendment of the facility it was a good step in reducing some of the potential volatility and asset prices, when you think about future equity needs, does it makes sense to go out and do a little bit more sooner rather than later, take advantage of the trading in the shares to do some more equity in order to reduce your debt loads or is it something that you -- I know you said that you are pretty much done at this point but just wanted to get your thoughts on that?

I think we always like to signal to the market what management's thoughts are and as you look at what we explained to people earlier in the year. We told people, we put this shelf up here. We said we are going to do it responsibly. We didn't like our share price. We did what we said. We waited. We waited, we waited. Then we raised $100 million. We thought it a very good execution with a 2.5% down on a $6.74 average price. We are now sitting on $142 million of cash on the balance sheet. That plus the amended facility and an improving charter market and significant free cash flow from the operating fleet, puts us in a pretty comfortable position. So I think right now we are feeling good about the market. Now, if the market changes our view may change but right now we are feeling pretty good.

Okay that's fair enough. I guess just I know you mentioned it before and I missed it, so I apologize. When you think about the potential equity contributions for some new opportunities here, I think you said roughly 50-50 equity debt; I just wanted to confirm that and then also get a sense of other. Do you think you continue on with acquisitions through the partnership with Delphin or maybe stay just a little bit more focused on the opportunities you have in your current order book and obviously you have a lot to go yet on that. So I just wanted to get your thoughts there too.

Well I think we have a tremendous growth rate in the company with secured funding and as I said almost $750 million of revenues associated with that growth. So if Eagle doesn't buy another ship for the next two years, there is going to be tremendous growth in the company from that project. I think we gave very clear guidance that we think the right balance of deals is about 50% debt, 50% equity, which some people might says is conservative but we think it's about right. Asset values in the dry bulk market because charter rates have improved and the outlook has improved in the last three months have gone up. So if you ask me today do I see compelling dry bulk opportunities, I would say no. But as we've seen that can change pretty quickly. So I would say do we feel there are buying opportunities in dry bulk today? I would say not right now today, but the market changes quickly in six months. It could be opportunities are possible again but we don't see them today.

Okay. That's very helpful, thanks very much guys. I appreciate the time.

That concludes the Q&A portion of today's call. I would now like to turn the presentation back over to Mr. Zoullas for closing remarks.

Thank you. I would like to once again thank everyone for joining us for our second quarter 2009 earnings call and we look forward to keeping you updated of new developments in the future. Thank you again.

This concludes the presentation. Thank you for your participation. You may now disconnect. Good day.