Eagle Bulk Shipping Inc (EGLE) 2011 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2011 Eagle Bulk Shipping Incorporated earnings conference call. My name is Anna and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time all participants are in a listen-only mode.

(Operator Instructions)

We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to Mr. Sophocles Zoullas, Chairman and CEO. Please proceed sir.

Thank you and good morning. I would like to welcome everyone to Eagle Bulk Shipping's third quarter 2011 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 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 3, the agenda for today's call will be as follows. I will first brief you on our third quarter 2011 results and highlights, proceed with an update on the Company, and lastly present our current views on the market. Alan will then give an overview of our financials before we open the call to questions.

Please turn to slide 5 for a review of our third quarter 2011 results and highlights. Peak supply growth continued to outpace demand leading to a lackluster rate environment which in turn negatively impacted earnings for the period. Eagle Bulk generated a net loss of $5.9 million, or $0.09 per share, basic and diluted. Revenues net of charter commissions totaled $80.3 million for the quarter, representing an increase of 10.3% year-on-year. This increase is primarily attributed to operating a larger fleet as compared to the same period last year.

EBITDA for the third quarter 2011 amounted to $25.9 million. And fleet utilization, which is calculated as the number of operating days divided by the number of available days came in at an impressive 99.4%. On the strategic front, we took delivery of our final 3 newbuild Supramaxes since our last earnings call in August, marking the end to our successful newbuilding program set out just a few years ago. All 3 of the vessels we took delivery of, the Puffin, The Roadrunner and the Sandpiper, are fixed on 3-year charters at an above market rate of $17,650 per day plus profit share. The total minimum contracted revenue is projected at $58 million.

Please turn to slide 7 where we depict our historical and projected fleet capacity. Since 2005, we have grown the fleet to 45 vessels, representing an impressive cumulative annual growth rate of 26%. It is worth noting the operating success of the Company as we maintained close to 100% fleet utilization during this growth phase. I believe this is attributive to our Company's fleet quality, to the excellent work by both our technical and our operations teams that work to maintain our fleet in top condition. Please turn to slide 8 for a current listing of top owners. In 2011, Eagle Bulk became the second-largest owner of Supramaxes globally with a Chinese quasi-government owned Cosco Group only slightly ahead. In the commercial or chartering markets Eagle Bulk has become synonymous with Supramaxes and we are very proud of having built a well recognized and globally respected brand. We have now reached a scale in terms of physical assets where we can really start to leverage our platform.

Please turn to slide 9. Here, we depict an updated list of our fleet, which totals almost 2.5 million deadweight tons and boasts an average age of only 4.4 years. The Eagle Bulk fleet is one of the youngest and most homogenous fleet in the market today, extremely difficult to replicate and one that commands a great deal of commercial interest due to its uniformity and flexibility.

Please turn to slide 10 for a discussion on chartering. Eagle Bulk's chartering strategy has evolved a great deal since the Company's inception. We have gone from doing exclusively time charter to a more dynamic approach which encompasses a few different strategies including spot or voyage charters, Index-linked charters, medium to long-term time charters, and servicing contracts of afreightment or COAs. We believe the increased flexibility in our commercial strategy gives us the opportunity to capture greater value in all market cycles. As of September 30, our chartering position for the fourth quarter is as follows, 81% covered by either time charters or COAs, 9% indexed to the Baltic Supramax index, and 10% open for fixing. For 2012 our chartering position is a bit more balanced which 56% covered, 8% indexed, and 37% open. We will continue to charter vessels and extend duration as the market normalizes.

On slide 11, we illustrate Eagle Bulk's cargoes for the third quarter. Our fleet carried over 4.8 million tons of cargo during the quarter, an impressive increase of 36% year on year. As recently announced, we started to take on and service COA business. To this extent, we carried almost 900,000 tons of sand during the quarter, equating to 18 voyages. This, along with relative weakness in iron ore, greatly shifted the portion of minor bulks carried to a Company record of 67%. With almost 700,000 tons shipped, coal remains as one of our most important cargoes that we carry. And our important popular trades for this commodity in coal is coal from Indonesia to India and Indonesia to China. Other cargoes which were important are in the quarter were potash or fertilizer, cement, other ores and sugar.

Please turn to slide 13 for a review of the dry bulk market. Similar to the first half of the year, rates remained under pressure during the quarter on the back of continued supply growth. Although sea-borne trade demand remains relatively strong, it is struggling to fully soak up the incremental supply, putting pressure on rates. Vessels supply, growth amounted to a record 74 million deadweight tons during the first 9 months of 2011, representing an increase of 14% over last year. Capesizes represented close to 50% of all dry bulk of deliveries year-to-date. Although monsoon season has come to an end, Indian iron ore exports remain subdued as compared to last year. The mining and export ban remained in place during the quarter, restricting significant cargoes for this Supermax important trade. Total Indian exports for 2011 is projected at 75 million tons, down 22 million tons from last year. This equates to almost 450 lost voyages for the year.

A material increase in Japan trade due to the reconstruction of earlier this year's earthquake, did not materialize and expectations are now for this to occur in the beginning of 2012. Although Capesizes have benefited from a spike in rates in August, we believe this was caused by a shortage of tonnage in the Atlantic basin and less to do with the pickup in underlying demand for this asset class. Framed vessels continue to outperform in the weak 2011 market thanks to their greater flexibility and relatively better supply dynamics. Year-to-date, Supramaxes have been the best performing dry bulk asset class with rates averaging over $14,500 per day., comfortably above operating breakeven levels, compared to $13,947 per day for Panamaxes and $13,353 per day for Capes. As a reminder, Eagle Bulk's current cash breakeven, which includes OpEx, G&A, maintenance CapEx and debt service is under $11,000 per day.

Please turn to slide 14 for a discussion on the near-term fundamentals, which we continue to view as mix. Fleet growth, although past its peak now, is expected to remain at elevated levels for the next year. Global steel production, which has posted a strong increase year on year of over 8% has come off in recent months. Chinese iron ore inventories remain at historically high levels, but steel stock piles are 20% off their 2011 highs and below their 2-year average. We view the recent collapse in iron ore prices as a short-term in nature. Ferrous scrap which tends to be highly correlated to iron ore prices, is off only 10% from its highs, significantly less than iron ore. Ferrous scrap metal can be used as a substitute for marginal iron ore units in steel production, and this discrepancy in price action between the substitute commodities implies that the sell-off in iron ore is overdone and technical in nature.

As recently reported, the iron ore mining ban has been partially lifted in the state of Karnataka in India. Over 20 companies are expected to come back online with an annual production capacity of 15 million tons. Although a lifting of the mining ban does not necessarily imply a lifting of the export ban, we view this as a positive development and remain hopeful that there will be resumption in 2012. As we have said before, we believe the reconstruction efforts in Japan will be a positive for dry bulk and expect to see a pickup in trade in early 2012. Japan will need to import iron ore, cement, steel products, logs, among other dry bulks.

Please turn to slide 15 for a review of the agricultural and minor bulk trades. Global trade in agricultural products remains firm and less prone to short-term economic movements as compared to other commodities. A weak US corn crop for the 2011/2012 season will curtail exports. Product is expected to be substituted from South America and FSU, which only recently lifted its export ban. On the top right-hand corner of the slide, we depict the top 10 destinations of US grain products. Minor bulk trade continues to be strong. Seasonal trade is expected to reach 1.2 billion tons in 2011, an increase of 5% over last year. Chinese miner bulk demand remains robust with 2011 imports expected to reach 250 million tons, an 80% increase since 2007.

On slide 16, we discuss long-term demand for coal and iron ore. Our thesis has not changed and we continue to view the fundamentals as healthy, especially for coal. The Fukushima Daiichi accident earlier this year has sparked global discussions and initiatives to cut back on nuclear generated electricity. The main beneficiary of this that will be coal power. We have seen, as we have mentioned previously, there are significant closures in Western Europe already. We believe this action will be mimicked by other western countries as well, a positive for global demand for coal.

Additionally, there is over 250 GW of the new coal fueled power capacity, coming online by 2015. Mostly in Asia. The incremental coal requirement will primarily come from Indonesia and Australia and destined to India and China. On the top right-hand chart we depict historical Indian and Chinese coal imports. The scale of growth in this trade is massive. Long-term projected growth in steel production, 400 million tons over the next 3 years, is expected to benefit both iron ore and coal. New iron ore supply regions, such as Africa, are expected to increase global ton mile demand. Just recently, Sierra Leone shipped its first iron ore cargo of 40,000 tons, destined for China.

On slide 17, we review the current supply picture. Newbuilding supply growth remains at high levels, but deliveries are past their peak and the order book continues to shrink quickly. New orders in dry bulk are down 80% year on year, and the order book as a percent of the fleet outstanding has come off over 50% since 2008. Just this past week the Chinese transportation ministry has come out and pledged to curtail newbuilding output in order to help bring supply demand back into balance. Slippage and cancellations for the sub Capesize segment remain at a significant level which we estimate at 35% plus. As we've said in the past it is widely believed that slippage and cancellation rates will continue going forward. The primary reasons for this are shipyard and financing issues.

With the rate environment remaining relatively weak and scrap prices staying high, demolition continues to be robust. For the first 9 months of 2011, scrapping has totaled 19 million deadweight tons, almost 3 times 2010 full-year totals and a historical record. Almost 1700 vessels are over 25 years of age and will eventually need to be scrapped. As we have said on previous calls, scrapping acts as a safety valve that will continue to assist in curtailing vessel growth and improve the supply demand fundamentals going forward.

On the bottom right-hand corner of the slide we depict the current profile of the dry bulk fleet age by asset class. The sub Panamax segment is by far the oldest in terms of the number of vessels and as a percent of fleet, which is over 20%. Asian shipbuilders continue to struggle with rising input costs and a rising domestic currency. Shipbuilders are already on thin margins and are getting squeezed, forcing them to enact strict cost controls. This phenomenon creates a floor for asset prices, a positive for the dry bulk industry. I would now like to turn over the call to Alan who will review our financial performance.

Thank you, Soph. Slide 19. I would like to offer a brief recap on our third quarter results of operations. Net revenues for the quarter were $80.3 million compared to the third quarter of 2010 figure of $72.9 million. The increase in revenue is principally attributable to the increase in the size of our fleet, the commencement of our trading operation which began at the end of the third quarter of 2010. During the quarter, the fleet was on a mixture of voyage charters and short and long-term time charters.

Operating income for the third quarter was $7.8 million compared to the 3Q 10 figure of $21.6 million. The year on year decrease in operating income was primarily attributable through operating a larger fleet in a lower rate environment. EBITDA as adjusted for exceptional items under the terms of our credit agreement was $29.5 million for the third quarter compared to the third quarter 10 figure of $41.1 million. Net loss was $5.9 million for the quarter or $0.09 per share. Our utilization rate continues to be superior at 99.4% for the third quarter.

Slide 20. A few comments on our balance sheet. We ended the quarter with approximately $30 million in the bank including restricted cash. We have taken delivery of a total of 8 vessels this year. In October we took delivery of the Sandpiper, the last of our 27 vessel newbuilding program. Also during the quarter we completed the sale of the Heron, a 10-year-old Supramax. Proceeds were used to repay debt. Therefore, the big news at Eagle Bulk is that as of today we have no further CapEx requirements. Our bank debt as of September 30 stands at $1.129 billion.

Slide 21. I am pleased to report that on September 26, we entered into a commercial framework agreement with our lenders. Under this agreement, the minimum adjusted net worth covenant which was in dispute has been suspended until April 30, 2012. Further, the minimum liquidity covenant has been suspended until January 30, 2012. From January 31 until March 30, reduction of the minimum liquidity covenant is reduced to $500,000 multiplied by the number of vessels owned. From March 31, 2012 until April 29, the Company is required to maintain free cash in the amount of $27 million and $36 million thereafter. At this time we're in discussions with our lenders and we will notify the market of any additional developments as they occur. With that, I'd like to turn it over to the operator to open the call for questions.

Thank you.

(Operator Instructions)

Natasha Boyden, Cantor Fitzgerald. Please proceed.

Thank you operator, good morning gentlemen. I am just curious, some of the other owners we've been speaking to have kind of indicated that charters are not really willing to look at contracts or charters longer than perhaps a year, looking at the 2 to 3 year mark. Is that what you are seeing in the market?

I would answer that slightly differently, Natasha. I would say, we have been approached by quite a few charters to do 3 to 5 year charters. But given that we think the downturn -- we are in the middle of a cyclical downturn that we think will continue into 2012, but after that there will be a recovery, I think most owners don't want to put their ships out for 3 to 5 years because they think the rate environment will be a lot higher there. I would say we see not so much 1-year interest. We see more interest for 3 to 5 years, but we are not interested in this low rate environment of locking our ships away for that long.

Okay so that kind of explains the level of spot exposure that you have for 2012 I would imagine, right? You are probably not looking to fill that anytime soon.

I think what we are very focused on is not doing what I call a classic ship owner mistake which is chartering in your fleet out for long periods at the bottom of the cycle. You want to stay short, because as we saw, you can have moments when the market picks up. And as the order book is quickly getting worked through, and really 2012 is the last somewhat elevated supply year. We think beyond 2012 things will pick up.

Okay, Alan, a couple of questions for you if I may. It looks like you didn't draw on your credit facility during the quarter despite the delivery of some ships. And instead you repaid about $22 million. Can we just confirm the undrawn amount of $22 million is now fee to be borrowed? Is that true, given the covenant?

The undrawn amount is free to be borrowed if we need it. And the amount that is outstanding as of September is in fact the amount outstanding on the facility today.

Okay, great. And then just another quick question. It looks like you drew on your restricted cash during the quarter. Will that need to be built up again to comply with the minimum liquidity covenant?

As I said in my prepared remarks, the minimum liquidity is waived or suspended until January 31, and then it begins to build up in March and April and May.

Okay, great, well thank you very much. I will turn it over. Thank you.

Chris Wetherbee, Citigroup. Please proceed.

Thanks, good morning guys. I guess, just curious about the trading side of the business, just looking at the chartered in days, they have declined sequentially the last couple quarters. Just want to get a sense of what your thoughts are there. How do you think about that business just given the fact that we are in the cyclical downturn? Do you want to continue at this pace? Does it goes up or down going forward?

I think you caught it, and you're commenting on something that shows where we are going with the trading business. We had some legacy charters that were put on earlier in the year that are running down. Those charters are not getting renewed. That is chartered in ships. As we announced this quarter, we are focusing on some core cargoes, primarily to put our ships on those business rather than chartered in ships to employ in that trade. And the primary trade that we are focused on is inter-Asian sand movements.

Okay. All right. And so, this is a reasonable run rate to forecast as we think about it going forward?

In terms of charter in ships?

Yes.

I would say no higher than this.

Okay.

And if anything we are running it down.

Okay. That's helpful, I appreciate that. And then you mentioned a 3 to 5 year demand from charterers. What type of level do you get -- what is the offer for that type of contract at this level? How much of a discount is it? Is it at the market but they just want duration? I'm just trying to get a sense of what really is the bid out there.

It's about 13 to 13.5.

Okay.

So you can understand why a lot of owners don't want to do that.

Sure. Absolutely. Makes sense. When you think about the bank discussions, and I know it is ongoing and you'll have more to tell us when you get further details, but I am guessing you're taking kind of a holistic approach to this to try to do something that may be more transformational, but any kind of color you can give your thoughts about how you would approach these discussions would be helpful.

I think you characterized it perfectly, which is they are going to be more permanent and transformational in nature. The framework that we just signed up is rather recent. So I would say we are very early days in what I would characterize as very collaborative and constructive talks, but it's very, very early in the process. And don't look for us probably to be able to put something out or announce something before the new year.

Okay. And just looking at the timing of everything that you guys have done recently, it all appears that we are right in towards the end of the first quarter, beginning of the second. Is that the timing we should be thinking about? Is that kind of how you're tipping us off to where we should be thinking about the timing of something coming?

Most likely. But as I said, the shape of things is still very premature. So I couldn't give you guidance beyond that, that would be meaningful.

Okay. Understood. Thanks for the time guys, I appreciate it.

You're welcome.

Justin Yagerman, Deutsche Bank. Please proceed.

Good morning guys. The jump in accounts receivables, is that all due to Korea Line or is there anything else going on there?

Well we are operating a significantly larger fleet, but a chunk of it is it due to Korea Lines, yes.

Okay. So is the majority of that incremental is attributable there? That's how I should think about that?

We have not broken it out but a slug of it is due to KLC, that is correct.

Okay, thanks Alan. In terms of just bigger picture, I think you guys did a really good job in the beginning of your slide show talking about the quality of your fleet. It seems to me that you guys are extremely focused on the business, but from a shareholder value standpoint, I'm just wondering if there are strategic options that are being explored right now given the low value of the stock. You have probably one of the nicest fleets of any of the public companies out there. I'm just trying to understand, from a strategic vision standpoint, where you see things going. The market is what the market is, and I understand that, but do you guys have broader exploratory thoughts right now given the action in the market and the value of the Company? And are there inquiries coming from outside investors?

I would say, first of all, we don't usually comment on share price on an earnings call, but what I will say is, I think Eagle is sort of victim, as is the whole peer group of dry bulk stocks to a downdraft and a down cycle in the market and a volatile stock market generally. I think you are 100% right that we have, as I said, a world-class brand in the Supramax market that we are using to leverage in things like this sand trade, that if we didn't have the fleet we had, we probably wouldn't get the contracts. That being said, if there were anything, any sort of big strategic issues that were meaningful or material in nature that we were undertaking, we would be discussing it. I would say right now we are focusing on our core business and using and deploying the fleet in these value-added trades that other owners who don't have the fleet we do can't compete with us.

How should we -- thanks for that answer by the way. How should we think about the COA business in terms of laid in percentage that you are seeing right now? Are you able to outperform market TCs because of the utilization on that business and are there more COAs that are coming on behind the sand business? What is the average TC that you are generating on that COA?

Okay, the way to think of COAs is a shelter from the market. And in a way a COA is great in a bad market if it is done well and caps your upside in a rising market, because you are fixed at a certain price to carry the cargo. So I would say the way to think about our COA business is a little bit defensively, that we are taking these cargoes, which remember an owner can take a COA and charter in ships to service it, or can if they have their own fleet, put their own fleet on the COA. So I would say the strategic fine-tuning that we have done in the last quarter and going forward, which is a little bit the guidance I gave I think with Chris's question, is we are running down the chartered in ships. We are focusing on fewer and more meaningful trades that we can deploy our ships into those trades as evidenced by the sand. So I would say, think of it as a defensive position we take going forward into 2012. COAs, we are also not looking on doing very long COAs. For example, there are COAs for iron ore that can go 10 years, even 20 years.

Right.

We are looking at COAs of anywhere from 6 to 12 months in duration. And the reason for that is again, similar to the answer I gave with not chartering long-term in a weak market, you don't want to book a lot of long-term cargoes in a weak market because as the charter rates improve in a rising market, that COA book will actually be a loser for the Company. So we are staying short in nature on the cargo commitments, short on our time charters. And again, I want to remind everyone that we have almost half of our fleet on fixed rate charters between say $17,000 and almost $18,000 a day, so what we are really talking about is what to do with the balance of the fleet. That's the way to think of it.

Okay, thanks. And one last question, Alan, you called out the minimum liquidity covenant and you answered Natasha's question. In my math it's not necessarily set this way depending on the market, but it's going to be close on January 31 as to where you guys are on that $0.5 million per ship metric. If you guys are within a couple million bucks, do you think that something that the banks are going to be sticklers on? What's the mood there when it comes to that kind of stuff as you get close to that date?

We are comfortable that we will meet our requirement.

Okay great. Thanks for the time guys. I appreciate it.

You're welcome, Justin.

James Woods, FBR Capital Markets. Please proceed.

Hi there gentlemen, I am dialing in on behalf of Rob MacKenzie today. Most of the questions have already been asked but I did want to get one in. You guys talked a little bit about a weak US agricultural crop potentially impacting cargoes. I just wanted to see if you would flesh out some of the moving pieces around that a little bit and where the incremental cargoes will come from to replace that and what that will do ton mile. Just sort of fill out that thought process for us a little bit.

We have most of our ships actually in the Pacific market right now, and very few are in a position to even exploit a Gulf grain market if there was one of. That's just information for people on the call. But the substitute load ports for the grain trade will incrementally come from the former Soviet Union and also South America. So even though the grain trade continues to be seasonal, there is enough storage capacity in South America and the Black Sea where that can move 12 months a year to cover for out of cycle seasons, make up for shortfalls in the northern hemisphere. Which is what we are seeing now.

Okay, wonderful. So that's actually coming out of storage in those areas?

Pretty much. It is out of season right now.

Right. Okay. That's really helpful. And I guess on that, I will turn it back. Thank you guys.

Thanks.

Michael Pak, Clarkson Capital Markets. Please proceed.

Hi Soph, hi Alan. Just a quick question, I wanted to follow up on the COA business. As you focus more on specific cargoes, i.e. sand, how do you see your fixed coverage changing as we roll the page into 2012 or over the next 6 months? Do you see it approaching the 80% kind of mix? Or can you give us some color behind that?

Sure, it's a rolling average, so as we go into 2012 we look to cover the current quarter that we are in and the following quarter, maybe even the following 2 quarters. I think the way that people on the call should view the COAs is a little bit like the way we view and I think the market views our Index-linked charters. That because we have the capability, we look to have a portion of our fleet on cargo commitments, if we view the cargoes as strategic to the Company. So we like, for example, the Index-linked charters, probably will maintain somewhere in the 5% to 10% of our fleet in Index-linked charters. I would say we are still developing a target for the cargo part of the business, but we are going to look to have a portion within a bandwidth, say of employing anywhere from 5 to 7, 8 ships on cargo commitments. And right now, as I said, the nature of the cargoes we have, we only have visibility for about 6 to 9 months. We are not looking on doing any multi-year COAs at this point. We think the market is just too low for that.

Great, I appreciate the time.

Thank you.

Ladies and gentlemen, in the interest of time this concludes today's question-and-answer session. I would now like to turn the call back to Mr. Sophocles Zoullas for closing remarks.

Thank you Anna. And I would like to thank everyone for joining us for our third-quarter 2011 earnings call. We look forward to keeping you updated of new developments in the future.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.