Eagle Bulk Shipping Inc (EGLE) 2012 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2012 Eagle Bulk Shipping Inc. earnings conference call. At this time all participants are in a listen-only mode. Later we will facilitate a question-and-answer session (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Sophocles Zoullas, Chairman and Chief Executive Officer. You may proceed.

Thank you and good morning. I would like to welcome everyone to Eagle Bulk Shipping's third quarter 2012 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 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.

On slide 3 you will note the agenda for today's call. I will first review our third quarter 2012 results and highlights. We will then proceed with an update of our commercial operations, and finally, present our current views of the market. Adir 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 financial results and highlights. The drybulk market experienced increased pressure during the third quarter, with new building deliveries continuing to hit the water at a robust, albeit slower, pace. In addition, trade deteriorated on the back of lower global steel production and reduced grain exports out of the US.

New building deliveries, which now appear to have peaked during the second quarter, totaled 20 million deadweight tons or over 240 vessels in the third quarter. This represents a decrease of almost 40% sequentially and 25% year on year.

On the demand side, global economic weakness has led to lower steel consumption during the third quarter, and hence lower demand for iron ore, metallurgical coal and thermal coal.

I would like to point out that we have seen a resurgence as of late in iron ore demand post-China's economic stimulus announcement in September. But we view this as more opportunistic purchasing and do not believe it is sustainable in the medium term. In addition, the drought experienced by the US during the summer months severely impacted grain imports out of the US.

The Baltic Dry Index, or BDI, averaged 846 points for the third quarter, representing a decrease of 17% sequentially and 45% year on year. Supramaxes fared better, posting a decrease of 8% sequentially and 26% year-on-year.

Turning to Eagle Bulk, the Company reported a net loss of $29.8 million, or $1.77 per share for the third quarter of 2012. Earnings for the period were primarily impacted by the Company's exposure to the depressed spot market.

Net revenue for the third quarter was $46.9 million, and EBITDA for the quarter amounted to $12.5 million. Fleet utilization, which is calculated as the number of operating days divided by the number of available days, remained at an impressive level of close to 99.4%.

Please turn to slide 7 for an update on our commercial operations. Eagle Bulk's fleet totals 45 vessels, comprised of 43 Supramaxes and 2 Handymaxes, and is considered one of the youngest, largest and most homogeneous fleets in the industry, with an average age of just 5.4 years. As we have stated in the past, we deploy an opportunistic and dynamic approach to chartering, utilizing a mixture of long-term time charters, contracts of affreightment or COAs, short-term voyages, and index charters.

Given the continued weak period market, we remain short in tenor until there is a further improvement and normalization in charter rates. As of September 30, our chartering position for the fourth quarter 2012 is as follows. 41% of our fleet is either fixed, on time charter or performing COA business. 11% is indexed to the Baltic Supramax Index, or BSI, and 48% is open for charter.

On slide 8 we illustrate Eagle Bulk's cargoes for the third quarter. Our fleet carried almost 5.2 million tons of cargo during the quarter, up 8% year-on-year. We moved a record 1.8 million tons of coal during the period, representing 36 voyages and an increase of 13% sequentially. We primarily carry coal from Indonesia, destined for both China and India, but we also move product from South Africa, Australia and the US Gulf.

Iron ore cargoes were down 14% sequentially to total 396,000 tons. We attribute this to lower global steel production, high Chinese iron ore inventories, but also the ongoing Indian export ban. Indian iron ore exports are projected to total 25 million tons for 2012, down 58% year-on-year.

In total we carried over 20 different cargoes during the quarter. This can be attributed to the Supramaxes' known versatility in being able to load and discharge cargo using onboard equipment, for being able to navigate in smaller ports, and for its optimal size and matching cargo stems.

Please turn to slide 10 for a review of the industry fundamentals. As I mentioned earlier in the call, freight market weakness intensified during the third quarter due to both persistent high supply growth and lower interim demand. Global economic sluggishness over recent months caused by heavily indebted developing world, developed world, and slower growth in the emerging markets has negatively affected steel consumption.

As depicted in the bar chart on the top right-hand corner of the slide, global steel consumption for the third quarter dropped 3.3% as compared to the previous quarter, with the EU posting a significant drop of almost 12%. Lower appetite for steel impacted its production, and hence demand for iron ore, metallurgical coal and even thermal coal. As a result, we saw commodity prices come off heavily. Iron ore prices plummeted by approximately 35% during the third quarter to under $100 in early September before recovering somewhat towards the end of the month.

On the grain side, the US drought severely impacted trade, bringing American exports down to a 15-year low. As reported by the USDA, the drought reduced water levels on the Mississippi and Ohio Rivers and their tributaries, impacting barge load capacities. Year-to-date US grain inspections for export are down 11% year on year as a result.

Supramaxes averaged $10,331 globally per day for the third quarter, down from $11,170 per day in the previous period, but still outperforming both the bigger Panamaxes at $6640 per day, and even larger Capes at $4827 per day. Supramax outperformance is attributed to its diversified trade, the steady demand characteristics for minor bulks versus the majors, and strength in Indonesian coal exports.

On slide 11 we take a detailed look on the current supply dynamics. As we just discussed earlier, new building supply growth remains at high levels, but deliveries now appear to have peaked during the second quarter this year. September deliveries totaled 5.5 million deadweight tons, down 61% from peak levels in June.

New orders in drybulk are down 66% year on year. Reasons for this include the ongoing depressed rate environment and relative attractiveness of secondhand vessels. But the lack of traditional bank financing is becoming the primary factor as to why owners are not placing new orders.

According to Dealogic, ship lending during the first nine months is down 38% year-on-year. And the bulk of this lending is actually going to the offshore and LNG sectors, with very little new financing being extended to drybulk.

Ship lending is dominated by European banks, and given their issues dealing with the ongoing sovereign debt crisis, and increased capital requirements due to Basel III, we expect for these banks to continue running off their ship loan portfolios and limit new capacity over the next five years, even when we experienced the recovery in rates. All of this bodes very well for the medium-term prospects for shipping and drybulk.

According to our industry sources, approximately two-thirds of Chinese yards have not received new building orders in over two years. And approximately one-half of the independent and non-state-owned supported yards could go out of business within the next 12 to 18 months. A reduction in yard capacity will further act as a positive catalyst in the shipping recovery.

Please turn to slide 12 for an update on vessel demolition. Approximately 25 million deadweight tons have been scrapped so far this year. Although scrap prices have come off in recent months, from almost $500 per lightweight ton at the end of 2011 to under $400 today, following the decline in steel prices, we believe the depressed earnings environment will continue to drive owners of older tonnage to sell their ships for demolition. Assuming the current scrapping pace continues, we project that almost 34 million deadweight tons will be scrapped this year, and that would make 2012 another record year.

In regards to scrapped candidates, we have traditionally looked at the fleet of age over 25 years. Given the prolonged depressed rate environment, though, we are actually seeing owners scrap vessels younger than 25 years old. For this reason we will now evaluate scrap candidates based on a fleet over the age of 20 years.

On that basis, and given that there are currently 1700 vessels which will scrap and meet this criteria, we view there will be continued increased scrapping going forward. On the right-hand side of the slide we depict the current profile of the scrapped candidate fleet by asset class. The sub-Panamax segment is by far the oldest, both in terms of number of vessels and as a percent of the fleet, which is just over 18%.

Please turn to slide 13 for a discussion of the short to medium-term demand fundamentals for the drybulk industry. Factors which will hold back a recovery in the short-term remain relatively unchanged from what we disclosed last quarter. Factors include continued global economic sluggishness, uncertainty surrounding the China leadership transition, the European debt crisis and the risk of the US fiscal cliff. Other ship-specific factors include high Chinese coal inventories and the negative effects on grain exports from the US drought.

On the other side, catalysts which should lead to recovery in the medium-term include further Chinese stimulus, the resolution in euro land, stronger growth out of the US, and continued global liquidity accommodation.

On slide 14 we discuss the long-term demand fundamentals for coal and iron ore. Our thesis has not changed and we continue to view the fundamentals as strong, especially for coal.

Global urbanization, as depicted in the top right-hand corner chart, is expected to drive increased long-term demand for drybulks. Minor bulks and agricultural trades are projected to grow at a respectable long-term average of 3% to 5%.

Steel production is projected to increase 40% by 2020, leading to increased demand for both iron ore and metallurgical coal. Over 370 gigawatts of new coal-fueled power capacity is expected to come online by 2016. This equates to over $1.2 billion in incremental coal demand that will primarily be sourced from Indonesia and Australia.

To summarize, we believe the short-term fundamentals for drybulk remain challenging, but we are seeing light at the end of the tunnel. The order book is depleting quickly, and we believe decreased lending and yard capacity will limit a rush of new orders when the recovery commences.

On the demand side, barring the world entering into another recession, we view drybulk trade fundamentals as positive for the medium-term, and more robust in the longer term.

I would now like to turn over the call to Adir, who will review our financial performance.

Thank you. Please turn to slide 16. This is a summary on our third-quarter results of operations.

Our net revenues for the quarter were $46.9 million, compared to $80.3 million in 2011. The year on year decline in revenues is primarily due to lower charter rates and a decrease in voyage charter revenues. In addition, we chartered-in 58 vessel days during the quarter, compared to 582 days during the third quarter of 2011.

Our operating loss for the quarter was $7.9 million compared to operating income of $7.8 million in 2011. Our cash interest expense for the quarter was $12.5 million compared to $11.3 million for the third quarter of 2011. Our non-cash interest expense for the quarter was $9.5 million. That includes peak interest of $7.4 million and a deferred financing cost of $2.1 million, compared to only deferred financing costs of $1.1 million for the third quarter of 2011.

EBITDA, as adjusted for exceptional items as defined in our credit agreement, was $12.5 million for the quarter compared to $25.9 million last year. Net loss for the quarter was $29.8 million, or $1.77 per share.

Please turn to slide 17 for a summary of our balance sheet. Cash at the end of the quarter was $18.6 million.

Please turn to slide 18. For our fourth quarter, estimated daily cash breakeven, our projected daily vessel operating cost is $5103. Our technical management fees paid to our vessel managers are estimated at $319. Our estimated G&A cash expenses is $1214.

We estimated that our cash interest expense, net of interest income, is $3026. This figure takes into consideration a margin of 3.5% over LIBOR.

Finally, we have estimated that our drydock cost is approximately $145. Our total expected cash cost for the fourth quarter of 2012 is $9807 per vessel per day.

This concludes our presentation. We now will turn the call to the operator to take your questions.

(Operator Instructions). Natasha Boyden, Global Hunter.

Thank you Operator. Good morning everybody. Just a couple of quick questions here; the first one is G&A. Both your non-cash stock comp and regular G&A expense was lower year-over-year and quarter-over-quarter. I'm just wondering what was behind that decrease and what you think is a good run rate going forward.

I think generally -- I'll pass it over to Adir, but I think generally what you're seeing is belt-tightening across the board, which is giving you the result that you just mentioned. But, Adir, I don't know if you want to add to that.

In addition for what Soph said, if you remember in Q2 we had about $1.9 million bad debt allowance. That does not exist this quarter.

Okay, great. So are you sort of saying without that bad debt allowance, this is a fairly good run rate going forward, what we are seeing in the third quarter?

We believe so, yes.

Okay, all right. Great. I know I've asked you this question before, but if you could refresh my memory, we are seeing Cape rates having a bit of a mini-rebound, which is nice to see. But it doesn't appear that maybe some of the smaller vessels are following suit, although there is more strength in the Supramax base than the Panamax.

At what point do you need to see Supramax rates get to before you really start to knuckle down and start getting some contracts there?

I remember the question from the prior quarter, and it's always a good one. So, just to elaborate on what I said during the presentation, we feel the Cape rate mini-rally, if you want to call it that, is on the back of Chinese buying of iron ore. And we feel that the converse weakness in the Panamaxes and Supramaxes is primarily grain-driven, primarily off the back of the US drought for the fall grain season.

We believe both these effects are seasonal, in a sense, and short-term, and that the grain situation is harvest-driven and after a couple months will work itself through, and that the Chinese buying of iron ore will ultimately be a short-term phenomenon that will also retract. That being said, we feel that our position regarding putting our ships on long-term charters hasn't changed since last time we spoke in August. And we would really be looking for, I would say low teens, which is still a significant discount to the ten-year average of what our assets can generate before we want to start committing our ships to long-term charters.

That makes a lot of sense, thank you. You talked about the grain harvest obviously having an impact on the smaller ships this quarter. What are you seeing for the South American harvest into early next year? Is that looking more attractive here?

It's a little early to tell. I don't think we see it quite as attractive yet. We are watching it closely. We are also watching what's going on in Russia, and we are a little concerned about the grain out of Russia.

Okay, that's helpful. Lastly, in the presentation you talked about the age of scrap vessels moving down to 20 years from 25 years. Given the state of the industry as we are today, are you seeing any scrapping of ships below the age of 20 years?

Yes, actually, quite a bit. Primarily the larger ships, but we are seeing Capes scrapped at 17 years of age, and we believe that number could even go lower. We are seeing -- the younger -- the smaller ships tend to scrap older. But we are seeing those ships scrap five years younger than they historically do, from say 25 years to 28 years now sort of 22 years, closer to 20 years.

So, everything I would say has moved younger in the scrap market by about five years, which we think is very positive for the medium-term going forward. And just to put it in perspective on why an owner would scrap a 17-year-old Cape, well, if you can sell the ship for, say, $8 million or $9 million in scrap value versus, say, the cost of putting it through survey or $2 million or $3 million, so you're looking at a differential in cash flow of say $11 million versus charter rates of somewhere around anywhere from $5000 to $15,000 with operating costs of $7000 or $8000 excluding debt financing, that's still a very attractive proposition for a lot of owners of old ships. So that's why we feel relatively comfortable with our forecast on scrapping going forward.

Okay. Given the trend of -- as you're saying, of scrapping of younger ships, do you foresee that 2013 will be another record year or possibly a record year in scrapping, if rates stay down, obviously?

If we hit 34 million tons for 2012, that's just a phenomenal number. I mean it's significantly higher than last year. So even if it doesn't come to 34 million or even 30 million, I would say if we get between 25 million and 30 million tons of scrap next year, we are creating a good launch pad for a recovery in drybulk beyond that.

Okay, great. Thank you very much for your time. I appreciate it, as always.

Christian Wetherbee, Citigroup.

Good morning. This is Alex Hahn in for Chris. I just wanted to touch more on the SG&A expenses. You spoke to the belt-tightening. If you can delve a little deeper into that, that would be great.

I think what you're seeing across the board is a reduction in expenses in the Company, as realized in this quarter. That number is actually lower than probably our run rate going forward, most likely because of what Adir said in the prior question from Natasha, that there was a bad debt expense that we don't have going forward. But I think it's still a little early for us to give run rates going forward, if that's where you're going, regarding G&A going forward.

So I think we'll have to sort of see what another quarter yields. But it's been in the magnitude of a couple hundred thousand dollars this quarter.

Okay. And what are your thoughts of the vessel sales of older Handymax or Supramax ships?

You mean for demolition or secondhand market?

Secondhand market.

Well, we are not sellers because we don't have older vessels. So, with a five-year-old fleet, that's not really an issue for us.

Okay. That's it for me, thanks.

Michael Webber, Wells Fargo.

Good morning. Just a couple housecleaning questions. You guys -- when you guys secured your debt deal this summer, you got a lot of room. But you have two covenants that I believe came in on June 30, a minimum liquidity covenant and an interest coverage covenant.

Can you fill out those values of where you were this quarter? I'm sure there's a fair amount of -- there's a pretty big gap there, just looking at what the actual numbers are.

We don't have those covenants today. So it's not until 2013.

Okay.

Yes, that's a nonissue for us today.

All right. That's my mistake. With regard to some of the chartering activities you went over with Natasha, you guys obviously have got the cash sweep in place. And it would certainly make sense, if rates pick their heads up, that there may be locked down a couple, although you have a pretty robust COA business at this point.

Is there any input at all from the banks, in terms of that chartering activity, if rates do pick their heads up? Is that an ongoing dialogue or they just let you guys just run the business?

Well, we don't want to get too much into the day-to-day relationship with our lenders. But I would like to say they have been highly supportive of us, as indicated by the deal that we did, which I think has been good for everyone, and I may comment is also I think by a long shot the longest in tenor of any US-listed drybulk company. I think that's -- you can read a lot into that.

But I think, look, with a 99.4% utilization on our assets, I don't think anyone, let alone our lenders, can ask for an operating performance higher than that. So the market is the market. We generated some positive cash flow in a working -- a worsening drybulk quarter. I think we are doing as good or better than most, and we just have to wait for the market to recover.

That's fair. Along the lines of the debt deal, you guys -- there are two conditional years on end of that term loan that matures in -- end of the year 2015 with two conditional extension years after that. Can you talk a little bit about what those conditions are, and who the holds those extension options and just a little bit of color there? Because that would really take that out beyond -- that's already beyond most of your peers; that would really kind of add some extension there.

Yes, no, it would push us well into 2017. It's a very simple hurdle rate, basically 80% loan-to-value.

Okay, 80% loan-to-value, then you would have this effectively your option

Right.

That's helpful. And finally, just to kind of go back from a high-level perspective, Soph, and you touched on this in your commentary, in talking about a potential recovery and the constrictive lending environment. And you said that basically that even in kind of the midst of a recovery, or as we start to recover, you still think we're going to see restricted lending environment.

That's pretty much the key point for any sort of bulk A scenario for the drybulk space, is it? You actually get some runway in terms where you can actually see some profitability without it being squashed by oversupply. So, maybe just a little color as to why you think we would actually see a restricted lending environment, even kind of a mid -- or a recovery scenario for drybulks, if you got rates that are profitable for 6 months to a year, why you think we are still going to see a restriction lending and we won't see another wave of supply.

It's probably -- a banker would be better positioned to answer the question than me, but I'll give it a shot anyways. I think the Dealogic numbers that I mentioned where you see a decrease of 38% of lending in shipping is really -- doesn't tell the full story.

And we didn't break it out, but if you were to sort of segment it by market, the bulk of the lending has really been to LNG and offshore. So there's really been a very concerted effort across the board to reduce lending and have lending occur in those two sectors, and not in the other sectors, one of which is drybulk. And I think even bankers publicly at conferences have supported that general view.

I think even in a recovering rate environment, and this is not an Eagle opinion, this is I think a consensus opinion and you see it in the financial press, we are still in a constrained environment globally with banking systems, not just the European banks, but also the American banks and the Asian banks. And it just takes a lot longer for people to get a loan. What used to take a month or two months now takes six months or a year or two years.

So I think even when lending does come back to drybulk, it's going to come back at a much slower pace, much, much slower, and secondly at a constrained pace. And I think that's just the new world reality that we are living in these days.

Got you. That's helpful. Thank you, I appreciate the time.

At this time there are no other questions in the queue. I'd like to turn the call back over to Mr. Sophocles Zoullas for your closing remarks.

I'd like to thank everyone again for joining us for our third quarter 2012 earnings call, and we look forward to keeping you updated on new developments in the future. Thank you very much, everyone.

Ladies and gentlemen, this concludes your presentation. You may now disconnect and have a good day.