Eagle Bulk Shipping Inc (EGLE) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Eagle Bulk Shipping Inc. report fourth-quarter and full-year 2012 results conference call. My name is Shalane, and I will be your operator today. At this time, all participants are in listening-only mode. We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. And now, I would like to hand the call over to the CEO, Mr. Zoullas.

Thank you, and good morning, everyone. I would like to welcome everyone to Eagle Bulk Shipping's fourth-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 risks and uncertainties. You should not place undue reliance on these forward-looking statements. We refer all of you to our filings with the SEC 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 fourth-quarter 2012 results and highlights. We will then proceed with an update on our commercial operations, and we will finally present our current views on 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 dry bulk market remained under pressure during the fourth quarter on the back of continued heavy supply growth. Demand remained healthy, but also choppy due to seasonal and weather-related factors. Newbuilding deliveries, which peaked during the second quarter of 2012, totaled 14.5 million deadweight tons, or approximately 185 vessels in the fourth quarter. This represents a decrease of almost 29% sequentially and 37% year on year.

Trade demand was mixed during the fourth quarter. The larger vessels found some support from the seasonal rebound in iron ore cargoes, while Panamaxes and Supramaxes struggled due to weak grain exports out of the US, which experienced one of its worst droughts in over 50 years. In addition, a short-term decrease in Indian coal exports put additional pressure on rates for the mid-sized ships. The Baltic Dry Index, or BDI, averaged 953 points for the fourth quarter, representing a modest increase of just over 10% sequentially, and a decrease of 51% year on year.

Turning to Eagle Bulk. The Company reported a net loss of $32.4 million or $1.92 per share for the fourth quarter of 2012. Earnings for the period were primarily impacted by the Company's exposure to the depressed spot market. Net revenues for the quarter were $42.8 million. EBITDA for the quarter amounted to $9.7 million, and 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 largest, most homogenous in the world, with an average age of just 5.6 years. As we have stated in the past, we employ an opportunistic and dynamic approach to chartering, utilizing a mixture of long-term timecharters, 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 December 31, our chartering position for the full-year 2013 was as follows -- 14% of our fleet was either fixed on timecharter or performing COA business; 1% was indexed to the Baltic Supramax Index, or BSI; and 85% was open for charter.

On slide 8, we illustrate Eagle Bulk's cargoes for the fourth quarter, which totaled almost 4.4 million tons. The composition was 55% in major bulks, and 45% in minor bulks. We once again moved a record 1.8 million tons of coal during the period, representing 36 voyages. We primarily carried coal from Indonesia destined for both China, and to a lesser extent India, but also moved product from South Africa, Australia, and the US Gulf. Other cargoes carried during the quarter included sand, representing almost 500,000 tons; cement, which represented approximately 420,000 tons; and agricultural products, representing close to 400,000 tons. In total, we carried over 20 different cargoes during the quarter. This can be attributed to the Supramax's known versatility in being able to load and discharge cargoes using on-board cranes, for being able to navigate into smaller ports, and for its optimal size and matching cargo stems.

Please turn to slide 10 for a review of industry fundamentals. The dry bulk market for 2012 can be characterized by solid demand trade growth of 6%, but even greater vessel supply growth of almost 10%, with the effect of driving rates lower across the board. On the demand side, all major dry bulk categories realized solid year-on-year increases in growth, with coal posting an impressive 11% increase. On the supply side, we had a large increase in the world's dry bulk fleet, with Panamaxes and Capesizes representing the bulk of this growth. At the same time, it was another record year for scrapping, with almost 34 million tons or 6% of the world fleet taken out of the market.

At the bottom of slide 10, we depict average annual spot rates for the three major asset classes. 2012 was a challenging year for dry bulk as a whole, with Supramaxes outperforming both the larger Panamaxes and even Capesizes. Supramaxes averaged $9,500 per day in 2012, representing a decrease of 34% over the prior year, and an outperformance of both Panamaxes and Capesizes of 23%. Panamaxes averaged only $7,700 per day in 2012, posting a 45% decrease year on year. And Capesizes also averaged only $7,700 per day in 2012, representing a decrease of 51% as compared to the prior year. Supramax outperformance can be attributed to better relative supply/demand fundamentals, and to its flexibility, as described earlier.

Please turn to slide 11 for an update on the supply fundamentals. After two record years for scrapping, the appetite to demolish old ships remains very strong. Approximately 4.8 million deadweight tons were scrapped in January and February alone of this year. We believe the depressed earnings environment will continue to drive owners of older tonnage to sell their ships for demolition, especially given strong scrap rates, which are currently hovering around $450 per lightweight ton. Assuming the current pace of demolition continues, we project that almost 30 million deadweight tons, or 4% of the world fleet, will be scrapped this year.

In regards to scrap candidates, there are currently over 1,500 vessels which fit our scrap candidate criteria. On the right-hand side of the slide, we depict the current profile of the scrap candidate fleet by asset class. The sub-Panamax segment is by far the oldest, both in terms of number of vessels, which totals almost 1,200, and as a percent of fleet, which is just over 16%.

On slide 12, we take a detailed look at past deliveries and future order book. As we discussed earlier, newbuilding supply growth remains at high levels, but deliveries are past their peak, which occurred during the second quarter of 2012. February deliveries totaled 3.9 million deadweight tons, down 72% from their peak level in June. New orders placed in 2012 are down 77% year on year. Reasons for this include the ongoing depressed rate environment and the relative attractiveness of secondhand vessels. The lack of traditional bank financing is also playing a pivotal role in the rapid reduction of the new order book. The order book as a percent of the fleet outstanding now stands at just over 18%, down 77% since peaking in 2008. We believe the order book will continue to run off over the course of 2013, paving the way for a potential recovery in rates as early as later this year.

Please turn to slide 13 for a review of the current market fundamentals. The dry bulk market so far this year can be broken down into two phases or periods -- pre- and post-Chinese New Year. Before Chinese New Year, the market was impacted by both a flood of deliveries in January, and muted cargoes due to the holiday season. It is common for owners taking delivery of newbuildings towards the end of a calendar year to push off receipt of the vessel until the following calendar year. This phenomenon is called the January Effect. Owners do this because vessels are stamped by the year of delivery. So, a January delivery will be considered one year younger than a December delivery. 10 million deadweight tons, or 120 vessels, were delivered in January, versus 3.2 million deadweight tons, or 38 vessels, in December. The flood of supply in January negatively affected rates.

On the trade demand side, it is common for there to be a lack of cargoes between Christmas, New Year, and Chinese New Year. This also negatively impacted rates. Supramaxes started the year at $7,700 per day, and reached a low of $6,900 per day on February 13. Since then they have rallied by 45% to $10,000 per day, the highest level since August last year. This rebound in rates can be attributed by both a plummet in deliveries since January, and a record harvest in South America, which tends to benefit both Supramaxes and Panamaxes. Deliveries in February plummeted [61]% month on month to reach 3.9 million deadweight tons. Looking forward into 2013, and barring any macroeconomic shocks such as a breakup in the Eurozone, we expect the dry bulk market in the short term to remain choppy. But, as we stated previously, we do foresee the formation of a real recovery taking place as early as the end of this year, or next year. Our view is based on the continued strength in trade demand and a lower supply growth going forward.

On slide 14, we discuss the long-term demand fundamentals for coal and iron ore. Our thesis here has not changed, and we continue to view the fundamentals as very strong, especially for coal. Global urbanization, as depicted in the top right-hand corner chart, is expected to drive increased long-term demand for dry bulks. Minor bulks and agricultural trades are projected to grow at a respectable long-term average 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-fired power capacity is scheduled to come online by 2016. This equates to over 1.2 billion tons in incremental coal demand that we believe will primarily be sourced from Indonesia and Australia. To summarize, we believe the short-term fundamentals for the dry bulk market remain challenging, but improving by the end of this year and into 2014. The long-term fundamentals remain robust.

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

Thank you, Soph. Please turn to slide 16. This is a summary on our fourth-quarter results of operations. Our net revenues for the fourth quarter were $42.8 million, compared to $70 million for the fourth quarter of 2011. The year-on-year decline in revenues is primarily due to lower charter rates and a decrease in [voyage] charter's revenues. In addition, we did not charter in any vessels during the fourth quarter of 2012, compared to 182 days during the fourth quarter of 2011. Our operating loss for the quarter was $10.8 million, compared to operating income of $9.2 million in 2011.

Our cash interest expense for the quarter was $12.2 million compared to $10.2 million in the fourth quarter of 2011. Our non-cash interest expense for the quarter was $9.4 million. That includes PIK interest of $7.3 million and deferred financing cost of $2.1 million, compared to only deferred financing cost of $1.2 million for the fourth quarter of 2011. EBITDA as adjusted for exceptional items as defined in our trade agreement was $9.7 million for the quarter, compared to $30 million last year. Net loss for the quarter was $32.4 million or $1.92 per share.

Please turn to slide 17 for a summary of our balance sheet. Cash at end of the quarter was $18.1 million, which was flat quarter on quarter.

Please turn to slide 18 for an update on KLC. During the first quarter of 2013, we reached a comprehensive agreement of which we accepted an early termination of the 13 charters out to KLC. In addition, on March 28, 2013, the Korean court approved an amendment to KLC rehabilitation plan after receiving a favorable vote from the concerned parties. The amendment, among other changes, convert 90% of the creditor's long-term receivable to an equity. In return, we received the following consideration from KLC -- a cash payment of $10 million; a cash equivalent payment of $3.8 million; a deferred cash payment of $5.5 million to be paid in installments; and common shares in KLC of approximately 5% holding.

This concludes our presentation. Now we will turn the call to the operator to take your questions.

(Operator Instructions)

The first question comes from Natasha Boyden from Global Hunter.

Thank you, operator. Good morning, Soph, Adir. How are you?

Hi, Natasha, how are you?

Good, thank you. Soph, I am just wondering, maybe you can help me. I am just a little bit confused on one point. On page 18 of the presentation, you say you have $5.5 million of delayed cash installments through 2021. In the press release, it says the balance is $53.7 million through 2021. What am I missing there?

Okay. What has happened on March 28, a part of KLC process of amended their rehabilitation plan, they convert 90% of the long-term receivable to equity, and the remainder, 10%, which is about $5.1 million will be in cash. So the $53 million that you have, plus the $2 million that we have in addition of long-term receivable which total was $55 million, converts to 10% a long-term receivable and 90% of that to equity.

And Natasha, as we mentioned, that just happened on Thursday last week.

Okay. So just again to clarify, so you are saying the 90% is equity, it is not cash?

Yes.

Okay. All right. That's helpful. Thank you. Also, just remaining on the KLC agreement here I guess, can you just talk about how this was arrived at, sort of the time period, eight years? I think in the press release again, you say it is sort of back-end loaded. How is that arrived at, and -- I mean, that is basically the question. How did you really decide on that?

Sure. I would say we were a little bit subjected to the court system in Korea and Seoul. So it was a little bit -- if you want to know the truth, it was a little bit of a black box for us sitting here in New York. But it was a very complex process, that as you know went over a period of over 12 months, and involved all of the interested parties in Korea Lines. It involved multiple court hearings over multiple months. But was ultimately punctuated with a decision that Adir just mentioned on March 28, that we think will be the final if you will, the final deal for Korea Lines. But again, our visibility on this wasn't tremendous, just because it was all being done in Korea.

So the eight year period I guess, was that court implemented or was that an idea that KLC arrived at?

That was something, I would say that was done between Korean Lines, the bankruptcy administrator and the Korean courts. So we didn't have any input in that.

Okay. Fair enough. Fair enough. Can you just talk a little about -- just shifting gears entirely. There has been a space of fairly high profile newbuild orders recently. And I am just wondering if you have seen any of that trickle down to the Handy, Supramax segments?

That is a great question. We have been very aware of that. And as you note, the couple of orders have all been pretty much in the Capesize market. And there has been really one player who has been very active and taken a lot of the press coverage of his ordering activity. We haven't seen that in our market, to answer your question directly. And we also think if you look at the global picture for newbuild orders, the orderbook is significantly reducing, even taking into consideration the new ordering. So I would say the market can handle one or two big guys coming in and doing big orders. We just don't want 10 doing it.

Well, that's for sure.

Yes.

Okay. So thank you very much for your time.

Thank you very much. The next question comes from Christian Wetherbee from Citi. Please go ahead.

If I could --

Go ahead. Your line is open.

Sorry. Can you hear me?

Yes, yes, we can hear you.

Okay. Yes. So this is Seth Lowry in for Chris.

Hi, Seth.

Hi. If I could stay on the KLC settlement, I was just wondering, do you have -- I mean, if you were to say mark-to-market the new KLC equity stake, do you have an estimate for how much that could be? And then, I was also wondering is there a potential to monetize that stake in the near future? Are there any restrictions for doing that?

Yes. We have a restriction to trading later this year. I think like with any public equity that is going to be free for trading, it is a little bit -- you tell me where the stock market in Seoul is, I will tell you where the share prices are. So we are waiting as you are, to see how this stock trades. We are -- we believe that having a stake in the Company after this restructuring will have some value. And over time as the market in dry bulk recovers, we believe the value of our share in that Company will also recover. But we don't have a lot more visibility than you do right now. And we are waiting to see how the stock will trade, as it starts to trade, and as we are able to trade our -- the security later this year if we want to.

Okay. And are you free to sell at the market, or is there any sort of restrictions for selling in their stock market with -- given the level of the ownership stake you have?

We would be free to sell in the market. We are not sure yet if there would be any lock-out period or not.

Okay.

Yes.

All right. If I could switch gears to your fleet then. It seems like -- I mean, it seems like you continue to execute your strategy of chartering your vessels opportunistically, and keeping the duration short in order to gain leverage to improving fundamentals. But it seems like there is a fair amount of your vessels, at least for this quarter that ended charters in January and have subsequently rechartered of -- I think the footnote said up to six months. I am just wondering -- have all those vessels been chartered? Are there any in lay-up? Do you think it makes sense to lay-up any of the vessels? And finally, if -- are the market rates that you have gotten I guess for this next chartering period post-January comparable to the previous short-term charter rates you have achieved?

Okay. Wow, that's a --

Sorry.

No, listen, a great series of questions. If I miss anything, feel free to remind me if I didn't get all of those points.

Sure.

So it was funny, in 2006, 2007 and 2008, when the market was really great, and people were pushing us to buy Capes and to buy older ships. And we stayed true to our mantra that we want to stay laser-focused on Supramaxes and having a five-year-old fleet. And I told people -- and I said the reason for it, is when the markets collapse -- and this is a cyclical industry, it will happen eventually, this is the best asset class to be in, because they outperform the bigger ships, and they can generate the most cash in a bad market in real terms. Nobody believed me five years ago. And it has been true for all of 2012. It has been true so far for 2013. If you want to be in dry bulk, the type of ship you want is a young Supramax.

So specifically, we have not laid up or do not intend to lay up any of our fleet because, A, it is the right type of ship in this kind of market, and B, it is a very young fleet. And C, I would I say, because we have a branded product. We have -- as a service provider, we can do a lot of deals with end users that Supramax owners, if they only had one, two, three or four ships couldn't do. That creates real value, the sort of firm value if you will of Eagle Bulk that other people can't replicate. So we remain positive on our asset class, partly because of how the ships are flexible, but also because of their age and the composition of the fleet. And we continue to believe that these ships will be outperforming going forward.

What -- to answer one of your other questions, the charters we did in the sort of Christmas period into January and maybe even the beginning of February, as I noted in my remarks, the real low point in Q1 was reached sometime in February. Those will be reflected as lower charter rates. It has really been from mid -- from the second half of February through now, that we have seen this pickup of 45% in charter rates that has been a real breath of fresh air in the market. And we think we are doing the right strategy having an office in Singapore, where about two-thirds of our ships are deployed, gives us the flexibility to do these COAs and stay close to our end users which we find very helpful. And we are going to continue to stay short, with the market rates this low, until we see things in the teens again. And then we are going to start to go longer in tenure.

Okay. Okay. That's fair enough. Thanks for the time.

Thank you very much. The next question on the line is from Urs Dur from Clarkson Capital Market. Please go ahead. Your line is now open.

Hi. Good morning.

Yes, hi, Urs.

Hi. Times remain tough. Fleet is still young. But can you remind us of the dry-dock schedule for this year, and what kind of cash is going to be utilized for that? And then possibly, if you have an outlook even for next year?

As you mentioned, Urs, the fleet is young. So we are not expecting to have a tremendous cost for dry-dock for the next year. Our budget is about $4 million for the next year of cost in dry-dock.

And Urs, just to add, and a lot of people I think aren't necessarily aware of this. When an owner goes to dry-dock a vessel, and you go in with your budget, the things that typically really throw your budget off where you budget say, $500,000, it goes to $1.5 million, these like really outlier surprises. And especially on the bigger ships more than the smaller ships is when you have steel replacement. So steel replacement really doesn't kick in to a fleet until the ships start to get to be somewhere over 10, say, 15 years of age. So we feel that with a young fleet that is basically going in for maintenance stuff, not steel replacement, those numbers tend to be pretty accurate and more manageable than, say, if we were running a 15-year-old fleet. I hope that is helpful color for the people on the call.

Yes. No, I generally recognize that. That is why I mentioned the fleet's young. I just wanted to see -- because you have got a situation where the market is poor. And it doesn't look like it's significantly more materially changed for 2Q as of yet. And the outlook remains tough, because the delivery schedule for Panamax and Supramaxes is tough this year. So it looks like rates are going to be tough for some time, at least for a good portion of the remainder of this year, which is not a surprise to anybody. And I am sure not to you. But just wanted to look at where you are in the cash side of things.

And I guess that leads into the next main question, if you could remind us where you stand in regards to your debt covenants, how much runway do you have left? Just remind us where you stand on the various issues since your restructuring last summer?

As far as our covenants for 2013, we believe with the current rates, charter rates, we will be -- comply with our covenants for this year.

Okay. Fair enough. Thank you for your time and good luck. Thanks.

Thanks, Urs.

Sir, you have no further questions at this time. I would now like to turn the call over to your host, Mr. Zoullas. Thank you.

I would like to thank everyone again for joining us for our fourth quarter 2012 earnings call. And we look forward to keeping you updated of new developments in the future. Thank you.

Thank you for your participation in today's conference call. This conference call is now concluded, and I wish you all a good day. You may now disconnect your lines.