Eagle Bulk Shipping Inc (EGLE) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Eagle Bulk Shipping Inc. reports first quarter 2013 results conference call. My name is Jo and I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions)

As a reminder, the call today is being recorded for replay purposes. Now I'd like to turn the call over to your host, 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 first quarter 2013 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.

On slide 3, you will note the agenda for today's call. I will first review our first quarter 2013 results and highlights. We'll then proceed with an update of our commercial operations, and finally, present our current views on the market. Adir will then give an overview of our financials, where we open the call to questions.

Please turn to slide 5 for a review of our financial results and highlights. The dry bulk market during the first quarter can be characterized as the tale of two halves. The first half of the quarter was negatively impacted by the flood of deliveries during the month of January and also by the lull of cargoes caused by the long Chinese New Year holiday, which fell in early January and early February this year. Post-Chinese New Year, Indonesian coal cargoes picked up and South American grain exports started to flow, providing support for both Supramaxes and Panamaxes. On the flip side, Capesizes continued to use experience severe pressure caused by the decrease in ton-mile trade for iron ore. Newbuilding deliveries, which are now way past their peak, totaled 21 million deadweight tons or approximately 250 vessels during the first quarter. This represents a decrease of 30% year-on-year. The Baltic Dry Index, or BDI, averaged 796 points for the first quarter, representing a decrease of 16% sequentially and a decrease of 8% year-on-year.

Turning to Eagle Bulk, the Company reported a net income of $1.4 million, or $0.08 per share, for the first quarter of 2013. Given our short-term chartering strategy, our earnings continued to be highly correlated to the spot market. Net revenue for the quarter was $72.2 million. EBITDA for the quarter amounted to $32.5 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 99.1%. Separately, I'm pleased to announce that the settlement with KLC resulted in a positive impact of $33.1 million for the quarter. Adir will go into this in a little bit more detail later on in the call.

Please turn to slide 7 for an update on our commercial operations. Eagle Bulk's fleet totals 45 vessels, comprised of 43 Supramaxes and two Handymaxes and is considered one of the largest and most homogeneous in the industry, with an average age of just 5.9 years. We employ an opportunistic and dynamic approach to chartering, utilizing a mix 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's a further improvement in normalization in charter rates. As of March 31, our chartering position for the remainder of 2013 was as follows. 20% of our fleet was either fixed on time charter or performing COA business. 1% was indexed to the Baltic Supramax Index, or BSI, 79% was open for charter.

On slide 8, we illustrate Eagle Bulk's cargoes for the first quarter, which totaled almost 4.9 million tons. The composition was 55% in minor bulks and 45% in major bulks. We continued to move a record amount of coal, which totaled 1.7 million tons during the period or almost 40% of total cargoes carried. To put this in context, this represents approximately 34 voyages. We primarily carried coal from Indonesia, destined for both China and India but we also moved product from both Colombia and the US. Other cargoes carried during the quarter included cement, representing almost 500,000 tons, grain and agricultural products, which totaled over 400,000 tons; and iron ore, representing close to 350,000 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 cargo using onboard cranes, for being able to navigate in smaller ports, and for its optimal size in matching cargo stems.

Please turn to slide 10 for a review of the industry fundamentals. As I mentioned earlier in the call, the first quarter was very mixed. The first half of the quarter was characterized by negative factors such as the seasonal spike in deliveries, which occurred during January and by Chinese New Year in February, which kept significant number of cargoes out the market as well. Rates for Supramaxes bottomed at $6,900 a day on February 13 and then rallied by 44% by the end of the quarter. Panamaxes realized a similar performance. The upturn in Supramax and Panamax rates during the second half of the quarter was primarily driven by a pick-up in the minor bulk and coal trades and by a record grain exports out of South America. For the full quarter, Supramax averaged $8,100 per day, representing an increase of 6% over the prior period, outperforming both Panamaxes and Capesizes by 15% and 34%, respectively. Panamaxes averaged $7,100 per day for the quarter while Capesizes averaged $6,100 per day. Supramax outperformance can be attributed to the better relative supply/demand fundamentals and to its flexibility, as outlined earlier.

Please turn to slide 11 for an update of the supply fundamentals. Scrapping of older vessels remains strong. Over 9 million deadweight tons equaling 150 ships, was scrapped between January and April of this year alone. We continue to believe the depressed earnings environment will drive owners of older tonnage to sell ships for demolition especially given strong scrap rates, which are still hovering around $450 per lightweight ton. Assuming the current pace of demolition will continue, we project that almost 30 million deadweight tons, or 4% of the fleet, will be scrapped this year. In regards to scrap candidates, there are approximately 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 remains by far the oldest in terms of number of vessels, which totals over 1,100, equating to 16% of the fleet.

On slide 12, we take a detailed look on past deliveries and future order books. As mentioned earlier in the call, newbuilding supply growth remains at high levels but deliveries are past their peak, which occurred during the second quarter of last year. April deliveries totaled 5.5 million deadweight tons, down 62% from their peak level in June. On the new order front, there has been a pick-up in contracts placed in 2013 as compared to last year. Orders placed during the first four months of this year totaled 15 million deadweight tons or 150 vessels. Almost 67% of this amount relates to Capesizes, 20% to Panamaxes and 6%, or just seven vessels, is linked to Supramaxes, and 7% to Handysizes as well. The order book, as a percent of the fleet outstanding, stands at just over 18%, down 77% since peaking in '08. We believe the majority of new orders placed this year relate to just a handful of large contracts and does not signify a general return to the newbuilding market. In addition, it is our understanding that shipyard capacity is now more or less full through 2015 at the top yards. Given this fact, we are of the opinion that the majority of buying will be in the secondhand market.

Please turn to slide 13 for a review of the current market fundamentals. The second quarter has been very much a continuation of the momentum exhibited during the second half of the first quarter, which we discussed earlier. Coal cargoes continued to pick up and South American grain exports continued to push the market for Supramaxes and Panamaxes even higher. Supramax rates broke through the $10,000 per day rate in late March, a seven-month high, but have since subsided a bit into the low $9,000s. The quarter-to-date average for Supramaxes is $9,400 per day, an increase of 16% over the prior period. Panamaxes have been averaging $8,800 per day, an increase of 24% over the prior period. Capesizes, however, continue to suffer, primarily from the lack of long-haul Brazilian iron ore cargoes. Rates are averaging just $4,800 per day, a decrease of 21%.

Looking forward to 2013, we believe risks relating to any serious macroeconomic shocks continue to abate. Vessel supply growth remains high but is coming off quickly. Demand remains firm but also choppy in the near term. As we've stated previously, we do not foresee the formation of a real recovery taking place but we do see something happening as early as the end of this year and into 2014.

On slide 14, we discuss long-term demand fundamentals. Our thesis has not changed, and we continue to view the fundamentals as strong, especially for coal. Global urbanization, as depicted in the chart on the left side of the slide, is expected to drive increased long-term demand for both the minor and major dry bulk commodities. Steel production is projected to increase 40% by 2020 leading to increased demand for both iron ore and metallurgical coal. Over 450 gigawatts of new coal fueled power capacity is expected to come online by 2017. This equates to over 1.4 billion in incremental coal demand, which will primarily be sourced from Indonesia and Australia. To summarize, we view the short-term fundamentals for the dry bulk market as remaining challenging but improving by the end of this year and into 2014. The long-term fundamentals remain robust. I will now turn over the call to Adir, who will review our financial performance.

Thank you, Soph. Please turn to slide 16. This is a summary on our first quarter results of operations. Our net revenue for the first quarter was $72.2 million, compared to $52.6 million for the first quarter of 2012. The year-on-year increase in revenue is due to the KLC settlement agreement that results a positive impact of approximately $33.1 million, which I will discuss in details shortly. Our operating income for the quarter was $24.8 million as compared to an operating loss of $7.5 million for the first quarter in 2012. Our cash interest expense for the quarter was $11.3 million compared to $9.8 million for the first quarter of 2012. Our non-cash interest expense for the quarter was $9.3 million that included PIK interest of $7.2 million and deferred financing costs of $2.1 million compared to only deferred financing costs of $1.1 million for the first quarter of 2012. EBITDA, is adjusted for exceptional items, as defined in our credit agreement, was $32.5 million for the quarter compared to $13.8 million in the first quarter last year. Net income for the quarter was $1.4 million, or $0.08 per share.

Please turn to slide 17 for a summary of our balance sheet. Cash at the end of the quarter was $19.3 million, an increase of $1.2 million quarter on quarter.

Please turn to slide 18 for an update on KLC. As we mentioned in our previous call, in the first quarter of 2013, we reached a comprehensive agreement for early termination of 13 charters out vessels to KLC. In addition, on March 28, 2013, the Korean court approved an amendment to the KLC rehabilitation plan after receiving a favorable vote from the concerned parties. Their amendment, among other changes, convert 90% of the [greatest] long-term receivables to KLC new shares and reduced the value of the existing number of shares by a ratio of 1 to 15. The positive impact on our financial statement from the KLC settlement includes a cash payment of $10.3 million; a release in a bank liability of $3.5 million; a deferred cash payment at a fair value of $2.7 million; a deferred revenue in fair value of charters related to KLC of $13.7 million; and KLC shares valued at $2.9 million. The total positive impact amounted to $33.1 million, of which we recognized $32.8 million in revenues, $3.3 million as a gain on time charter termination and realized loss of investment of $3 million. On May 9, 2013, we received our new shares in KLC and now we own approximately 5% of KLC outstanding shares, which are subject to six-months lock-up.

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

Thank you.

(Operator Instructions)

Chris Wetherbee, Citi.

This is Alex Hahn in for Chris. We wanted to know if the demand was supportive of the spot market rates going to the back half of the year? And when we can see rate recovery?

Hi, good morning. That's a great question. I would say the whole downturn in the market going back to the end of 2008, because it's been a very protracted bad market, has never really been a demand problem, apart from the first six months after Lehman Brothers, which was a dislocation in the banking system when there was demand for cargoes but people couldn't get bills of lading issued. So demand, in our view, has been pretty consistent throughout the last 4.5 years, that it's never been a demand problem. The problem's really been a supply problem. As I characterized in the remarks earlier, which we view as subsiding pretty quickly through this year, really end of this year into next year and by the summer of next year, quite rapidly. So our view on demand is that it's been stable throughout.

Our outlook on demand for the next year is good. As you know, because we typically see 20 to 25 different commodities, because we trade Supramaxes which carry every kind of dry bulk cargo, we feel we have very good visibility on dry bulk commodity demand, our view is that across all the commodities we see, there's generally healthy demand. The only thing I will comment is that we did notice a dislocation in the iron ore trade in the first quarter which impacted the bigger ships but it's only a small part of our trade. That's why we were able to move into a lot of other markets and also you saw us move more into the minor bulks of 55% of our cargoes carried, which is reflective of a weaker market where we move into the cargoes that the bigger ships can't carry. I hope that answers the question.

Yes. Definitely. Thanks. And just another question about KLC; are those issues now over? Or do you expect other settlements along the way?

Well, no one has a crystal ball, but we're feeling good about things. As you know, and as Adir mentioned, this settlement was approved by the courts in Korea so we're feeling pretty good about things.

Michael Webber, Wells Fargo.

You guys -- in your 10-K that you guys put out along with your results, which was really helpful, you gave some updated commentary around where you are with your covenants and what rates -- where rates were and where they could go and then how that plays with your covenants. Can you maybe try to quantify as we look at -- you talked to a potential improvement, a short-term improvement in the rate environment in the back half of the year, and then long-term fundamentals remaining solid. Can you talk to what rate you guys need to see in order to maintain compliance with the covenants through the Q1 '14 time frame? I know that's a tough question to answer but if you could give your best shot, that would be helpful.

I'll take that. So good question, Mike. I think the best way for us to answer that is, as you know, we probably put out more detail -- and as you highlighted, not just in the press release but also in our Ks and Qs. We put out everything. It's a very transparent company here, including charter rates on the fleets, ship by ship duration, we give you the BSI, you can look at the forward curve. We have given you all of the covenants. So rather than on the call, go through ship by ship charter rates, it's all out there. So I would say just, if you look at all of the data that I just mentioned, it's pretty easy to calculate.

Right. And I'm out of pocket right now but we, trust me, it's something we do calculate. I'm just trying to think about, from your perspective, if you're not expecting a rate improvement for the back end of the year and '14 is certainly still a question mark, how big is that delta? And then is that something that you're already having conversations with your lenders about and another set of waivers? You've got a fair amount of runway, from an analyst perspective, but the waivers certainly come back into play so just an update there?

No. I would say we differ a little bit with your view, which is we think that the way the market's moving, I can't tell you the magnitude of it but I think end of this year is better than beginning of this year. And we're feeling pretty good about 2014 right now. So I would say we're feeling -- we're generally feeling good about the market. Not that it's a great market today, but the trajectory of the market, as we outlined in the last call and this call, is about in line with what we expect.

Got you. Okay. You also mentioned in that same text in the K and the Q some other cost-saving measures and low hanging fruit -- just trying to get to bolster liquidity in your covenant compliance. Is that already reflected in your results or is that something you were referring to in terms of ability to block and tackle throughout the back half of the year and other ways you can try to fight for compliance?

What we did is last year, we put in place a cost-saving program. And from when we did it last year to the time you implement it, it takes a couple months. And I think what you guys are seeing in this result is the positive results of a program that we implemented last year. And it's meaningful and it's been very helpful to the Company in a tough market. And I think it's indicative of a proactive management team in a tough market.

In terms of what you're looking at through the back half of the year, is there a way to quantify what you think you could potentially save and what cash impact that could have?

Well, we -- I would say this quarter was a really great quarter in terms of our cost-saving program. But I would say, wait until you get another quarter. Wait until we report 2Q so you can get a run rate a little bit because I think that's what you're asking, right?

Effectively.

So I would say this is a great quarter for cost-saving, but probably wait another quarter to get a run rate.

Got you. Okay. Now, I guess beyond that and beyond a rate recovery in terms of just your overall liquidity and maintaining it and net cash position -- or not if it's a cash position, a net cash position certainly, is there anything else you see out there that you guys can do besides looking for improvement in pricing in blocking and tackling? The KLC shares, I think, they lock up in November. I'm sure you don't know what you do with those yet and if you did, you wouldn't want to talk about it, but anything else out there that you see that you could do to potentially bolster liquidity?

Well, look, the truth is, in this market, which, I mean, Q1 was a horrible beginning and an okay recovery towards the end, as I said. Look, I think the proof is in the results. We have an effective cost-saving program that we put into place in ' 12 that you've seen the results in Q1 of '13. We are very happy with the result of the KLC transaction that was approved in Korea recently. We're in the right asset class by far.

I remember when people were criticizing me a couple years ago about, why do we have the young Supramax fleet and why are we not in Capes? And I think the answer is pretty self-evident right now. Having a five-year-old fleet, one of the largest Supramax owners, having a global set-up and presence where we're able to do COAs Index and this dynamic charter strategy and stay short in tenor is where we want to be. Because when the market recovers, we don't want to miss it. We want to be participating in it.

Thank you for your questions. I would now like to turn the call over to Mr. Zoullas for closing remarks.

I would like to thank everyone again for joining us for the first quarter 2013 earnings call. And we look forward to keeping you updated of new developments in the future.

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