Eagle Bulk Shipping Inc.
Q2 2016 Earnings Call Transcript

Published: 9 Aug 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2016 Eagle Bulk Shipping Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Eagle Bulk’s CEO Mr. Gary Vogel. Mr. Vogel, you may begin.

[Gary Vogel:]

Thank you and good morning. I’d like to welcome everyone to Eagle Bulk’s second quarter 2016 earnings call. This is my first call as CEO since joining Eagle last September and I welcome the opportunity to share our results with you, and I’m excited to be able to share with you the developments and our plans for Eagle Bulk for the future. To supplement our remarks today, I encourage participants to access a slide presentation that’s available on our Web site at www.eagleships.com under the Investor Relations tab and then Events & Presentations. 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 turn to Slide 3 of the presentation. Before we proceed with the discussion regarding our recent results, business initiatives and market commentary, I’d like to take a moment to reintroduce Eagle Bulk. Eagle is a Stamford, Connecticut Bay ship owner operator focused on the Supramax as a class within the drybulk sector. We own a fleet of 41 vessels totaling almost 2.3 million deadweight tons making us the third largest owner of Supramaxes in the world after only Chinese-based COSCO and NYK from Japan. Management of the fleet both commercial and technical is now done completely in-house from our offices in Stamford, Singapore, and as of this week Hamburg, Germany. Please turn to Slide 4 for a brief discussion on the company. Eagle's own fleet of 41 vessels is including the Kittiwake which is currently under contract to be sold. Our fleet’s one of the largest and most homogeneous in the industry. And as we continue to execute on our vessel renewal program selling off some older ships and purchasing newer and more efficient ones, the composition of our fleet will only improve allowing us to better serve our customers and create more value. A bit later on the call I’ll provide some more detail on our company business model. On Slide 5, you will note the agenda for today's call. I will first provide you with an overview of our second quarter’s 2016 results and highlights. Our CFO, Adir Katzav will then discuss our financials and liquidity. And following this, I will provide you with an update on industry fundamentals before we open the call to questions. Please turn to Slide 7. After the drybulk market hit an all-time low in February on the back of sluggish demand and a flood of newbuilding deliveries, rates experienced a material recovery during the second quarter. The improvement in spot market can be attributed to a number of factors, including an increase in iron ore imports and steel exports by China and grain exports out of the Black Sea and East Coast South American regions. There was also pickup in certain minor bulks such as cement as well as pet coke exports out of U.S. Gulf, primarily destined for India all of which are important to the Supramax sub-segment of drybulk. On the supply side, newbuilding deliveries totaled 10.7 million deadweight tons during the second quarter or approximately 130 vessels. Demolition of older tonnage amounted to 8.2 million deadweight tons during the quarter or roughly 120 vessels. The Baltic Supramax Index or BSI averaged approximately 5,800 per day for the second quarter, a significant increase of roughly 52% quarter-on-quarter but still at a historically depressed level. Please turn to Slide 8. For the second quarter of 2016, Eagle Bulk generated net revenues of 25.6 million and net loss for the second quarter was 22.5 million or $9.98 per share taking into account the recently affected 1-for-20 reverse share split. Performance was primarily driven by the weak rate environment during the period. It was also impacted by the residual effect of operating under various forbearances which were only resolved on March 30, as part of our comprehensive balance sheet recapitalization. Subsequent to June 30 close of the second quarter, the company raised 88 million of growth capital via a common stock private placement, the details of which I will discuss later. Also, as previously announced, Eagle sold and delivered the Harrier to her new buyer and entered into an MOA for the sale of the Kittiwake. In total, the sale of these vessels plus two others earlier this year will generate a total of more than 7.4 million in incremental liquidity plus approximately 2.6 million in drydock CapEx savings. As mentioned at the start of this call, I joined Eagle Bulk in September having spent the last 28 years of my drybulk career in drybulk shipping. My overall vision for Eagle is to become the premier drybulk owner-operator, and I would like to take a few moments to convey to you what that means and some of the initiatives we’ve executed on since last fall. Please turn to Slide 9. The primary driver behind transforming our business model is moving from being a tonnage provider, which we view as essentially an outsourcing of commercial business to an owner-operator model where we primarily contract vessels directly with end users and actively manage our fleet. This chart graphically depicts some of the key aspects of the owner-operator model, which we are actively utilizing. Our evolution into establishing a more robust and sophisticated commercial platform which benefits from having a large and homogeneous fleet such as ours will provide us with the ability to optimize earnings and extract more value from our fleet the benefit of our shareholders. We believe our evolving ability to operate within higher spread business spectrums uniquely positions Eagle amongst the U.S. listed peer group. In support of this business transformation we've added some key professionals. Bo Westergaard joined Eagle as our new Chief Commercial Officer with responsibility for all chartering and operations globally. Bo brought to Eagle 24 years in drybulk shipping and his relatively short time with the company has already been able to elevate our performance on the commercial side. We also brought in Per Mølris in December as our new Head of Technical Management. In the six months since his arrival, Per has successfully focused on both lowering our OpEx costs while at the same time elevating the condition and reliability of our fleet. Additionally, we recently completed bringing all of our vessels under in-house technical management which we believe will enable us to better control both cost and quality. Subsequently, we created a new function for fleet performance and optimization with the singular objective of maximizing our vessels performance across the fleet and saving fuel. This past March, we moved into our new headquarters based in Stamford, Connecticut. Apart from the fact that we relocated into an appropriate new space in the drybulk shipping community of Stamford, we’ve been able to reduce our annual lease cost by 700,000 per year going forward. Lastly, and as reported recently, we’ve established a new commercial office in Hamburg which will open officially for business tomorrow. Having a presence in Europe is an important and essential step in our path toward becoming a global owner operator and will allow us to better serve our customers in that region and around the world. Please turn to Slide 10. Of course, an essential part of our ability to execute on our commercial strategy is to have the balance sheet and liquidity to make it happen. Adir will provide details as to the terms of our March 30 recapitalization, but I’d like to take a moment to speak about the recently announced equity raise. In early July, Eagle reached a definitive agreement to issue stock via a private placement raising $88 million in gross proceeds. While the raise was well supported by existing shareholders, it's noteworthy that 25 new shareholders participated representing roughly 40% of the new capital. The company intends to use the proceeds for growth opportunities taking advantage of the current low asset prices as well as for general corporate purposes. We’re extremely pleased that we’ve been able to raise growth equity in the current market environment, especially so soon after our recapitalization. We believe this is a testament to Eagle's unique and evolving story and we thank all of our shareholders, both old and new, for their support. I will now turn the call over to Adir who will review our financial performance.

[Adir Katzav:]

Thank you, Gary. Please turn to Slide 12 for a summary of our second quarter results of operations. Our net revenue for the second quarter was $25.6 million compared to $22.7 million in the second quarter of 2015. The year-on-year increase in revenue is due to higher number of freight voyages and an increase in available days due to chartered in vessels offset by lower spot charter rates. Our operating loss for the quarter was $17.3 million compared to an operating loss of $24.4 million for the second quarter of 2015. Our cash interest expense for the quarter was $2.3 million compared to $2.5 million for the second quarter of 2015. Our non-cash interest expense for the quarter was $2.6 million which includes peak interest on the Second Lien loan of $2.1 million. For the second quarter of 2016, the company recorded a net loss of $22.5 million or $9.98 loss per share compared to net loss of $27.5 million or $14.62 loss per share for the second quarter of 2015. Please turn to Slide 13 for a summary of our balance sheet. Cash at the end of the quarter was $11.9 million. Our total liquidity was $46.9 million which includes $35 million of undrawn credit facility. In addition, previously reported, we raised an additional $88 million in gross proceeds for a common stock private placement in the third quarter of 2016. As of June 30, 2016, out total debt outstanding excluding $6.3 million of amortized debt issuance costs was $264.8 million. Please turn to Slide 14 for a summary of our debt restructuring. As we previously announced, the company and its lenders reached a comprehensive agreement that amended the terms of our financing facility and has provided us with a greater improved ability to navigate through the downturn of the shipping cycle without compromising our ability to benefit when the market does recover. Under the First Lien agreement, we established a newly formed [ph] wholly-owned subsidiary Eagle Shipping LLC that substantially assumes all the assets and liabilities of the company. The agreement provides for a term loan in amount of $189.75 million after principal payment of $11.72 million, as well as $50 million revolving credit facility of which $9.8 million was drawn at the closing. The First Lien agreement contains semiannual cash sweeps in 2017 and 2018 and no fixed amortization until 2019. The minimum liquidity under the First Lien agreement is $8.1 million. In addition, asset sales are allowed subject to VMC conditions as defined in the First Lien loan agreement. This includes 50% of the first $60 million of vessels held for sales being retained by Eagle Shipping LLC. We also reached an agreement with certain existing equity shareholders and third-party capital providers for a Second Lien loan. This agreement provides for a term loan in amount of $60 million and peak interest at a rate of LIBOR plus 14% per annum. The principal and peak payments are due until a maturity in Q1 2020. Please turn to Slide 15 for our six months actual cash breakeven. Our daily vessel operating costs was $4,829 per day. Our cash G&A expense was $1,077 per day. Our drybulk cost was $257 per day. And our cash interest expense was $605 per day. The total cash breakeven for the first six months was $6,868 per vessel per day. Our total expected vessel operating cost for the second half of 2016 is $4,850 per vessel per day. Please turn to Slide 16 for our drydock costs. For the next year, we have minimal cash requirements for drydock costs. We completed a drydock for six of our vessels in the first half of 2016 and we expect to drydock an additional four vessels during the second half of 2016. Our expected drydock costs for the second half of 2016 is $650,000 per drydock per vessel. I will now turn the call over to Gary for an industry update and closing remarks.

[Gary Vogel:]

Thank you, Adir. Please turn to Slide 18. As I mentioned earlier on the call, scrapping of older tonnage has been an important factor so far this year in improving the supply side fundamentals. Year-to-date, 309 ships equating to approximately 23 million deadweight tons have gone to demolition. We’re estimating that the total for 2016 could easily reach 40 million deadweight tons. While lower than the 60 million run rate from the first quarter, it would still mark the highest on record equating to just over 5% of the on-the-water fleet. On Slide 19, we discuss forward supply. Excluding the VLOC newbuilding orders placed, there’s been virtually no new ordering of traditional drybulk ships this year. This is primarily explained by the fact that secondhand tonnage is trading at a significant discount in newbuildings as well as that financing remains very difficult to access. And unless charter market posted drastic and sustainable recovery in the short- to medium-term, we don't expect to change in the relative value hierarchy. With new orders coming off significantly from that 2013 highs, the order book is shrinking rapidly and currently stands at approximately 15% which is at a 12-year low. It's also important to note that within this 15% order book figure, there are a significant number of existing orders that will likely never get delivered either because buyers are walking away from deposits or yards are simply not able to build due to their own financial troubles or constraints. So it is our view that the reported order book figure today is effectively overstated implying that supply side fundamentals may actually turn out better than expected. With continued high scrapping and decreased newbuilding deliveries, net supply growth is expected to be marginal this year of no more than 1%. On Slide 20, we provide an overview of trade demand. As mentioned earlier on the call, Chinese iron ore imports have been relatively strong this year, thanks to accommodative measures put in place by the Chinese starting back in 2015. On the top left-hand corner we depict monthly Chinese iron ore imports and a 12-month year-on-year change. As you can see, the current uptrend in Chinese imports started back in October and with iron ore representing approximately 30% of the total drybulk trade, there’s no doubt this has been supportive for the market. But with Chinese iron ore stocks roughly 105 million now, the highest since December of 2014, it remains to be seen whether this import momentum continue in the short term. Chinese steel production is marginally lower by 1% over the first six months of 2016 as exhibited in the lower left-hand corner chart. However, steel exports remain elevated and increased by 10% in the same period, even with the implementation of tariffs in some countries. This is of particular note for Eagle since the majority of steel, the minor bulk is carried on tonnage, such as Supramaxes. On the coal side, fundamentals remain weak on the back of sluggish demand from both Europe and India, albeit there have been some signs of improvement. Chinese coal imports peaked in 2013 falling precipitously by 38% through 2015 and low expectations for a further decrease in '16 due to China's attempt to lessen its reliance on a commodity, imports have been holding firm year-to-date and are actually currently on a run rate as opposed to a slight increase over 2015. This is due to a substitution of imported coal and replacement of domestic production cuts. As can be seen in the lower right-hand graph, on the grain side, China’s trade has been very robust on the back of record global production and low commodity prices. Of particular note for Supramaxes, wheat exports from Ukrainian and Russian Black Sea ports are at record levels this year-to-date. Similarly, minor bulks which make up approximately half of the trade for Supramax class vessels continue to generate consistent trade demand and this one of the primary reasons why Supramax rates have been relatively resilient and been able to broadly outperform the larger asset classes. Please turn to Slide 21. Although supply growth has been a major driver for capping drybulk rates in recent years, it’s the combination of that supply with deteriorating demand that has put such an intense pressure on the market over the last 12 to 18 months. Trade demand is expected to grow at just 1.1% for 2016 versus its previous three-year average of 3.5%. The current ratio of drybulk trade growth to GDP appears to be well out of sync. It’s currently at a ratio of 0.2 as compared to the long-term historical average of 1.3. Any normalization to this ratio should imply a material recovery in drybulk demand in the medium term. I do know we’ve covered a lot of territory today and before we open it up for questions, I want to conclude by offering three takeaways as follows. One, due to the recapitalization of recent equity raise we have the foundation in the liquidity to both endure and invest at this point in the cycle to ensure we’re well positioned for a market recovery. Two, our transformation of the business model of Eagle Bulk to an active owner-operator is well underway. And three, we believe our actions over the last nine months have demonstrated management's ability to execute and has provided Eagle with a distinct competitive advantage. I’d now like to turn the call over to the operator and answer any questions you may have. Operator?

[Operator:]

[Operator Instructions]. There are no questions at this time. I’d like to turn the call back over to Gary Vogel, CEO, for any closing remarks.

[Gary Vogel:]

Thank you. With that, I’d like to thank everyone for joining us today for our quarterly earnings call, and wish you all a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.