Eagle Bulk Shipping Inc.
Q2 2007 Earnings Call Transcript

Published: 10 Aug 2007

[Operator:]

Good day ladies and gentlemen, and welcome to the second quarter 2007, Eagle Bulk Shipping Incorporated earnings conference call. My name is Dane and I will be your operator for today. At this time all participants are in listen only mode. We will conduct a Question-Answer session towards the end of this conference. If at any time during the call you require assistance please press *0 and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Sophocles Zoullas, Chairman and CEO. Please proceed.

[Sophocles Zoullas:]

Thank you and good morning. I would like to welcome everyone to Eagle Bulk Shipping Second Quarter 2007 earnings call. It has been an eventful and very productive time since our first quarter update to the investment community, and there is a good deal to review today. So, I encourage participants to access a slide presentation that is available on our website at www.eagleships.com. Please note that part of our discussions 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 on the risks and uncertainties that may have a direct bearing on our operating results, our performance, and our financial conditions. Please note on Slide 2, the agenda for the call will follow our usual format. After my opening remarks, I will discuss the second quarter highlights, and then provide an updated review of our fleet and the industry. During this discussion, I will review our $1.1 billion fleet acquisition that we announced July 25th, which currently secures Eagle Bulk’s position as a leader in the Supramax market, which we believe is the best asset class to capitalize under growing demand from multiple commodities in multiple regions around the world today. Our CFO, Alan Ginsberg will then discuss the company’s financial performance. I will then end the management discussion with some concluding remarks before taking questions. Please turn to Slide 4 for the second quarter highlights. During the quarter, our net income increased 27% quarter-on-quarter to $11.9 million or $0.29 per share. Our gross time charter revenues increased 18% during the same respective period to $31 million. EBITDA as defined in our credit agreement was also up 17% on quarter-on-quarter to $22.3 million and we recently paid a second quarter dividend of $0.47 to our shareholders. To date, we have returned a $145 million equating to $4.10 a share to our shareholders in eight quarters. During the quarter, we continued our growth objectives, as we took delivery of three young Japanese built Supramaxes which we acquired in February of this year for $138.7 million, a highly favorable price relative to current values for second hand ships. We also expanded our new building program from four to five sister ships at one of Japan’s pre-eminent shipyards, INI Marine United. Lastly, with a Supramax fleet acquisition announced on July 25th, and a minimum of $1.2 billion of revenue secure on Eagle Fleet, we are able to target a $0.50 quarterly dividend with aspirations to grow this over time. Slide 5

[Alan Ginsburg:]

Thank you Soph. Slide 16

[Sophocles Zoullas:]

Thank you, Alan. In conclusion on slide 21, Eagle Bulk continues to deliver on its successful growth strategy. This strategy has clear benefits to our shareholders as the greatly increased contracted revenues of approximately $1.2 billion secure the dividend over the long term. Furthermore, the accretion to our cash flow as the new ships deliver into our fleet allows us to pay down debt, look to grow our dividend in the future, and maintain the balance sheet strength we need to continue to opportunistically pursue growth opportunities. Eagle Bulk’s recent acquisition also affirms this management team’s ability to execute the types of transactions that affirm our status as a consolidator in the dry-bulk industry. In the two years since our IPO, the Eagle Bulk fleet has grown from 11 ships to 49 ships excluding the nine options we secured on August 1. More over the fleet’s cargo carrying capacity stands at $2.7 million deadweight. Our average age stands at only 2 years old, and 41 sister vessels provide operating efficiencies. These fleet characteristics provide a distinct operating advantage in a market where charters are exercising more discretion than ever in selecting shipping partners. Management’s strong industry relationships and the company’s record of operational excellence further enhance our appeal among existing and potential charting partners. Lastly, Eagle Bulk is well positioned to benefit from the healthy dry-bulk market fundamentals. We will now have 15 ships to take advantage of the strong dry-bulk market to charter through 2008 as well as 20 ships that have profit sharing arrangements in their contracts. We believe that our large and growing modern homogeneous fleet has the physical characteristics to meet not only the transportation requirements of multiple commodities in developed and developing regions around the world today, but the flexibility to continue to meet those changing needs in the future as well. Thank you very much for your time this morning. I would now like to turn over the call to the operator for questions.

[Operator:]

Your first question comes from the line of Natasha Boyden. Please proceed.

[Natasha Boyden:]

I would like to see if we can get a little more detail on these nine options you have out. How much did you manage to get these options, A, and B, get delivery beginning in 2010 given the shipyards are really full right now.

[Sophocles Zoullas:]

That’s a great question Natasha. In fact, in a market that is so tight where most ship yards don’t give any options today, we are very pleased with this outcome. How this came about is, after we announced the deal, I flew to Shanghai for 38 last week and had some very successful meetings with the Sino-Pacific ship building group, which is the parent company for the yard where we are building the 26 ships. We view, and I believe the Sino-Pacific group also views Eagle Bulk as a very good strategic partner for the ship yard. So, there are incredible synergies that are beneficial not only for us in having access to these ships but also the shipyard in having a very large important Supramax owner in their roster of clients. What I think we are particularly pleased about is that we secured these options at no cost to Eagle Bulk.

[Natasha Boyden:]

Speaking of costs, are you able to actually give us some idea of what you got the options for?

[Sophocles Zoullas:]

Sure. Basically the structure is that the nine additional options are for 58,000 ton next generation sister ships that have approximately $2 million per ship of additional upgrades. Bigger engines, bigger generators, better cranes, stronger tank tops, and we got these at an option price of $42.3 million per vessel, which we believe is a very good value in today’s market. It is also of further interest for the callers today that these options are saleable and transferable although that is not our intention at this point of time.

[Natasha Boyden:]

So, when you say they are saleable and transferable, you are saying that if in the next year, the value of these ships is $55 or $60 million dollars each; you could take advantage of that?

[Sophocles Zoullas:]

We could. But, that is something that is a possibility right now, but that is not our intention.

[Natasha Boyden:]

The credit facility that you just announced, does that also cover the new options or would you need to seek other financing needs for the options?

[Sophocles Zoullas:]

It is a global facility that gives us several hundred million dollars of headroom above the $1.1 billion acquisition.

[Natasha Boyden:]

Thank you very much, gentlemen.

[Operator:]

Your next question comes from the line of Scott Burk. Please proceed.

[Scott Burk:]

I am interested in the insurance terms that you talked about for the long term charters that you have locked in on these vessels for these next 3 years. First of all, are you saying that the counterparties are A-Rated or did you actually go and purchase some insurance for those charters?

[Sophocles Zoullas:]

What we did and that to our knowledge is sort of an industry first, really. We have secured the entire fleet revenues until July 2010 under an umbrella policy with an underwriter that is A, A2 rated. It is a large credit risk underwriter that controls I think 32% of the global credit risk market. So, to answer your question specifically, it’s like an umbrella of the underwriter’s rating. Because, remember, many of the companies, many of the charters in the dry-bulk shipping world today are either private companies or S&P and Moody’s don’t rate them. So we view this as a trailblazing new kind of way to secure revenues that we are very pleased with.

[Scott Burk:]

So, the insurance is triggered in, if the rating of the counterparty declines? How do you get payment and also what kind of costs do you have?

[Sophocles Zoullas:]

Very simple. If for any reason there is an interruption in the revenues, the insurance kicks in. Either voluntary or involuntary interruption.

[Scott Burk:]

That seems terrific. How much does something like that cost?

[Sophocles Zoullas:]

We find the premium value relative to what we are getting as a tremendous value. It is roughly a day and a half of hire per ship per year. So, in other words, for a day and a half of hire, over the whole year, you ‘ve guaranteed your revenue streams for the entire year.

[Scott Burk:]

And that is just on a ship to ship that you have charters on lasting through 2010?

[Sophocles Zoullas:]

Correct. This is really a sort of an unheard of type of thing that we are pleased to be the first company to announce to the market that this kind of a thing exists and we think that this could be an organic part of our sort of long term strategy going forward.

[Scott Burk:]

OK

[Operator:]

Your next question comes from the line of Mr. Doug Mavrinac. Please proceed

[Douglas Mavrinac:]

Great. Thanks. Good Morning Soph and Allen.

[Sophocles Zoullas:]

Good Morning Doug.

[Douglas Mavrinac:]

Hi. Just had a couple of follow up questions to the previous two

[Sophocles Zoullas:]

Sure. What’s nice about the options is, again, in a market where options are almost never given today, the exercise dates are pretty far out. For the first four ships it is not until December 31st this year, and the next 5 ships, it goes to March 31, 2008. So, that gives us significant amount of time to watch the market, see the market developments, see this fall what we expect to be the traditional up-tick in the dry bulk market after what typically is the summer lull currently.

[Douglas Mavrinac:]

OK. Great. Thank You. As you mentioned you just don’t see options given out these days. I would imagine that there is probably already some interest in this. Can you share some color on that whether or not you have already received indications of interest on the securing of these options?

[Sophocles Zoullas:]

Within half an hour of our release yesterday, we already had interest in the options.

[Douglas Mavrinac:]

Wow. OK. Great. Thank you. And then following up on the insurance policy, I have never seen something like this where these things guarantee your revenue. Can you discuss whether or not there is any deductibles or premiums or other similar types of costs that go along with other insurance policies on insuring your revenue stream?

[Sophocles Zoullas:]

I tell you, this policy, we are really thrilled about it. Not only because it gives just an unheard of level of comfort to our shareholders, but also it is an unprecedented type of a strategy within in the dry bulk market. This policy is what is commonly referred to as a “First dollar indemnity policy”. There is no deductible. So, unlike for example, a loss of hire insurance, which insures against mechanical failure, casualty, which typically has deductibles of 14 or 21 days, there is no deductible on this revenue stream insurance policy.

[Douglas Mavrinac:]

OK. Great. Thank you, and the finally, just looking as a reminder, what a wide variety of cargos you guys transport, what do you see today in terms of what do you think that most people are overlooking in terms of demand for a particular type of dry-cargo?

[Sophocles Zoullas:]

What is really interesting is, I always say, the biggest change not only from first quarter call to the second quarter call, I would say, the second quarter call relative to every call we have had is that every quarter we have been telling the market, demand is up, we are seeing these ships in trade patterns, increasing this cargo might be shifting around a bit, this is the first time where we can report to the market that it is not just that demand is up, but there are new markets and commodities being created. This phenomenon of nickel-ore that we mentioned on this call, literally, in the last 4 months, all of a sudden we have had a lot of chartering activity, the movement of nickel-ore, which is a very high cost commodity that is used partly in the production of stainless steel. So, that to us is a new yet additional phenomenon on the back of general increases in major and minor bulks. There are new minor bulk commodities that are coming out of nowhere and having an impact on the market, and as everyone on the call might recognize, the minor bulk market is the protected domain of the sub-panama ships where Supramaxes are really the prime movers and beneficiaries of these new market trends.

[Douglas Mavrinac:]

OK. Great. Thank you very much.

[Operator:]

Next question comes from the line of Urs Dur, please proceed

[Urs Dur:]

Hi Guys

[Sophocles Zoullas:]

Hi Urs, how are you?

[Urs Dur:]

Very Good. Very Good. On the road at the moment. Congratulations and nice on the 9 options and thanks for the information on the insurance. I think those are the key questions I guess what we have seen recently and from this report. I was wondering if you could walk us through because I really like what you did in regards to the change in the dividend policy and walk us through what the advantages are of that, and secondly, can you give us some indication of a level of operating cash flow that you might be looking at or maintaining as you go forward and your fleet grows in terms of distribution?

[Sophocles Zoullas:]

I think it’s an acquisition like this 20-ship acquisition which brings in this billion dollars of additional minimum contracted revenue into the company which gives us the kind of cash flow accretion over the long term year after year that allows us as a company to have this tremendous new flexibility that allows us to put in $.50 target per quarter. I think the point that I think is really the key here is, we don’t want to give specific guidance on what the cash flow accretion per share is, but it is pretty easy for people to figure out. It gives us the ability to pay the $.50, pay down the debt, and look to grow that dividend, all at the same time which is something that up to now we hadn’t really been able to do, and I might add also, really take a lot of the volatility out of the dividend. In fact, the $.50 target is a nice improvement off of the $.47 we declared for Q2. With regards to the second part of your question, with regards to cash flow, we tried to tend away from giving too much guidance, but we feel that we have given the market enough raw data where it’s reasonable that they can put it together.

[Urs Dur:]

OK. That’s sufficient for me. Thanks a lot and good luck.

[Operator:]

Your next question comes from the line of Mr. John Chappell. Please proceed.

[Johnathan Chappell:]

A question about the industry. Everyone seems to focus on China as a major importer, and that is really having a beneficial impact on demand, but China has also been exporting a lot of the minor bulks that you guys carry. As China’s demand remains robust and the economy continues to exceed expectations, they can potentially keep more of those products in their domestic borders to fuel their own growth. Do you see any slow down in Chinese exports and that are having any kind of impact on the Supramax market?

[Sophocles Zoullas:]

The short answer is no. In fact, what is interesting is that the import of the nickel ore that we talked about on the call today which comes out of place like Indonesia is going into China and that new market is stimulated by the increased demand for exports out of China. Not of steel products because that is something we have all been focusing on, but the sub-steel market of stainless steel. Super high grade steel. So, almost 0-20 million tons is actually specifically addressing your question which is exports of minor bulks out of China.

[Johnathan Chappell:]

My follow up question is, can you give me an update on off hire dates for second half of this year, and for 2008?

[Alan Ginsburg:]

Less than 5 for the quarter. We do not know what our offhire will be for 2008, but John, we have had about a 99.8% utilization rate over the last year and a half. So, for modeling purposes, that is what we would use.

[Johnathan Chappell:]

And scheduled dry-docking?

[Alan Ginsburg:]

We have the dry-docking in the press release by quarter for the next four quarters.

[Johnathan Chappell:]

Thanks Alan.

[Operator:]

Your next question comes from the line of Michael Sasprasky. Please proceed.

[Michael Sasprasky:]

Good Morning

[Sophocles Zoullas:]

Good Morning

[Michael Sasprasky:]

I want to talk about this credit insurance again. So, you are the first ones every to do this. Is this a new product or something that has been in the market for a while?

[Sophocles Zoullas:]

We believe that we are the first ones to ever do it because we have never heard of it done before. It is really a new product with its underwriter.

[Michael Sasprasky:]

Are you able to disclose the Underwriter?

[Sophocles Zoullas:]

I can tell you the insurance was placed through a top UK based insurance agent called Securus, and they are actually managing the entire insurance of this facility. So, basically Securus are the people you should turn to, because they can get into the whole sort of esoteric side of the insurance market on how this works.

[Michael Sasprasky:]

And this is is factored into your break even cost of close of the $7000 per ship per day?

[Sophocles Zoullas:]

Yes

[Michael Sasprasky:]

OK. Now just on to the debt. A lot has been made in the recent weeks about the different risks to credit. Do you see the Royal Bank of Scotland sort of trying to add or raise the rates on the $1.6 billion credit facility that hasn’t been finalized yet, and looking forward on a more industry wide view, is it going to be harder to secure financing for new ship builds?

[Sophocles Zoullas:]

Actually, what is very interesting is, we had a recent talk with Royal Bank a couple of days ago. I gave them a call, and their intent is to actually improve. Their current indication to us is that although they were initially looking to syndicate right out of the block. Their current intent is actually to underwrite the entire facility themselves. And then to look to sell down later. Also, since we announced the deal, we have received calls from quite a few banks asking to join the facility. We just pushed that inquiry over to Royal Bank, as the lead arranger. So if anything, this situation since we announced the deal has improved with Royal bank because they have indicated they want to direct the whole thing initially.

[Michael Sasprasky:]

So, this panic on Monday was basically much ado about nothing when all the shipping companies went down for perceived credit risk. That was really an irrational situation, I am guessing.

[Sophocles Zoullas:]

I think so because there is a huge difference between the sort of domestic sub-prime market, the LBO financing and the foreign banks lending into foreign shipping companies which are asset backed with huge degree of contracted revenues. They are really sort of de-coupled markets but I think there was a bit of irrational linkage there.

[Operator:]

Your next question comes from the line of Mr. Scott Burk. Please proceed.

[Scott Burk:]

I wanted to get the details on the mine expansions that you discussed during the call. Where are the expansions occurring? They are mostly in Brazil or can you give us more details?

[Sophocles Zoullas:]

That, which is not a surprise to people on the call today I am sure, that expansion is primarily coming out of Australia, but even more so out of Brazil.

[Scott Burk:]

OK. That is similar to what we have been seeing.

[Sophocles Zoullas:]

The fact that a lot of it is coming out of Brazil really factors in to the whole ton-mile point, which is not just increased capacity, but increased capacity moving over longer distances which has a bigger impact on demand.

[Scott Burk:]

One of the interesting things going on in the summer with the day rates, the Handymax or the Supramax sectors kind of out performed in terms of the day rates continuing to pick up. Would you attribute that more to these new minor bulk markets that you have talked about or is it more of the fact that China social trade starts to absorb more of the smaller ships’ supply.

[Sophocles Zoullas:]

I think it is all of the above. I think basically the Supramax market is coming into its own. It was a couple of years ago a nascent market. These were the new ships that charters and the shipping market in general would kind of figure out what do we do with these big crane flexible ships and it is now just a byproduct of these ships finding their utility in the market their utility and the demand for the minor and major bulks. I think it is incredibly interesting on the slide where we have the chart with all the cargos we carried to note the increase of how much our Supramaxes are carrying major bulks. That to us is very surprising. The first half of 2007, and it is like 13. 45% of our cargos were major bulk which are traditionally Cape and Panamax cargos. So, we full participated in that, in fact that figure is up from 34%. So, we have gone from34% to 45% in the major bulks, but then in the minor bulks, we are noticing as I discussed earlier, not just increase in minor bulks, cargos like cement, steel, but the emergence of new cargo commodities like nickel Ore, stainless steel, which are also being moved on Supramaxes and that coupled with as Scott you have rightly mentioned, the rapid explosive growth of Chinese coastal trade which predominantly moves in the Sub-Panamax ships. So, I think it is all of those items above.

[Scott Burk:]

OK. And one other thing I wanted to ask about the charters of profit sharing. You have started about six months ago and an increasing number of your charters come with profit sharing. In general, how much do you give up on the base charter rate to be able to get the profit sharing on top of that?

[Sophocles Zoullas:]

The truth is we don’t think we give up that much at all because if you look at the charter rates on the acquired Supramax fleet, to have a floor rate in the sort of $18,500 range you have to factor it into the fact that these are eight, nine, ten year charters. So, again talk about precedence setting, there has never been to our knowledge a fleet of Supramaxes chartered in the market for this duration. So, there is no barometer for this. You can’t look at some industry report and say for the last 10 year charter of Supramax has done at X, so this charter is above or below. I believe this is sort of Eagle Bulk more trailblazing and creating new markets.

[Scott Burk:]

To follow up on that question, maybe if we look at the three year charters, what would you give up on a three year charter?

[Sophocles Zoullas:]

Three Year charter I believe is in the $30,000 range. I think $34,500 on the two year charter on the Sparrow is about market. I would say that is what it is. Also, the other point to mention is with the fleet acquisition, we have secured the cash flow for the ships yet to be delivered to us. So that is another important factor to bring out.

[Operator:]

Your next question comes from the line of Mr. Michael Sasprasky. Please proceed.

[Michael Sasprasky:]

I was trying to figure out if you have a range on the debt on the interest rate.

[Sophocles Zoullas:]

Sorry, the interest?

[Michael Sasprasky:]

An idea of what you are going to be paying on the facility.

[Sophocles Zoullas:]

That we will give out at a later date. Probably, we will lock down the facility later this month and we will give it to the market later.

[Michael Sasprasky:]

But those assumptions are in your per day cost, I guess.

[Sophocles Zoullas:]

I would say, to give you some guidance, as much as we can, similar to what we currently have. Not a huge difference from what we currently have on the existing facilty.

[Michael Sasprasky:]

Sounds like you guys are almost bullet proof in here. Realistically speaking, are there any risks? You have everything locked in for three years and insured. Are there risks on the expense side or is everything just really as good as it can be?

[Sophocles Zoullas:]

I actually gave an interview recently for a shipping magazine where I was asked exactly that same question. In other words, what is the risk? It was a more generic question. The reporter said, what is the risk to the industry, not specifically to Eagle, and I am going to answer the question the same way. Because the risk to the industry and the risk to Eagle is the same, which is I think we currently in a pandemic of crew shortages not just in dry-bulk but across the industry. So, what we’ve told in our prior calls and what I think we are going to continue to signal to investors and callers on our next calls is don’t expect crewing costs to go anywhere but north. We have tried to stay ahead of the curve because frankly these are $60 million ships that are generating $30,000 a day and we believe that you want to find the best crews you can to be stewards of those assets and those cash flows. So, we want to be ahead of the curve and actually pay pretty healthy salaries. So, we are the upper quartile of what most people pay. We also instituted a cadet system where we take top quartile of the cadets out of the maritime academy and put them on our ships. We pay them salary, we pay them expense, food and board and transportation because we want to create a pipeline of good cadets going forward, and junior officers on the fleet. The expenses are going up. That is just a reality but if you look at for example crewing costs which represent probably about 55% of the say, $4000 operating costs, and even if you factor in a five or ten percent cost, today you are talking about an increase of $100 a day. Relative to the revenue generation, it is still a small number.

[Michael Sasprasky:]

OK. But is there a relationship between shipping rates and crew costs? In other words, as crew costs go up, shipping rates will go up or profit sharing income will go up as well?

[Sophocles Zoullas:]

No. Crewing costs tend to be dis-associative with the market. Crews obviously are aware that the market is healthy. Because also crews can move from ship to ship, the challenge of the ship owners to create loyalty and keep them in the fleet, and we believe that with a 2 year old fleet, we have some very nice ships, good pay package and the promise for improvement in the ranks, that is how we build loyalty, but if the market falls, the crewing costs will not fall.

[Michael Sasprasky:]

OK. So, the risk is really on the expense side, not on the revenue side?

[Sophocles Zoullas:]

Correct.

[Michael Sasprasky:]

Congratulations on a good quarter.

[Operator:]

Your next question comes from the line of Mr. Elliot Miller. Please proceed.

[Elliot Miller:]

Number one, does the credit insurance include the profit sharing component or is it just for the base rate.

[Sophocles Zoullas:]

Alan, do you want to take that?

[Alan Ginsburg:]

It includes everything.

[Elliot Miller:]

It includes the profit sharing components as well?

[Alan Ginsburg:]

If the charter cannot pay Elliot, then there is not going to be any profit sharing. It will only be down to the base rate.

[Elliot Miller:]

Number two, As per the 26 new builds, can we get an update on the status of the five unchartered ships? I know you were expecting all kinds of phone calls and all kinds of offers, and I wonder how you are progressing on that.

[Sophocles Zoullas:]

First of all, everything we prognosticated happened has happened which is we have received many not just indications, but bids on the five new builds, and we very intentionally held back because we believe the fundamentals for the dry bulk market are actually improving so, these are sort of very desirable if not the most desirable ships that have a very high value. So we are just sitting back and waiting at this point. And we are going to opportunistically start chartering them but this is supposed to be a summer lull season and August is proving to be anything but that.

[Elliot Miller:]

Another follow up on the 26 new builds. Alan, you are having any difficulty in terms of the cost increases in terms of finding interest rate swaps for those new builds?

[Alan Ginsburg:]

No. Not at all

[Elliot Miller:]

So this credit crunch has not impacted that?

[Alan Ginsburg:]

No. Not at all.

[Elliot Miller:]

That’s it. Thank you.

[Operator:]

At this time, there are no further questions in the queue. I would like to turn the call back over to Mr. Zoullas.

[Sophocles Zoullas:]

Closing Remarks