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Paragon Shipping, Inc. (NASDAQ:PRGN)

Q4 2012 Earnings Conference Call

February 19, 2013 10:00 AM ET

Executives

Rudy Barrio – Investor Relations and Corporate Communications, Allen & Caron, Inc.

Michael Bodouroglou – Chairman & CEO

Robert Perri– CFO

Analyst

Natasha Boyden – Global Hunter

Operator

Good day and welcome to the Paragon Shipping Fourth Quarter and Year-End Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

And now, I’d like to turn the conference over to Rudy Barrio of Allen & Caron Investor Relations. Please go ahead.

Rudy Barrio

Thank you, Emily. Good day everyone, and welcome to Paragon Shipping’s investor conference call to discuss its financial results for the fourth quarter and year-ended December 31, 2012. With us from management today is Michael Bodouroglou, Chairman, President, Chief Executive Officer; and Robert Perri, Chief Financial Officer.

Before we start today’s call, there are a couple of items I would like to cover. Many of you received a copy of Paragon Shipping’s earnings results press release. It was disseminated earlier today. If you did not receive a copy of the press release, it is posted on Paragon Shipping’s website at www.paragonship.com and in the Investor Relations section of our website at www.allencaron.com. It is also posted on Yahoo! Finance and most financial sites. You may also call our office in New York at 212-691-8087, and we will email it to you.

As mentioned earlier, this call is being recorded. A replay will be available shortly after the call for seven days and may be accessed from North America by calling 877-344-7529 and entering passcode 10025328. International callers should dial 412-317-0088. This call is also being broadcast live over the internet and maybe accessed via Paragon Shipping’s website. A replay of the webcast will be available shortly after the call and will continue for seven days.

Further, we would like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Some of the statements made during this call may contain forward-looking statements. The company’s actual results may differ materially from such statements. We advise you to read the cautionary note regarding forward-looking statements in Paragon’s recent earnings release and in the Risk Factors section of the company’s most recent filings with the Securities and Exchange Commission, all of which are available at www.sec.gov.

I would now like to turn the call over to Robert Perri. Good day, Robert.

Robert Perri

Good day Rudy, thank you. Good morning ladies and gentlemen. Today, I will briefly give you the financial highlights from the quarter followed by an update on the latest company developments as well as our views on the drybulk industry. I will then present a more detailed overview of our fourth quarter and year end December 31, 2012 financial results before ending with our closing remarks. Joining me on the call today is our Chairman, President, and CEO, Michael Bodouroglou, and we will be available for questions after the end of the presentation.

Please turn to slide number four. During the fourth quarter of 2012, we operated an average of 12 vessels at a time charter equivalent rate of $10,563 per day which equated to net revenues of $12.9 million, EBITDA of $6.9 million, and net income of $0.3 million or $0.05 per share.

For the year ended December 31, 2012, we operated an average of 11.2 vessels at a time charter equivalent rate of $11,923 per day, which equaled to net revenues of $50.3 million, EBITDA of $7.6 million, and a net loss of $17.6 million or $2.84 per share. After adjusting for non-cash items that we will discuss in more detail later in this presentation, our EBITDA for the year was $24.2 million, while our net loss was $1 million or $0.16 per share.

On slide five, as per our financing update, we are very pleased to announce that we have successfully completed our debt restructuring. More specifically, we finalized the documentation for amending our loan agreements with all of our lenders, which coupled with the $10 million equity raise through our CEO’s private placement that was announced on December 24, we successfully fulfilled all of the conditions precedent in amendments to our loan agreements.

To summarize, what we achieved through this debt restructuring, let me highlight that we obtained waivers and agreed to the relaxation of several of our financial and security covered ratio covenants, the deferral of a portion of our scheduled quarterly installments, and in the case of the loan agreements with Bank of Ireland and Bank of Scotland, the extension of our loan agreement to the second quarter of 2017 and the third quarter of 2015 respectively.

In addition, we extended the availability period of our Nordea facility for nine months securing the financing of hull number 625, our latest handy size new building vessel that is expected to be delivered in the fourth quarter of 2013.

In respect to the loan agreement with Bank of Scotland, which was a syndicated facility, we agreed to the prepayment of $2.8 million in return for the full and final settlement of $4.7 million in debt, representing the portion of the loans to one of the syndicate members. This resulted in a gain of $1.9 million from debt extinguishment that was recorded in the fourth quarter of 2012.

Overall, we managed to reduce our annual debt repayments by $44.4 million in 2013 and $6.9 million in 2014.

On Slide six, I would like to make some remarks on our current leverage. Currently, our total debt stands at $194 million, while our cash position stands at $25 million. This translates into a net debt of $169 million, representing a 60% net debt to total capitalization ratio.

The right hand graph presents our scheduled quarterly loan repayments before and after the completion of our debt restructuring. As previously mentioned through our debt restructuring, we managed to significantly reduce our debt repayment requirements for 2013 from $58.8 million to $14.4 million or approximately $3.6 million on a quarterly basis.

On slide seven, let me discuss our latest fleet developments. We are also pleased to announce that on January 29, 2013, we took delivery of our third new building vessel, the Modern Vessel Priceless Seas, a handy sized drybulk carrier built in China. The vessel has a carrying capacity of 37,200 deadweight tons.

With our latest acquisitions, Paragon’s fleet increased to 13 drybulk carriers with a total carrying capacity of more than 816,000 deadweight tons at an average age of seven years. The construction of the Priceless Seas was financed purely with equity, and therefore that vessel is debt free, which results in a decreased break-even point. The vessel is currently employed under short-term time charter fixtures.

On slide eight, we have provided an overview of the length of the remaining charter period for each of our vessels. Full details of the charter of our fleet can be found under the appendix section of this presentation. Based on earliest re-delivery dates, our fixed revenue days currently stand at 55% for the remainder of 2013 and 7% for 2014.

Overall, the average remaining term of our charters is about six months. As of December 31, after taking into consideration all recent fleet developments, based on earliest re-delivery dates, and excluding off-hire days due to scheduled drydockings. We have secured time charter revenue of approximately $36.9 million, out of which $32.5 million is secured in 2013.

Currently, we focus on employing re-delivered vessels on short-term time charters, and unless we see an upturn in the market, we will continue to operate these vessels on a short-term basis.

Now, let us provide you with an industry update. The left hand graph on slide nine depicts the fluctuations of the average TC routes of the main drybulk sector since January 2011.

In early 2012, the BDI had the lowest level seen in 25 years and tested those lows again in the summer. The charter market is still considered to be rather depressed, and time charter rates remain close to breakeven levels in all sectors.

Predictably, the S&P market remains at significantly low levels due to the increased oversupply observed in the drybulk market. Nonetheless, during the last three months, asset values appear to have been stabilizing in all sectors.

On the top left hand graph of slide 10, you can see that the vast majority of the order book relates to Capesize and Panamax vessels. On the top right hand side, we see the relationship between the existing global fleet and the order book. The graph’s orange line depicts the order book as a percentage of the global fleet since the year 2000.

Currently, the aggregate capacity of the existing fleet is more than 685 million deadweight tons, with about 130 million deadweight tons on order. The relevant ratio is 19% down from more than 70% in late 2008.

The decrease in the order book is clearly a positive sign. In addition in 2012, a record level of more than 33 million deadweight tons were scrapped. Overall, however, net additions to the fleet were still significant. A similar pattern is expected to continue through 2013, thus the oversupply of tonnage remains a great concern for the drybulk industry. Hence, we don’t expect to see recovery in the market before 2014.

The graph on slide 11 super-imposes the required fleet growth to meet the rise in demand together with the actual supply. The light green area shows the shortage of vessels while the pink shows the surplus of vessels on an annual basis, which is not cumulative.

We see that from 2008 to 2010, the supply of vessels exceeded demand and it has balanced the shortage of vessels we had from 2005 to 2008. Post 2010, however, the oversupply has been consistent and created this big area in red which is causing the collapse in rates. Unfortunately, the red area of oversupply is expected to persist during 2013, albeit by a smaller rate before it gives away to green in 2014. So, this oversupply may get worse before it starts getting any better, but as long as the order book remains weak, we should see some recovery starting in 2014, in other words, we have another one to one and half years downside ahead of us.

Now let me proceed with a quick analysis of our financial results for the fourth quarter and full-year 2012. Please turn to slide number 12.

Due to a number of non-cash items that affected our results, I would like to walk you through our adjusted net income and EBITDA. We believe these performance measures show a clear picture of the company’s cash earnings. However, these measures are not recognized by US GAAP.

As discussed earlier, during the fourth quarter of 2012, the most significant non-cash item that was recorded is the non-cash gain from debt extinguishment of $1.9 million. There was also regular non-cash items such as a $0.1 million expense related to the amortization of share based compensation which is included in G&A; and another income, a non-cash gain of $0.7 million related to the mark-to-market valuation of our interest rate swap contracts, which is netted against the actual cash payments made under the swapped agreements during the quarter.

In summary, for the fourth quarter of 2012, the non-cash items totaled $2.4 million and excluding these, adjusted EBITDA was $4.4 million and adjusted net loss was $2.1 million or $0.33 per share. For the full year 2012, the non-cash items totaled $16.6 million while adjusted EBITDA was $24.2 million and adjusted net loss was $1 million or $0.16 per share.

Slide 13 provides an analysis of Paragon’s operating performance for the fiscal year of 2012. The fleet average net daily time charter rate was $11,923 per day. Total vessel operating expenses, which included the operating expenses plus G&A expenses and management fees were $6,896 per day, which was over $1,000 per day better than our TVOE 2011 as we have worked to cut overhead during these difficult market periods. This resulted in a vessel free cash flow from operations of $5,027 per day. However, after debt service and dividends received from affiliates, we ran at an average burn rate of about $1,000 per day.

On a more positive note, I would like to point out that we reported 99.1% utilization rate during the year.

In conclusion, on slide 14 ladies and gentlemen the market still shows signs of weaknesses that we expect to continue through 2013 until the over capacity problem should start to recede. As a company, we continue to execute our strategy of fleet renewal and conservative growth through the current downturn in drybulk market. We took a proactive approach with our lenders, and we successfully completed our debt restructuring in order to secure the company in the event that the current downturn is prolonged. We are confident that our company will emerge stronger from this current crisis.

Thank you for your attention. I will now turn the call back to the operator for questions. I also wish to remind you that Mr. Michael Bodouroglou is standing by to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question will come from Natasha Boyden of Global Hunter. Please go ahead.

Natasha Boyden – Global Hunter

Thank you, good morning gentlemen.

Michael Bodouroglou

Good morning Natasha.

Robert Perri

Good morning Natasha.

Natasha Boyden – Global Hunter

Just on the loan to you, obviously that’s outstanding, can you give us a timeframe on your expectation of the repayment of that loan?

Michael Bodouroglou

Well, the loan is due to be paid back to Paragon in April, and we are in contacts, I mean, Box Ships and Paragon are affiliates through the (indiscernible), so we are in contact with Box Ships. We know that they are working on some options, but nothing definite. There is nothing definite to report at this moment, Natasha.

Natasha Boyden – Global Hunter

Okay, great, thank you. And then, Rob, you have got about $28 million of cash on the balance sheet at the end of the quarter. Can you just breakdown how much of that is restricted cash and how much is available?

Robert Perri

As part of our restructuring agreements, we basically lowered our restricted cash to about $10 million. So, there is about $10 million of restricted and the rest is available.

Natasha Boyden – Global Hunter

Okay, great. Sorry, go ahead.

Robert Perri

No, no, that’s fine.

Natasha Boyden – Global Hunter

Okay. So, I wanted to ask you about – obviously you’re employment strategy, but I think you addressed that on the call pretty effectively. So, just moving over to the container new builds that you have, what are the strategies there, I mean, I know obviously that the TEU has the option to purchase those from you. So, can you give us an update there please?

Michael Bodouroglou

Yeah, well, the delivery of those vessels is in the second quarter of 2014. We haven’t done anything on the chartering side. And we will not do anything on the chartering side until the market shows some signs of improvement. And as we said, the Box Ships have the option to buying those vessels. But no decisions have been made on that front.

Natasha Boyden – Global Hunter

Okay, great. That’s all from me, thank you very much.

Robert Perri

Thank you Natasha.

Operator

(Operator Instructions). I am having no further questions. This concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Perri for any closing remarks.

Robert Perri

Yeah. I’d just like to thank everyone for joining the call today. And we look forward to talking to you next quarter. Have a good day everyone.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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