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Baltic Trading Limited (NYSE:BALT)

Q4 2012 Earnings Call

February 21, 2013 10:00 am ET

Executives

John C. Wobensmith - Principal Executive Officer, President, Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer

Apostolos Zafolias

Operator

Good day, everyone, and welcome to the Baltic Trading Limited Fourth Quarter 2012 Earnings Conference Call and Presentation.

Before we begin, please note that there will be a slide presentation accompanying today’s conference call. That presentation can be obtained from Baltic Trading’s website at www.baltictrading.com.

Today's conference is being recorded and is now being webcast at the company's website, www.baltictrading.com. [Operator Instructions] A replay of the conference will be accessible at any time during the next 2 weeks by dialing (888) 203-1112 or at (719) 457-0820, and the access code for the replay is 4821121.

At this time, I will turn the conference over to the company. Please go ahead.

Unknown Executive

Good morning. Before we begin our presentation, I note that, in this conference call, we will be making certain forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements use words such as anticipate, budget, estimate, expect, project, intend, plan, believe and other words and terms of similar meaning in connection with the discussion of potential future events, circumstances or future operating or financial performance. These forward-looking statements are based on management’s current expectations and observations.

For a discussion of factors that could cause results to differ, please see the company’s press release that was issued yesterday, the materials relating to this call posted on the company’s website and the company’s filings with the Securities and Exchange Commission, including, without limitation, the company’s Annual Report on Form 10-K for the year ended December 31, 2011, and the company’s subsequent reports filed with the SEC.

At this time, I would like to introduce John Wobensmith, the President and Chief Financial Officer of Baltic Trading Limited.

John C. Wobensmith

Good morning. Welcome to Baltic Trading's Fourth Quarter 2012 Conference Call. With me today is Apostolos Zafolias. I will begin today's call by reviewing our fourth quarter highlights, as outlined on Slide 2 of the presentation, followed by a review of our financial results for the quarter. We will then discuss the industry's current fundamentals and open up the call for questions.

Beginning on Slide 4, I will be reviewing Baltic Trading's highlights for the fourth quarter. During the fourth quarter, we maintained our financial flexibility and operational integrity in a challenging drybulk market. We remain committed to preserving a balance sheet with low debt, maintaining an efficient cost structure and employing a fleet of modern vessels on spot market-related time charters that provide the ability to drive future performance and freight rates improved.

For the fourth quarter, we declared a dividend of $0.01 per share, representing our 11th consecutive dividend since going public. As we remain focused on distributing a substantial portion of our cash flows to shareholders, our financial results for the quarter were affected by a volatile freight rate environment. For the 3-month period ended December 31, 2012, Baltic Trading recorded a net loss of $4.3 million or $0.19 basic and diluted loss per share. I will discuss our financial performance in more detail in a few minutes.

Turning to Slide 5. We provide an overview of our current fleet. We are pleased to own a modern fleet that meets stringent operational and safety standards, with an average age of 3.1 years, far below the world average of approximately 10 years. Our current 9-vessel fleet consists of 4 2009-built Supramax vessels, 2 2010-built Capesize vessels, 2 2010-built Handysize vessels and 1 2009-built Handysize vessel, with an aggregate carrying capacity of 672,000 deadweight tons.

The fleet also contains 3 groups of sister ships, which we believe creates economies of scale in the maintenance and crewing of our vessels. Consistent with our fleet deployment strategy, all 9 of our vessels are employed on spot market-related time charters at creditworthy counterparties, including Cargill International, a global producer and marketer of food and agricultural products, which is our largest customer, enabling Baltic Trading to maximize utilization while earning rates closely linked to the various Baltic Dry indices and capitalize on the positive long-term demand for essential commodities in developing countries, such as China and India.

Turning to Slide 7. We present our financial results. For the fourth quarter and year ended December 31, 2012, the company generated revenues of $7.1 million and $27.3 million, respectively. This compares to the revenues for the fourth quarter of 2011 year -- and year ended December 31, 2011, of $13.1 million and $43.5 million, respectively. The decrease in revenues for the fourth quarter of 2012 compared to the prior year period is due to the lower spot market rates achieved by our vessels.

The company recorded a net loss for the fourth quarter of 2012 of $4.3 million or $0.19 basic and diluted loss per share. The net loss for the year ended December 31, 2012, was $17.3 million or $0.78 basic and diluted loss per share. This compares to that income of $1.8 million or $0.08 basic and diluted earnings per share for the fourth quarter of 2011 and a net loss of $400,000 or $0.02 basic and diluted loss per share for the year ended December 31, 2011.

Key balance sheet items, as presented on Slide 8, include the following. Our cash position was $3.3 million as of December 31, 2012. Our total assets, as of December 31, 2012, were $364.4 million, consisting primarily of cash and cash equivalents and our 9-vessel fleet. Our EBITDA for the 3 months ended December 31, 2012, was $400,000.

Moving to Slide 9. Our utilization rate was 99.7% for the fourth quarter of 2012 compared to 99.4% in the year earlier period. Our time charter equivalent rate for the fourth quarter of 2012 was $7,953. This compares to $15,437 recorded in the fourth quarter of 2011. The decrease in time charter equivalent rates resulted from lower spot rates achieved in the fourth quarter of 2012 versus the same period last year for the vessels in our fleet.

For the fourth quarter of 2012, our daily vessel operating expenses were $5,141 per vessel per day versus $5,133 per vessel per day for the fourth quarter of 2011. Daily vessel operating expenses for the year ended December 31, 2012, or $5,079 per vessels versus $4,872 per vessel for the year ended December 31, 2011. We believe daily vessel operating expenses are best measured for comparative purposes over a 12-month period in order to take into account all the expenses that each vessel will incur over a full year of operation.

For both the fourth quarter and year ended December 31, 2012, we are pleased that our daily vessel operating expenses were below our budget of $5,300 per vessel on a weighted basis. Based on estimates provided by our technical managers and management's expectations, we expect daily vessel operating expenses for the full year 2013 to be $5,400 per vessel on a weighted average basis.

On Slide 10, we discussed our dividend for the fourth quarter and provide an overview of our ongoing dividend policy. As I mentioned earlier on the call, Baltic Trading declared a fourth quarter dividend of $0.01 per share. This dividend is payable on or about March 14, 2013, to all shareholders of record on March 7, 2013. Baltic Trading has declared cumulative dividends of $1.02 per share since completing its $228 million dollar IPO in March of 2010.

Baltic Trading intends to return a substantial portion of its cash flow to shareholders on a quarterly basis and pay dividends approximately equal to net income less cash expenditures related to our fleet, such as drydocking and special surveys, plus noncash compensation subject to reserves acquired by our Board of Directors. The application of the formula in our policy would not have produced a dividend for the fourth quarter of 2012. However, our Board of Directors, nonetheless, determined to declare a $0.01 per share dividend after taking into account our cash flow and our liquidity, as well as our capital resources. We continue to believe Baltic Trading's modern, high-quality fleet and unique deployment strategy combined with its approach of maintaining a strong capital structure and cost-effective operating platform positions the company well over the long term.

On Slide 11, we present our anticipated breakeven levels for 2013. Our low breakeven levels are a testament to Baltic Trading's lean cost structure and serve as the core differentiator for our company. We estimate our daily vessel operating expenses to be $5,400 per vessel on a weighted basis of an average number of 9 vessels for the year. We expect our daily free cash flow breakeven to be $8,270 and our daily net income breakeven to be $13,325.

I will now turn the call over to Apostolos to discuss the industry fundamentals.

Apostolos Zafolias

Thank you, John. I will start with Slide 13, which points to the dry bulk indices. Represented on this slide is the overall Baltic Dry Index. The BDI started the quarter off near the previous quarter's lows but rebounded significantly, trading in both the 1,000 mark in October and November, primarily due to the restocking of iron ore and a considerable slowdown in vessel deliveries during the second half of 2012.

The year ended with the BDI retracting to 699 points as ore prices rebounded and the slowdown in anticipation of the Chinese New Year begun. While 2012 has been a particularly hard year for drybulk freight rates, preliminary data show that seaborne transportation of commodities continued growing at healthy rates, suggesting that the main hindrance to the turnaround lies on the supply side of the equation.

On Slide 14, we summarize recent developments in the drybulk freight market, beginning with the supply side fundamentals. As a result of prolonged low freight rates, scrapping has continued on a record pace, increasing by 45% year-over-year for 2012 to reach 33.7 million tons or 1/3 of the total 2012 deliveries. Although the majority of the vessels scrapped have been Handysize and Supramax vessels due to the older age of those fleets, we also observed younger vessel demolitions, especially in the Capesize sector.

The depressed rate environment during the past year also resulted in a 43% decrease of newbuilding orders year-over-year, pushing the order book to its lowest level in 8 years or 19% of the fleet. Existing order deliveries peaked in June of 2012 and have since considerably decelerated, with second half 2012 deliveries being the fewest in any half-year period since 2009. Moreover, average net additions per month slowed from 76 vessels during the first half of 2012 to 26 for the second half. The same trend is evident so far this year with January deliveries coming in 21% lower than the same month last year. Slippage continues at a fairly constant rate, with approximately 30% of the order book not delivering in 2012. It is estimated that slippage was 37% for January of this year.

As previously mentioned, the demand side of the equation continues to grow at healthy levels, as evidenced by Chinese iron ore imports recording an 8.5% increase for last year. Although Brazil's share of exports declined through the first half of 2012, the effect of the additional ton miles was evidenced by significant freight rate increases in the fourth quarter, as Brazilian iron ore exports reached a quarterly record of 97.5 million tons. Going forward, we believe that depending on the arbitrage of domestic versus imported iron ore, volumes from Brazil and Australia will play a significant role in scraping future freight rates.

While temporary weather-related factors have put pressure on iron ore production and pushed prices of the commodity to trade around $150 per ton, we believe that the need to replenish reduced inventories, along with the onset of additional supply over the long run, could potentially reverse this development through the second half of the year. On the coal front, Chinese imports of the commodity continue to reach record levels, with 2012 recording a nearly 30% increase year-over-year. Strong imports are expected to continue into 2013, as domestic production has been reduced to further improve safety within the industry.

In an effort to accomplish that, China plans to shut down as many as 5,000 small coal mines this year. Furthermore, peak season electricity demand, coupled with the low hydropower production, continues to lead to robust thermal-coal-derived power generation. India's growing electricity needs are also resulting in increased imports of coal into that country, as December imports reached a record of 140 million tons on an annualized basis.

In terms of grain shipments, the South American grain season is underway, and we are already seeing signs of improvement in Panamax earnings as a result. Although the U.S. grain crop has been negatively impacted by drought conditions, additional grain shipments from Brazil have been able to offset U.S. cargo shortages, as well as lead to greater trade distances.

Turning to Slide 15. We believe that a number of short- and long-term catalysts will impact the drybulk market. Construction in China's stimulus projects approved in September of last year are set to commence, leading to a potentially higher need for steel as 2013 progresses. We note that Chinese steel stockpiles have significantly increased since December. Historically, however, Chinese steel stockpiles rise in the first quarter of the year due to lower consumption because of winter weather conditions and the New Year holiday and decline in second quarter as consumption increases and weather improves. We believe this trend will continue this year, especially as construction on the infrastructure project escalates.

As steel demand firms, iron ore fixtures are likely to find support as port inventories are at yearly lows as previously stated. Seaborne trade may be positively affected by planned volume expansions, as ore miners plan to increase production and invest into higher capacity port facilities over the next few years. Higher imported volumes could further induce the price arbitrage between domestic and imported iron ore prices, thereby enhancing ton miles in the long run.

On the supply side, as volatility in charter rates continues and scrap steel prices remain on high levels, we expect to see a large amount of vessels scrapped in 2013, continuing the trend of the prior 2 years. 2011 and 2012 were a record years for vessel deliveries. As the weight of the order book lessens and more newbuilding vessels get either delayed or canceled, the supply growth experienced over the past few years will likely slow down, allowing demand to catch up. According to Pareto shipping research, in 2013, tonnage demand is forecast to grow 8%, exceeding net supply growth of 7%.

On Slide 16, we talk more about the demand side fundamentals. Chinese steel production increased approximately 3% in 2012 as compared to 2011, while urban fixed-asset investment rose 20.6%. As China's urban population continues to expand in the years to come, steel consumption is expected to keep increasing, as urban households have a much greater steel intensity than rural households. In line with urbanization, the Ministry of Transportation is working towards more than doubling its network of high-speed railways to total over 11,000 miles by 2015. In addition to railways, highway construction has been a focal point of the Chinese government, as highway freight volume continues to set monthly records.

In regard to housing, China plans to start construction of 9 -- of 6 million social housing units and complete construction of 4.6 million units in 2013. India's growth potential going forward also bodes well for the drybulk market. Steel production in India grew 6.3% in 2012 year-over-year and is expected to grow an additional 5% in 2013, according to the World Steel Association. Growing steel demand and limited iron ore export availability from India is also forcing Chinese steel mills to source imported ore from longer ton mile origins.

Moving on to Slide 17. On the left side of the page, we saw the expansion plans of key iron ore producers, as recently revised by the respective companies. The combined expansion plans through 2016 aggregate to 407 million tons per annum or approximately 37% of 2012 seaborne ore trade. According to Macquarie Commodities Research, Australian December exports reached an all-time high of 592 million tons per annum, reflecting strong operational performance and additional capacity coming onstream from Rio Tinto, Fortescue and BHP Billiton. This is leading Australia's Bureau of Resources and Energy Economics to forecast an increase in iron ore exports of 13% in 2013.

Although the Australia-to-China route doesn't have as great a ton mile impact as the Brazil-to-China route, the shared quantity of expected additional volumes can still create transportation demand necessary to absorb excess Capesize vessels. Added ore supply internationally could also lead to prices -- to lower prices, thus making imported ore more attractive to buyers. On the coal side, domestic coal supply continues to fall short of demand in India, leading to coal imports rising 17% in 2012 when compared to the prior year. The domestic coal supply and demand gap is expected to be close to 200 million tons in the year ending March 2013.

Lastly, on Slide 18, we discuss the supply side fundamentals, which remain uncertain. As conveyed in the graph at the bottom left of the page, the scheduled 2013 order book currently stands at approximately 90 million deadweight ton. With expected slippage and cancellation of vessel orders factored in, deliveries appear set to come of the highs experienced during the prior 2 years. Scheduled deliveries of new tonnage for 2014 and onward remain much lower as newbuilding orders have decreased.

With regards to scrapping, we believe it will continue to play a significant role throughout 2013, especially if volatility in the freight rate environment persists and 16% of the world fleet is 20 years or older. As illustrated on the graph at the bottom right of the page, 2011 and 2012 were record years for scrapping, with 23.2 million deadweight tons and 33.7 million deadweight tons scrapped, respectively.

Lastly, we note that the scrapping of younger tonnage, specifically within the Capesize fleet, has become a major theme in 2012. Of the 73 Capesize vessels scrapped last year, 34 were built between 1990 and 1995. We believe this will be an important development moving forward to help combat excess tonnage in the drybulk market.

This concludes our presentation, and we will now be happy to take your questions.

Question-and-Answer Session

Operator

[Operator instructions]

John C. Wobensmith

Okay. Operator, thank you very much.

Operator

And at this time, we have no questions in our queue. This will conclude today's conference. Thank you for your participation.

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