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Eagle Bulk Shipping (NASDAQ:EGLE)

Q4 2012 Earnings Call

April 02, 2013 08:30 AM ET

Executives

Sophocles Zoullas - CEO

Adir Katzav - CFO

Analysts

Natasha Boyden - Global Hunter

Seth Lowry - Citi

Urs Dur - Clarkson Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Eagle Bulk Shipping Inc. report Fourth Quarter and Full Year 2012 Result Conference Call. My name is Charlene and I will be your operator 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, this call is being recorded for replay purposes.

And now I would like to hand the call over to the CEO, Mr. Zoullas.

Sophocles Zoullas

Thank you and good morning everyone. I would like to welcome everyone to Eagle Bulk Shipping's fourth quarter 2012 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 risk and uncertainties. You should not place undue reliance on these forward-looking statements. We refer all of you to our filings with the SEC 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 fourth quarter 2012 results and highlights. We'll then proceed with an update on our commercial operations and will finally present our current views of the market. Adir will then give an overview of our financials before we open the call to questions.

Please turn to slide five for a review of our financial results and highlights. The dry bulk market remained under pressure during the fourth quarter on the back of continued heavy supply growth. Demand remained healthy but also choppy due to seasonal and weather related factors. New building deliveries which peaked during the second quarter of 2012 totaled $14.5 million deadweight tons or approximately 185 vessels in the fourth quarter.

This represents a decrease of almost 29% sequentially and 37% year-on-year. Trade demand was mixed during the fourth quarter. The larger vessels found some support from the seasonal rebound in iron ore cargos, while Panamaxes and Supramaxes struggled due to weak grain exports out of the U.S. which experienced one of its worst droughts in over 50 years. In addition, a short term decrease in Indian coal exports put additional pressure on rates for the midsized ships.

The Baltic Dry Index or BDI averaged 953 points for the fourth quarter representing a modest increase of just over 10% sequentially and a decrease of 51% year on year. Turning to Eagle Bulk the company reported a net loss of $32.4 million or $1.92 per share for the fourth quarter of 2012. Earnings for the period were primarily impacted by the company's exposure to the depressed spot market.

Net revenues for the quarter were 42.8 million, EBITDA for the quarter amounted to 9.7 million and fleet utilization which is calculated as the number of operating days divided by the number of available days remained an impressive level of close to 99.4%. Please turn to slide 7 for an update on our commercial operations.

Eagle Bulk's Fleet totals 45 vessels, comprised of 43 Supramaxes and 2 Handymaxes and is considered one of the largest, most homogeneous in the world, with an average age of just 5.6 years. As we've stated in the past we employ an opportunistic and dynamic approach to charting, utilizing a mixture of long term time charters, contracts of a freight metro COAs, short term voyages and index charters. Given the continued weak period market we remain short (inaudible) until there is a further improvement and normalization in charter rates.

As of December 31st, our charting position for the full year 2013 was as follows, 14% of our fleet was either fixed on time charter or performing COA business, 1% was indexed to the Baltic Supramax Index or BSI and 85% was open for charter.

On slide eight, we illustrate Eagle Bulk's cargos for the fourth quarter which totaled almost 4.4 million tons. The composition was 55% in major bulks and 45% in minor bulks. We once again moved a record 1.8 million tons of coal during the period representing 36 voyages. We primarily carried coal from Indonesia, destined for both China and to a lesser extent India, but also moved product from South Africa, Australia, and the US Gulf.

Other cargos carried during the quarter included sand representing almost 500,000 tons, cement which represented approximately 420,000 tons and agricultural products representing close to 400,000 tons. In total, we carried over 20 different cargos during the quarter. This can be attributed to the Supramax’s know versatility and being able to load and discharge cargos using onboard cranes for being able to navigate into smaller ports and for its optimal size in matching cargo stems.

Please turn to slide 10 for a review of the industry fundamentals. The dry bulk market for 2012 can be characterized by solid demand trade growth of 6% but even greater vessel supply growth of almost 10% with the effect of driving rates lower across the board. On the advanced side, all major dry bulk categories realized solid year-on-year increases in growth with coal posting an impressive 11% increase.

On the supply side, we had a large increase in the world’s dry bulk fleet with Panamaxes and Capasizes representing the bulk of this growth. At the same time, it was another record year for scrapping with almost 34 million tons where 6% of the world fleet taken out of the market. At the bottom of slide 10, we depict average annual spot rates for the three major asset classes.

2012 was a challenging year for dry bulk as a hull with Supramaxes up performing both the larger Panamaxes and even Capasizes. Supramaxes averaged $9,500 per day in 2012 representing a decrease of 34% over the prior year and an outperformance of both Panamaxes and Capasizes of 23%. Panamaxes averaged only $7,700 per day in 2012 posting a 45% decrease year-on-year and Capasizes also averaged only $7,700 per day in 2012 representing a decrease at 51% as compared to the prior year. Supramax out performance can be attributed to better relative supply demand fundamentals and to its flexibility as described earlier.

Please turn to slide 11 for an update on the supply fundamentals. After two record years for scrapping the appetite to demolish old ships remains very strong. Approximately 4.8 million dead weight tons were scrapped in January and February alone at this year. We believe the depressed earnings environment will continue to drive owners of older tonnage to sell their ships for demolition especially given strong scrap rates which are currently hovering around $450 per light weight ton.

Assuming the current pace of demolition continues, we project that almost $30 million dead weight tons or 4% of the world's fleet will be scrapped this year. In regards to scrap candidates, there are currently over 1,500 vessels which fit our scrap candidate criteria. Under the right hand side of the slide, we depict the current profile of the scrap candidate fleet by asset class. The sub-Panamax segment is by far the oldest both in terms of number of vessels which totals almost 1,200 and there as a percent of fleet which is over just 16%.

On slide 12, we take a detailed look of past deliveries and future order book. As we discussed earlier, new building supply growth remains at high levels but deliveries are past their peak which occurred during the second quarter of 2012.

February deliveries totaled 3.9 million dead weight tons down 72% from their peak level in June. New orders placed in 2012 are down 77% year-on-year. Reasons for this include the ongoing depressed rate environment and the relative attractiveness of second hand vessel, a lack of traditional bank financing is also playing a pivotal role in the rapid reduction of the new order book. The order book as a percent of the fleet outstanding now stands at just over 18% down 77% since peaking in 2008. We believe the order book will continue to run off over the course of 2013 paving the way for a potential recovery in rates as early as later this year.

Please turn to slide 13 for a review of the current market fundamentals, the dry bulk market so far this year can be broken down into two phases or periods. Pre and post Chinese New Year. Before Chinese New Year the market was impacted by both a flood of deliveries in January and muted cargos due to the holiday season. It is common for owners taking delivery of new buildings towards the end of a calendar year to push off receipt of the vessel until the following calendar year. This phenomenon is called the January effect. Owners do this because vessels are stamped by their year of delivery, so a January delivery will be considered one year younger than a December delivery.

10 million deadweight tons or a 120 vessels were delivered in January versus 3.2 million deadweight tons or 38 vessels in December. The flood of supply in January negatively affected rates. On the trade demand side it is common for there to be a lack of cargos between Christmas, New Year and Chinese New Year, this also negatively impacted rates. Supramaxes started the year at $7,700 per day and reached a low of $6,900 per day on February 13th. Since then they have rallied by 45% to $10,000 per day, the highest level since August last year.

This rebound in rates can be attributed by both a plummet in deliveries since January and a record harvest in South America which tends to benefit both Supramaxes and Panamaxes. Deliveries in February plummeted 61% month on month to reach 3.9 million deadweight tons. Looking forward into 2013 and barring any macroeconomic shocks such as a breakup in the Eurozone, we expect the dry bulk market in the short term to remain choppy but as we stated previously, we do foresee the formation of a real recovery taking place as early as the end of this year or next year. Our view is based on the continued strength in trade demand and lower supply growth going forward.

On slide 14, we discussed the long term demand fundamentals for coal and iron ore. Our thesis here has not changed and we continue to view the fundamentals as very strong especially for coal. Global urbanization as depicted in the top right hand corner chart is expected to drive increased long-term demand for dry bulks. Minor bulks and agricultural trades are projected to grow at a respectable long-term average of 3% to 5%.

Steel production is projected to increase 40% by 2020, leading to increased demand for both iron ore and metallurgical coal. Over 370 gigawatts of new coal-fired power capacity is scheduled to come on line by 2016. This equates to over 1.2 billion tones in incremental coal demand that we believe will primarily be sourced from Indonesia and Australia.

To summarize, we believe the short-term fundamentals for the dry bulk market remain challenging, but improving by the end of this year and into 2014. The long term fundamentals remain robust.

I would now like to turn over the call to Adir, who will review our financial performance.

Adir Katzav

Thank you, Soph. Please turn to slide 16. This is a summary on our fourth quarter results of operations. Our net revenues for the fourth quarter were $42.8 million compared to $70 million for the fourth quarter of 2011. The year-on-year decline in revenues is primarily due to lower charter rates and a decrease in voyage charter revenues. In addition, we did not charter in any vessels during the fourth quarter of 2012, compared to 182 days during the fourth quarter of 2011.

Our operating loss for the quarter was $10.8 million compared to operating income of $9.2 million in 2011. Our cash interest expense for the quarter was 12.2 million compared to 10.2 million in the fourth quarter of 2011. Our non-cash interest expense for the quarter was 9.4 million that include peak interest of 7.3 million and deferred financing cost of 2.1 million compared to only deferred financing cost of 1.2 million for the fourth quarter of 2011.

EBITDA, as adjusted for exceptional items, as defined in our credit agreement, was 9.7 million for the quarter compared to 30 million last year. Net loss for the quarter was 32.4 million or $1.92 per share. Please turn to slide 17 for a summary of our balance sheet. Cash at the end of the quarter was 18.1 million, which was flat quarter on quarter.

Please turn to slide 18 for an update on KLC. During the first quarter of 2013, we reached a comprehensive agreement of which we accepted an early termination of the 13 charters out to KLC. In addition, On March 28, 2013, the Korean court approved an amendment to KLC rehabilitation plan after receiving a favorable vote from the concerned parties.

The amendment among other changes convert 90% of the creditors long term receivable to an equity. In return, we received the following considerations from KLC. A cash payment of $10 million, a cash equivalent payment of 3.8 million, a deferred cash payment of 5.5 million to be paid in installments and the common shares in KLC of approximately 5% holding.

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

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Natasha Boyden from Global Hunter.

Natasha Boyden - Global Hunter

Soph maybe you can help me, I am still a little bit confused on one point. On page 18, in the presentation you say you have 5.5 million as a late cash installment through 2021. In the press release, it says the balance is 53.7 million through 2021. What am I missing there?

Adir Katzav

Okay what's happened on March 28th a part of KLC process of amended rehabilitation plan, they convert 90% of the long term receivable to equity and the remainder of 10% which is about $5.1 million will be in cash. So, the 53 that you have plus the two that we have in addition of long term receivable which in total was $55 million converts to 10% a long term receivable and 90% of that to equity.

Sophocles Zoullas

And Natasha, as we mentioned that just happened on Thursday last week.

Natasha Boyden -Global Hunter

Okay so again to clarify, so you are saying the 90% is equity, it’s not cash?

Sophocles Zoullas

Yes.

Natasha Boyden -Global Hunter

Also just remaining on the KLC agreement here I guess; can you just talk about how this was arrived at sort of the time period, eight years. I think in the press release again you said it's sort of backend loaded. How was that arrived at; I mean that’s basically the question, how do you really decide on that?

Sophocles Zoullas

Sure. I would say we were a little bit subjected to the court system in Korea and Seoul, if you want to know the truth it’s a little bit of a black box for us sitting here in New York but it was a very complex process that as you know went over a period of over 12 months and involved all of the interested parties in Korea lines and involved multiple court hearings over multiple months but was ultimately punctuated with the decision that Adir just mentioned on March 28th that we think will be the final if you will the final deal for Korea lines but again our visibility on this wasn’t tremendous just because it was all being done in Korea.

Natasha Boyden - Global Hunter

So the eight year period I guess, was that court implemented, or was that an idea that KLC arrived at.

Sophocles Zoullas

That was something I would say that was done between Korea lines, the bankruptcy administrator and the Korean courts. So we didn’t have any input in that.

Natasha Boyden - Global Hunter

Okay, fair enough. Can you just talk a little bit about, this is the shifting gears entirely, there has been a space that has fairly high profile newbuild orders recently, and I am just wondering if you’ve seen any of that trickle down to the Handy or Supermax segment?

Sophocles Zoullas

That’s a great question. We have been very aware of that and as you know, the couple of orders have all been pretty much in the Cape size market, and there has been really one player who has been very active and taken a lot of the press coverage of his ordering activity. We haven’t seen that in our market, to answer your question directly and we also think if you look at the global picture for new build orders, the order book is significantly reducing even taking into consideration the new ordering, so I would say the market can handle one or two big guys coming in and doing big orders. We just don’t want 10 doing it.

Operator

The next question comes from Christian Wetherbee from Citi. Please go ahead.

Seth Lowry - Citi

This is Seth Lowry in for Chris. If I could say on the KLC settlement, I was just wondering, do you have, if you were to say mark-to-market the new KLC equity stake, do you have an estimate for how much that could be and then I was also wondering is there a potential to monetize that stake in the near future? Are there any restrictions for doing that?

Sophocles Zoullas

Yes, we have a restriction to trading later this year. I think like with any public equity that is going to be free for trading, you tell me where the stock market in Seoul is, I'll tell you where the share prices are, so, we're waiting as you are to see how this stock trades, we believe that having a stake in the company after this restructuring will have some value and over time as the market in dry bulk recovers we believe the value of our share in that company will also recover. But we don't have a lot more visibility than you do right now and we're waiting to see how the stock will trade, as it starts to trade and as we are able to trade our security later this year if we want to.

Seth Lowry - Citi

Okay and are you free to sell out the market or is there any sort of restrictions for selling in their stock market given the level of the ownership stake you have.

Adir Katzav

We will be free to sell in the market, we're not sure yet if there will be any lock up period or not.

Seth Lowry - Citi

All right, if I could switch gears to your fleet then it seems like, as you guys continue to execute your strategy of chartering your vessels opportunistically and keeping the duration short in order to gain leverage to improving fundamentals, but it seems like there is a fair amount of your vessels at least for this quarter that ended charters in January and have subsequently either re-chartered of, I think the footnotes said up to six months. I am just wondering, have all those vessels been chartered, are there any in layup do you think it makes sense to lay up any of the vessels, and finally are the market rates that you've gotten I guess for this next chartering period post January comparable to the previous short term charter rates you've achieved.

Sophocles Zoullas

It's a great series of questions. If I miss anything feel free to remind me if I didn't shoot all of those points. So you know it was funny in 2006, 7, and 8 when the market was really great and people were pushing us to buy capes and buy older ships and we stayed true to our mantra that we want to stay laser focused on Supramaxes and having a five year old fleet and I told people and I said the reason for it, is when the markets collapse and this is a cyclical industry, it will happen eventually, this is the best asset class to be in because they outperform the bigger ships and they can generate the most cash in a bad market in real terms, nobody believed me five years ago, and it's been true for all of 2012, it's been true so far for 2013. If you want to be in dry bulk, these type of ship you want is a young Supramax, so specifically we have not led up but do not intend to lay up any of our fleet because, A, it’s the right type of ship in this kind of market and, B, it’s a very young fleet and, C, I would say because we have a branded product, we have as a service provider we can do a lot of deals with end-users that Supramax owners that only had one, two, or three, or four ships couldn’t do, that creates real value, the sort of firm value if will at Eagle Bulk that other people can’t replicate.

So, we remain positive on our asset class partly because of how the ships are flexible but also because of their age and the composition of the fleet and we continue to believe that these ships will be outperforming going forward. To answer one of your other questions, the charters we did in this sort of Charismas period into January and maybe even the beginning of February as I noted in my remarks, the real low point in Q1 was reached sometime in February, those will be reflected as lower charter rates.

It’s really been from the second half of February through now that we've seen this pickup of 45% in charter rates that has been a real breath of fresh air in the market and we think we’re doing the right strategy having an office in Singapore where about two thirds of our ships are deployed gives us the flexibility to do these COAs and stay close to our end-users which we find very helpful.

And we’re going to continue to stay short with the market rates this low until we see things in the teens again and now we’re going to start to longer in tenure.

Operator

Thank you very much and the next question on the line is from Urs Dur from Clarkson Capital Markets. Please go ahead. Your line is now open.

Urs Dur - Clarkson Capital Markets

Times remain tough, fleet is still young, but can you remind us of the dry dock schedule for this year and what kind of cash is going to be utilized for that and then possibly if you have an outlook even for next year?

Sophocles Zoullas

As you mentioned, the fleet is young so we’re not expecting to have a tremendous cost for dry dock for the next year and our budget is about say $4 million for the next year of course in dry dock. And just to add; a lot of people, I think aren't necessarily aware of this. When an owner goes to dry dock a vessel and you go in over your budget, the things that typically really throw your budget off, where your budget say, 500,000 it goes to 1.5 million, these are like really outlier surprises. And especially on the bigger ships more than the smaller ships, is when you have steel replacements. So steel replacements really doesn't kick in to a fleet until the ship start to get to be somewhere over 10 say 15 years of age. So, we feel that with a young fleet that's basically going in for maintenance is tough, not steel replacement, those numbers tend to be pretty accurate and more manageable than say if we are running a 15 year old fleet. I hope that's helpful color for the people on the call.

Urs Dur - Clarkson Capital Markets

Yes, I generally recognize that, that's why I mentioned the fleet's young. I just wanted to see because you got a situation where the market is poor and it doesn't look like its significantly more materially changed for 2Q as of yet. And the outlook remains tough because the delivery schedule for Panamaxes and Supramax is tough this year. So looks like rates are going to be tough for some time at least for a good portion of the remainder of this year which is not a surprise to anybody and I am sure not to you. But just wanted to look at where you are in the cash side of things and I guess that leads into the next line of question if you could remind us and where you stand in regards to your debt covenants? How much runway do you have left? Just remind us where you stand on the various issues since you are restructuring last summer?

Sophocles Zoullas

As far for our covenants for 2014, we believe with the current rates, charter rates; we will comply with our covenants for this year.

Operator

Sir you have no further questions at this time. I’d like to turn the call over to your host Mr. Zoullas, thank you.

Sophocles Zoullas

I’d like to thank everyone again for joining us for our fourth quarter 2012 earnings call, and we look forward to keeping you updated of new developments in the future. Thank you.

Operator

Thank you for your participation in today’s conference call. This conference call is now concluded and I wish you all a good day. You may now disconnect your lines.

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