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Paragon Shipping Inc. (NASDAQ:PRGN)

Q1 2013 Results Earnings Call

April 26, 2013 9:00 AM ET

Executives

Rudy Barrio - Allen & Caron Inc., IR

Michael Bodouroglou - Chairman, President and CEO

Robert Perri - Chief Financial Officer

Analysts

Mathis TJ - Morgan Stanley

Omar Nokta - Global Hunter

Operator

Good morning. And welcome to the Paragon Shipping First Quarter 2013 Earnings Conference Call. All participants will be in 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. I would now like to turn the conference over to Rudy Barrio. Please go ahead.

Rudy Barrio

Thank you, Sue. Good day, everyone. And welcome to Paragon Shipping’s investor conference call to discuss its financial results for the first quarter ended March 31, 2013. With us from management today is Michael Bodouroglou, Chairman, President and 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 yesterday afternoon. If you do not receive a copy of the press release, it is posted on Paragon Shipping’s website at www.paragonship.com and 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 877-870-5176 and entering passcode 10028131. International callers should dial 858-384-5517. 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 as.

Further, I 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, and thank you. Good morning, ladies and gentlemen. Today, I will briefly give you highlights for 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 first quarter ended March 31, 2013 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 both be available for questions after the end of this presentation.

Please turn to slide number four. In the first quarter of 2013, we reported net revenues of $13.5 million, adjusted EBITDA of $3.2 million and an adjusted net loss of $2.9 million or $0.26 per share.

During the quarter we took delivery of our third Handysize newbuilding, the Priceless Seas and successfully completed our debt restructuring giving the company the flexibility we need to get through the current downturn in the drybulk market.

And finally, as of last Friday, we successfully transitioned to the NASDAQ from NYSE. We believe this will give the company more flexibility of its trading and improves our liquid.

On slide five, I would like to make some remarks on our leverage. Currently, our total debt stands at $192 million, while our cash position stands at $25 million. This translates to a net debt of $167 million, representing a 63% net debt to total capitalization. The right hand graph presents our outstanding debt and scheduled quarterly loan repayments for the remainder of the year.

Following the completion of our debt restructuring, our total debt repayment requirements for 2013 amounts to $14.4 million or approximately $3.6 million quarterly, out of which we have already paid $4 million year-to-date.

In addition, we still have up to $25 million available under our Nordea Facility to draw down subject to certain conditions presents for the delivery of our fourth and last Handysize newbuilding, the M/V Proud Seas and the Priceless Seas, and we expect the Proud Seas to be scheduled to deliver in the fourth quarter of 2013.

Slide six provides an overview of the length of the remaining charter period for each of our vessels. Full details on our charter -- the charter of our fleet can be found under the appendix section of this presentation. Based on earliest redelivery dates, our fixed revenue days currently stand at 49% for the remainder of 2013 and 7% for 2014. Overall, the average remaining term of our charters is about four months.

As of March 31st after taking into consideration all recent fleet developments, based on earliest redelivery dates and excluding off-hire days due to scheduled drydockings, we have secured time charter revenues of approximately $26.1 million, out of which $21.7 million is secured for the reminder of 2013.

Currently, we are focus on employing our vessels on short-term time charter and voyage charters, unless we see an upturn in the market. We will continue to operate these vessels on a short-term basis and we believe it give us the flexibility to take advantage of any potential upturn in the market.

Now, let me provide you with an industry update. The left hand graph on slide seven depicts the fluctuations of the average time charter routes of the main drybulk sector since January 2012. As you can see from the above Panamax rates along with most TC rates bottomed in October of 2012 and have redounded slightly since.

So far in 2013 rates for Panamaxes and Supramaxes have improved to around 9,000 per day as the growing trade from South America heats up and we already saw the highest for conjunction ever recorded in Brazil during March. This conjunction is causing severe delays in deliveries and may put pressure on rate increases to -- rates to increase further.

Although, another markets, I’m sorry, another markets such as the Cape remained under pressure. The charter market is still consider to be rather depress and time charter rates remain close to break-even -- levels in all sectors.

However, the S&P market has shown some sense of life as values have stabilized and some in instances increase since the begging of 2013. Nonetheless, values still remain at historical low levels.

On slide eight, we show the projected volume growth of drybulk cargos through 2016. As you can see, demand remains healthy growing more than 6% a year for the next four years, with largest expected growth from iron ore and steam coal that has been driven by the Far East. I note that iron ore and steam coal are one of the key cargos for Panamax vessels.

Despite all the issues in Europe and the U.S. that take all the headlines, the rest of the world continues to grow at accelerated rate and many of the emerging economies such as Brazil, China, India and several other Far Eastern countries are thirsty for resources as they build up their infrastructure and their need for energy increases, and this trend is expected to continue for the foreseeable future.

The fact that demand growth has remained robust has been forgotten because of the oversupply of tonnage, but the good news is that this demand is expected to remain robust even after the supplies starts being observed.

Speaking of supply, on the top left hand side, on slide nine, you can see that the vast majority of the order book has already been delivered and they currently stands at only 18% of the existing fleet, which is historically low figure.

Currently, the aggregate capacity of the existing fleet is more than 690 million deadweight tons, with about 127 million deadweight tons on order and most of this order book for Capesize and Panamax vessels.

In addition, during the first quarter of 2013 about 7 million deadweight tons were scrapped, which represents 1% of the total drybulk fleet in only three months. This is a continuation of the trend we saw in 2012 where record level of about 99 million deadweight tons were scrapped that represented 5.9% of the total fleet during the year.

Overall, however, net additions to the fleet are still significant and the net drybulk fleet growth was 10.2% in 2012, and in 2013 we expect the net fleet growth of approximately 8.6%. Nonetheless, we can finally start to see the light at the end of tunnel as the expected fleet growth in 2014 decreases to 1.5% of the total fleet, even with the recent uptick in new order.

This graph on slide 10, superimposes the required fleet growth to meet the rise in demand together with actual supply. The light green area shows the shortage of vessels while the pink shows the surplus of vessels on an annualized basis, but this chart is not cumulative.

During 2013, we expect the market to continue to be oversupplied albeit by a smaller rate than in the past before it gives way to green, which represents demand for new vessels outstripping supply in 2014. So this oversupply, it may remain before it starts getting worked out of the market 2014. But as long as the order book remain slow, we should start to see a recovery in early 2014, as the oversupply of the past years gets absorbed into the market.

Let me now proceed with a quick analysis of our financial results for the first quarter of 2013. Please turn to slide 11. During the first quarter of 2013, we operated in average of 12.7 vessels at a time charter equivalent rate of $11,388 per day, which equated to net revenues of $13.5 million and we had a 99.8% utilization rate.

Our EBITDA was $2.6 million and we reported net loss of $3.5 million or $0.32 per share. For the first quarter of 2013, our non-cash items totaled $0.6 million, which included a $391,000 one-time loss related to our non-participation of Box Ships follow-on offering during the quarter. $478,000 in share based and a one-off gain of $238,000 related to interest rate swaps and excluding these, our adjusted EBITDA was $3.2 million and adjusted net loss was $2.9 million or $0.26 per share.

Let me also note that during the quarter, there were several one-off items in our G&A that related to our debt restructuring and impacted our results. However, going forward we expect our G&A expenses to back around the same level as last year or roughly $2 million per quarter.

On slide 10, in conclusion, ladies and gentlemen, the market remains very challenging but we can finally see the makings of recovery, as demand remained strong and the order book is finally back to manageable levels. As a company, we continued to execute on our strategy of fleet renewal and conservative growth through the current downturn in the drybulk market.

We took a proactive approach with our lenders and we successfully completed our debt restructuring in order to secure the company through this downturn. And we can now concentrate on positioning the company on taking advantage of any opportunities that may arise.

We are confident that our company will emerge stronger from this crisis. Thank you for your attention and I will now turn the call back over to operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Mathis TJ of Morgan Stanley. Please go ahead.

Mathis TJ - Morgan Stanley

Good morning, gentlemen. Thank you very much for that. So, I’m interested -- one question about the recovery. So you said that Panamax and Supramax rates are recovering right now and in the long-term you see Panamax steam coal recovering through the steam coal so and this isn’t in 2014. So, I was wondering when do you sectors like the Capesize recovering and do you think -- how do you think that if that would fit in the order there for the recovery?

Michael Bodouroglou

I think that’s caps will recover as well. As you know, we do not own any caps but I expect that caps will also do pretty well. There are few caps to be delivered, due to be delivered in 2014. Those that are in the water are employed, although they continued to be employed. They all find employment also at reduced rates. And I expect the whole sector, all the sizes to do better, as we get into 2014. But probably the small sizes will do better because they have the build.

Mathis TJ - Morgan Stanley

Okay. Great. And so then I have another question regarding your liquidity position. So you did have a debt restructuring and if this market recovery does not occur in 2014 as you are expecting now, how will that liquidity position developed? Do you think you will have to another follow-on offering or do you have to restructure that again? What are your thoughts there?

Robert Perri

So when we read our scenarios internally, we always look at the worst case scenarios. While, we believe there is recovery coming, we still want to make sure that our cash flow is sufficient if we do stand this downturn and given that, we do believe that we can get through 2013 and into 2014 with our -- in our current position. So we don’t see any need for those at the moment.

Mathis TJ - Morgan Stanley

Okay. Great. And then I just have last question regarding your Panamax container vessel. So I was on the Box Ships call as well, and you said the probably the -- in the mid-term future, the wide-beam Panamaxes will become more -- will become -- the standard theme at the Panamax canal is being widened. And so I was wondering if you’re still like expecting to take delivery of these two vessels and because I mean, they do trade for 30 years. So what are your thoughts on that?

Michael Bodouroglou

Well, those ships seem to be delivered in 2014. They are the wider beam of Panamax vessel, the ecotype, much more fuel efficient of the existing ones. And we expect that these vessels be in strong demand going forward. Already, there is appetite by charters. But there is the chartering rate that they have in their minds and not something that we would be willing to lock in right now.

So -- of course, those depend on how the market develops going forward but I’m confident that this type of vessels in particular will be in high demand.

Mathis TJ - Morgan Stanley

Okay. Great. Well, thank you very much for that. That was my last question.

Michael Bodouroglou

Thank you.

Robert Perri

Thank you.

Operator

(Operator Instructions) Our next question comes from Omar Nokta of Global Hunter. Please go ahead.

Omar Nokta - Global Hunter

Thank you. Good afternoon, gentlemen.

Robert Perri

Good afternoon.

Omar Nokta - Global Hunter

I just wanted -- Hi. I just wanted to get some clarity on the final handysize newbuilding. You guys have financing in place. But I just wanted to understand their conditions at present that you outlined in the presentation. Is it -- my understanding is that Box Ships would need to repay the loan, the $12 million or $13 million outstanding to you first and then that facility becomes available to drawn. Is that the case or is it my understanding, I think correctly?

Robert Perri

No. That is the current case. But the one thing as I mentioned, it’s also we have the facility for the price for seas as well, the third vessel that we took delivery of it is debt free. So we have the ability to record both of those vessels for the delivery of fourth vessels with the contingent that Box Ships be paid -- be paid along with that. It is also something we’re talking daily about but at this time that’s where it is.

Omar Nokta - Global Hunter

Okay. And considering that Box Ships, you guys have the agreement on place for them to pay it in -- fully in April 2014. Do you see the potential for you guys to approach the yard and think if you can delay delivery for six months?

Michael Bodouroglou

Yeah. I think, well, we’ve already done that before. We’ve done that before also with handy’s and also with the container ships because initially they were to be delivered at the end of 2015. We have a very good relation with the ship here, very amicable.

And I’m confident that should the need be, we can work something out. We’ll definitely try. However, right now, we are very -- we are very pleased with a date of the delivery, the expected date of the delivery of the container ships, which is mid 2014.

Omar Nokta - Global Hunter

Okay. Bob, thank you. That’s all I had.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Perri for any closing remarks.

Robert Perri

Thanks everyone for joining the call today. And we look forward to speaking with you next quarter. Have a good day everyone. Have a good weekend.

Operator

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

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