Baltic Trading Limited (NYSE:BALT)
Q1 2013 Earnings Conference Call
May 2, 2013 10:00 ET
John Wobensmith - President and Chief Financial Officer
Apostolos Zafolias - Investor Relations
Good morning, ladies and gentlemen, and welcome to the Baltic Trading Limited First Quarter 2013 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. To inform everyone, today’s conference is being recorded and is now being webcast at the company’s website, www.baltictrading.com. We will conduct a question-and-answer session after the opening remarks and instructions will follow at that time. A replay of the conference will be accessible at anytime during the next two weeks by dialing 888-203-1112 or 719-457-0820, and entering the pass code 1355569.
At this time, I will turn the conference over to the company. Please go ahead.
Unidentified Company Speaker
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 Wobensmith - President and Chief Financial Officer
Good morning. Welcome to Baltic Trading’s first quarter 2013 conference call. With me today is our Chairman, Peter Georgiopoulos, and Apostolos Zafolias. I will begin today’s call by reviewing our first quarter highlights as outlined on slide two 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 any questions.
Starting on slide four, I will begin by reviewing Baltic Trading’s highlights for the first quarter. During the first quarter, we continued to preserve an efficient cost structure and a balance sheet with low debt while implementing our fleet deployment strategy that provides the ability to drive future performance when freight rates improve. We also declared a dividend for the first quarter of $0.01 per share, increasing the cumulative dividend declared by the company to $1.03 per share since going public in March of 2010. As we maintain our focus on distributing a substantial portion of our cash flows to shareholders over the long-term, our financial results continue to be affected by the challenging market conditions in the drybulk industry. For the three months period ended March 31, 2013, Baltic Trading recorded a net loss of $5.1 million, or $0.23 basic and diluted loss per share. I will discuss our financial performance in more detail later on the call.
Turning to slide five, we provide an overview of our current fleet. Baltic Trading is dedicated to owning and operating a modern, high-quality fleet of drybulk vessels that adhere to the highest standards. Our current 9-vessel 672,000 deadweight ton fleet consists of four 2009-built Supramax vessels, two 2010-built Capesize vessels, two 2010-built Handysize vessels, and one 2009-built Handysize vessel, with an average age of 3.3 years far below the world average of approximately 10 years.
The fleet also contains three groups of sister ships, which we believe creates economies of scale in the maintenance and crewing of our vessels. Importantly, the company’s vessels remain employed on spot market related time charters with multinational companies, including Cargill International, a global producer and marketer of food and agricultural products, and our largest customer positioning the Baltic Trading to maximize utilization while earning rates closely correlated with various Baltic Dry indices and eventually benefit from the positive long-term demand for core commodities in developing countries, such as China and India.
Moving to slide seven, we present our financial results. For the first quarter ended March 31, 2013, the company generated revenues of $6 million. This compares to revenues for the first quarter of 2012 of $6.3 million. The decrease in revenues for the first quarter of 2013 compared to the prior year period is due to lower spot market rates achieved by our vessels. The company recorded a net loss for the first quarter of 2013 of $5.1 million, or $0.23 basic and diluted loss per share. This compares to a net loss of $4.5 million or $0.20 basic and diluted loss per share for the first quarter of 2012.
Key balance sheet items, as presented on slide eight, include the following. Our cash position was $1 million as of March 31, 2013. And our total assets as of March 31, 2013 were $359.4 million, which consisted primarily of cash and cash equivalents and our 9-vessel fleet.
Moving to slide 9, our utilization rate was 100% for the first quarter of 2013 compared to 99.4% in the year earlier period. Our time charter equivalent rate for the first quarter of 2013 was $6,685 per day. This compares to $7,521 per day recorded in the first quarter of 2012. The decrease in TCE rates resulted from lower spot rates achieved in the first quarter of 2013 versus the same period last year for the vessels in our fleet. For the first quarter of 2013, our daily vessel operating expenses were $4,771 per vessel per day versus $4,788 per vessel per day for the first quarter of 2012. While our daily vessel operating expenses for the first quarter of 2013 were below budget, 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 the full year of 2013, we expect our DVOE to be $5,400 per vessel per day on a weighted average basis.
On slide 10, we discussed our dividend for the first quarter and provide an overview of our ongoing dividend policy. As I mentioned earlier, Baltic Trading declared a first quarter dividend of $0.01 per share. The dividend is payable on or about May 20, 2013 to all shareholders of record on May 13, 2013. Baltic Trading has declared cumulative dividends of a $1.03 per share since completing its $228 million 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 expenses for capital items related to our fleet, such as drydocking and special surveys, other than vessel acquisitions related expenses, plus non-cash 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 first quarter of 2013. 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 in 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 a cost effective and scalable operation positions the company well over the long-term.
On slide 11, we present our anticipated breakeven cost levels. Our steadfast approach to controlling cost is contributed to Baltic Trading’s success in achieving low breakeven levels. For the second quarter of 2013, we estimate our daily vessel operating expenses to be $5,400 per vessel per day, on a weighted average basis of 9 vessels for the quarter. We expect our daily free cash flow breakeven to be $8,255 and our daily net income breakeven to be $13,290.
I will now turn the call over to Apostolos to discuss the industry fundamentals.
Apostolos Zafolias - Investor Relations
Thanks John. I will start with slide 13, which points to the drybulk indices. Representing on this slide is the overall Baltic Dry Index. During the first quarter of 2013, the BDI was trading slightly than December lows as the onset of South American grain season lead to higher fixtures for Panamax and Supramax vessels. Despite the fragile advanced experience throughout most of the quarter, the BDI remained at relatively low levels primarily due to vessel supply related matters, such as the front-loaded order book and the large amount of existing tonnage currently on the water.
Seasonality also played a role as short-term weather-related disruptions occurred in both Brazil and Australia, and the Chinese New Year in February led to a mid quarter lull in fixture activity. Additionally, strikes by Columbian minors negatively impacted the market resulting in Q1 thermal coal experts, recording the country’s lowest quarterly level since 2006. According to SSY, the largest decline in export volume focused on Capesize cargos specifically in Colombian coal and Brazilian iron ore. The combined quarter-on-quarter decrease was more than 30% amounting to 36.4 million tons of less volume.
On slide 14, we summarized recent developments in the drybulk market beginning with the supply side fundamentals. Since last July, the rate of new building vessel deliveries slowed considerably. This trend continued into the first quarter of 2013 as deliveries were down 30% year-over-year. Included in that figure was the lowest delivery total since 2010, assisting to offset the deliveries to-date, has been firm scrapping levels. Although vessel demolition hasn’t been as robust as the record setting year of 2012, it is still on pace to be a significantly strong year for scrapping on a tonnage basis.
Scrapping during the first quarter of 2013 has predominantly being led at a Capesize sector, which accounted for 3.2 million deadweight ton of the 7.5 million deadweight tons scrapped. The other sectors have lagged to-date as the short-term market outlook for them has improved and earnings remained at healthier levels. The nearly 50% rise in Capesize demolition year-over-year has been primarily fueled by ships both in the 1990s, a 16 of the 23 Capesizes scrapped were built in that decade. We believe this to be a significant trend moving forward. This 20% of the Capesize fleet was built during that period and 14% of the Capesize fleet was built in 1995 or earlier.
Fewer deliveries, combined with steady vessel demolition have led to 37% decline of net additions in the first quarter of 2013 versus the same period in 2012. Along with slower fleet growers in the Capesize sector, the handysized fleet experienced a contraction in the first quarter by 13 vessels largely because of the older age of that fleet combined with a relatively smaller order book.
Overall, the drybulk order book as a percentage of the fleet has fallen to 18%. It’s lowest level in over 8 years. Slippage of the new building order book continues at a fairly constant rate as well, with approximately 30% of delivering in 2012 and an estimated 36% of delivering through the first quarter of 2013. The combination of a smaller order book, a higher slippage rate, firm scrapping levels, and slowing deliveries should help enhance the supply side fundamentals of the drybulk market going forward. On the demand front, Chinese thermal coal-derived electricity production remains robust, leading to a 30% increase in coal imports in Q1 year-over-year. Strong thermal coal shipments have continued into the current quarter. The ongoing maintenance of the Daqin Railway has resulted in a drawdown of stockpiles at China’s largest coal port, Qinhuangdao below the critical 7 million ton mark to 5.5 million tons.
According to Commodore Research, an additional 5 to 7 million tons of domestic coal that won’t be railed can possibly be imported during the maintenance period. Panamax and Supramax vessels are likely to be securing most of these cargos, which in the near-term could provide support of these sectors’ earnings. However, now that the South American grain season has likely peaked, those potential earnings maybe limited or possibly offset by fewer grain cargos. Chinese steel production through the first quarter grew 9.1% year-over-year, which in turn led to a decrease in iron ore inventories and a rise in steel stockpiles. Since the end of March, however, steel stockpiles have declined for five consecutive weeks and steel consumption seasonally increases during this time of the year. Although steel production has been robust, it has not translated into higher imports into China as imports of the commodity are down 1% year-over-year. Consequently, inventories at Chinese ports have been drawn down and are at their lowest level since April of 2010.
According to ICAP Shipping, the average iron ore stocks at China’s large and medium-sized steel mills through mid-April stood at 14 days. Historically, the lowest level of inventory, these mills could withstand was 11 days. Iron ore prices peaked earlier in the year at $159 per ton and have since re-traded to a range of $130 to $140 per ton. Although the arbitrage opportunity between international and Chinese domestic ore at these price levels is minimal, the spread could widen with the onset of higher ore capacity expected to come on stream through the end of the year.
Turning to slide 15, we believe that a number of short-term and long-term catalysts will impact the drybulk market. As previously mentioned, Brazilian iron ore exports during Q1 of 2013 were lower year-over-year, limiting ton-mile demand growth in the Capesize sector. According to RS Platou over the last five years, the second half of the year has been considerably higher shipments when compared to the first half. In fact in every year since 2009, there has been a 20% jump in Brazil’s iron ore exports in the second half versus the first half. Seaborne trade may also be positively affected by planned volume expansion, as iron ore miners plan to increase production and invest into higher capacity port facilities over the next few years.
Construction in China’s stimulus projects approved last year could potentially also support higher needs for steel as 2013 progresses. On the supply side, as volatility in charter rates continues and scrap steel prices remain high, scrapping of additional vessels could continue in 2013 following the trend of the prior two years. 2011 and 2012 were record years for vessel deliveries. As the weight of the order book lessened and more new building vessels either get delayed or canceled. The supply growth experience over the past few years will likely slowdown allowing demand to catch up.
On slide 16, we talked more about the demand side fundamentals. Global steel production set a record in March underpinned by new highs reached in China and India as well as strong Japanese output. Although the Indian Supreme Court has permitted certain iron ore mines in Karnataka to resume operations rather than increasing exports most of these incremental ore is expected to go towards domestic steel production, which could help to facilitate growth. The World Steel Association expects Indian steel demand to grow by 5.9% in 2013 and in advance another 7% in 2014 as they attempt to narrow the fiscal deficit and improve foreign direct investment.
In China as urban population continues to expand in the years to come, still consumption is expected to keep increasing as Chinese urban households have a much greater intensity for steel rather than rural households. In line with urbanization, China has made a significant effort to enhance the country’s transportation network. The National Development and Reform Commission recently announced that 42 new transport hubs will be build by the end of 2015 with at least one hub located in every Chinese province, municipality and autonomous region. The NDRC’s also focused on stimulating growth in the Northeast region and announced that considerably more funding will be provided to the country’s aging cities.
Moving on to slide 17, on the left side of the page we show the expansion plans for key iron ore producers was recently revised by the respective companies, the combined expansion plan through 2017 aggregates to 400 million tons per annum or approximately 36% of 2012 seaborne ore trade. Most of the projected growth in iron ore export capacity in 2013 is expected to come from Australia. Rio Tinto’s expansion helped the company produce its highest first quarter volume ever, while also forecasting an expansion to 290 million tons per annum by the end of Q3 2013, up from 237 million tons per annum currently. Another Australian miner Fortescue is planning on a 50% rise in production capacity this year. As a result of these expansion projects Australia’s Bureau of Resources and Energy Economics forecasts an increase in iron ore exports of 14% in 2013.
On the coal side ICAP shipping forecasted Indian thermal coal imports to grow about approximately 11% per year through 2015 as domestic coal supply continues to fall short of demand. India’s coal demand is estimated to rise 1.1 billion tons by 2017, 317 million ton increase from last year’s levels. Of this increase not of all it is expected to be met by domestic production giving a gap for a potential growth in imports.
On slide 18, we discussed the supplies side fundamentals which remain uncertain. The remaining order book for 2013 currently stands at approximately 70.9 million deadweight tons. With regard to scarping we believe it will continue to play significant role throughout the remainder of the year especially volatility in the freight rate environment persists. As illustrated on the graph at the bottom right of the page 2011 and ’12 were record years for scrapping with 23.2 million deadweight tons and 33.7 million deadweight tons scrap respectively. Year-to-date approximately 9 million deadweight ton has been scrapped in 2013 which combined with a slower pace of deliveries led to average net additions easing to 42 vessels per month in Q1 of 2013 as compared to 67 vessels per month in the prior year period.
Lastly we know that although there is still an over supply of vessels in the drybulk market and more manageable order book and fewer deliveries along with the projected demand growth are encouraging towards reestablishing a more balanced long-term supply and demand equation.
This concludes our call and we would be now happy to take your questions.
(Operator Instructions) At this time there are no more questions. This concludes the Baltic Trading conference call. We thank you and have a nice day.
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