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Baltic Trading Limited (NYSE:BALT)

Q2 2013 Earnings Call

August 01, 2013 10:00 am ET

Executives

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

Apostolos Zafolias

Analysts

Douglas J. Mavrinac - Jefferies LLC, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the Baltic Trading Limited Second 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.

[Operator Instructions] A replay of the conference will be accessible any time during the next 2 weeks by dialing (888) 203-1112 or (719) 457-0820, and entering the passcode 2309393.

At this time, I'll now turn the conference over to the company.

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. To our 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, 2012, 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 second quarter 2013 conference call. With me today is our Chairman, Peter Georgiopoulos; and Apostolos Zafolias.

I will begin today’s call by reviewing our second 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 any questions.

Beginning on Slide 4, I will review Baltic Trading's highlights for the second quarter. During the second quarter, we continued to implement our fleet deployment strategy that provides the ability to generate significant operating leverage when freight rates improve.

We also focus on positioning the company to take advantage of attractive asset prices by entering into an agreement required to acquire 2 Handysize vessels.

For the second quarter, we declared a dividend of $0.01 per share, increasing the cumulative dividend declared by the company to $1.04 per share since going public in March of 2010.

As we maintain our focus on returning a substantial portion of cash flows to shareholders over the long term, our financial results continue to be affected by the challenging market conditions across the drybulk industry.

Last month, we agreed to acquire 2 high-quality Handysize vessels for an aggregate purchase price of approximately $41 million. The acquisition, which is subject to the completion of customary documentation and closing conditions, will expand our modern fleet approximately 10% on a tonnage basis.

Consistent with our strategy, the 2010-built Baltic Fox and the 2009-built Baltic Hare will enter into the Clipper Logger Pool, a spot market-related Handysize pool operated by Clipper Bulk upon their expected delivery by the end of the current third quarter.

In support of our growth initiatives, we completed a $23.1 million share offering, the proceeds of which will be used to finance a portion of the acquisition. We also obtained a commitment from a global lending institution to finance the balance of the purchase price, which is subject to definitive loan documentation.

We appreciate the support that we have received from the banking and the capital markets in the execution of our growth strategy. Going forward, we will continue to focus on maintaining a sound capital structure and pursuing additional acquisition opportunities that create significant long-term value.

Turning to Slide 5, we provide an overview of our fleet. Since the company's inception, we have focused on building a modern fleet of drybulk vessels that meet stringent operational and safety standards. Upon the completion of the acquisition of the 2 Handysize vessels, Baltic Trading will own 11 drybulk vessels consisting of 2 Capesize vessels, 4 Supramax vessels and 5 Handysize vessels, with a total carrying capacity of approximately 736,000 deadweight ton and an average age of approximately 3.6 years, far below the world average of approximately 10 years.

All the companies existing vessels currently trade on spot market-related time charters at multinational companies, including Cargill International, a global producer and marketer of food and agricultural products, which enables Baltic to earn rates closely linked to the various Baltic Dry indices, while maximizing utilization and benefit from the positive long-term demand for global transportation of iron ore, steel and other core commodities upon improvement in the prevailing rate environment.

During the second quarter, we extended the spot market-related charter for the Baltic Bear, a 2010-built Capesize vessel with Swissmarine Services for a minimum and maximum expiration of February 1, 2015 and April 15, 2015, respectively. The rate of the spot market-related time charter is based on 101.5% of the Baltic Capesize Index.

Moving to Slide 7, we present our financial results. For the second quarter and 6-month period ended June 30, 2013, the company generated revenues of $6.4 million and $12.4 million, respectively. This compares to revenues for the second quarter of 2012 and 6 months ended June 30, 2012 of $7.6 million and $13.9 million, respectively. The decrease in revenues for the second quarter of 2013 compared to the prior year period is due to lower spot market-related rates achieved by our vessels.

The company recorded a net loss for the second quarter of 2013 of $4.6 million, or $0.19 basic and diluted loss per share. The net loss for the 6 months ended June 30, 2013 was $9.7 million, or $0.41 basic and diluted loss per share. This compares to a net loss of $3.7 million, or $0.16 basic and diluted loss per share, for the second quarter of 2012, and a net loss of $8.1 million, or $0.37 basic and diluted loss per share, for the 6-month period ended June 30, 2012.

Key balance sheet items, as presented on Slide 8, include the following: Our cash position increased to $23.7 million as of June 30, 2013, our total assets as of June 30, 2013 were $378.1 million, consisting primarily of cash and cash equivalents in our 9-vessel fleet.

On Slide 9, you'll see our utilization rate was 99.8% for the second quarter of 2013 compared to 99.1% in the year-earlier period. Our time charter equivalent rate for the second quarter of 2013 was $7,548. This compares to $8,802 recorded in the second quarter of 2012. The decrease in time charter equivalence rates resulted from lower spot rates achieved in the second quarter of 2013 versus the same period last year for the vessels in our fleet.

For the second quarter of 2013, our daily vessel operating expenses decreased slightly to $5,187 per day versus $5,214 per vessel per day for the second quarter of 2012. Daily vessel operating expenses for the 6 months ended June 30, 2013 were $4,980 per day versus $5,001 per day for the 6 months ended June 30, 2012.

As we have stated in the past, 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. Based on estimates provided by our technical managers and management's expectations, we believe daily vessel operating expenses for the second half of 2012 will be $5,400 per vessel per day on a weighted-average basis.

On Slide 10, we discussed our dividend for the second quarter. As I mentioned earlier, Baltic Trading declared a second quarter dividend of $0.01 per share. The dividend is payable on or about August 22, 2013, to all shareholders of record on August 15, 2013. Baltic Trading has declared cumulative dividends of $1.04 per share since completing its $228 million IPO in March of 2010.

On Slide 11, we present our anticipated breakeven expense levels. For the third quarter of 2013, we estimate our daily vessel operating expenses to be $5,400 per vessel per day on a weighted basis of an average number of 9.46 vessels for the quarter. We expect our daily free cash flow breakeven to be $8,152 and our daily net income breakeven rate to be $13,021. Our low breakeven levels are testament to Baltic Trading's efficient cost structure and service a core differentiator for our company.

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

Apostolos Zafolias

Thank you, John. I'll start with Slide 13, which points the drybulk indices. Represented on this slide is the overall Baltic Dry index. During April and May, the BDI remained at similar levels to those experienced during the first quarter. We believe this is predominantly due to the excess vessel supply, exacerbated by the front-loaded nature of the order book, lower iron ore output from Brazil and the winding down of the South American grain season.

As the second quarter progressed, the pace of new building vessel deliveries continued on a downward trajectory. As fleet growth slowed and more fixture activity surfaced in the market, the BDI began to ascend. The index increased from June 6 through the end of this second quarter, reaching a 2013 high of 1,179, a level not changed since January of 2012.

On Slide 14, we'll summarize some of the contributing factors that arise in the BDI, as well as other recent developments in the drybulk freight market.

Starting with the supply side. We have seen ongoing deceleration of new building deliveries since the peak of June of 2012.

For the second half -- for the first half of 2013, deliveries were 43% lower as compared to the same period last year. Partially offsetting vessel deliveries to date has been demolition, which, although not as robust this period as compared to the record setting year of 2012, still actively contributes to reducing vessel supply growth. 13.2 million deadweight ton was scrapped through the first half of 2013, helping to lower net additions by 50% as compared to the first half of 2012.

Furthermore, although the number of new building orders has increased since the beginning of the year, the overall drybulk order book, as a percentage of the fleets, still remains at 18%, its lowest level in over 8 years. Slippage continues at a fairly constant rate, with approximately a 28% not delivering in the first half of 2013.

On the demand front, although iron ore cargoes out of Brazil hit their seasonal lows in the first half of 2013, we believe the return of these long ton mile cargoes in the beginning of June, along with firm coal and grain fixtures, helped to improve short-term fundamentals and pushed Capesize rates of both $10,000 per day.

Freight weights also found support towards the end of the second quarter as a result of higher commodity exports out of Australia. June coal shipments from the 3 major ports of Queensland reached a record high monthly total of 15.6 million tons, their second highest month since June of 2010. Combined exports of coal and iron ore for the second quarter of 2013 also reached quarterly records coming in at 234 million tons.

As discussed in previous calls, we continue to believe that incremental capacity of ore from the major miners will positively affect demand for the transportation of commodities over a 5-year period. Expansion plans for the major Australian ore miners are well under way, with Fortescue recording a nearly 80% production increase and a Rio Tinto recording a 7% increase in the second quarter. Ore inventories at Chinese ports have slightly increased to 72.7 million tons, but still stand 25 million tons lower than the same time last year. Iron ore prices have recovered to $130 per ton after reaching a bottom of approximately $110 per ton in June of this year, but still remain below their annual peak of $159.

Although the arbitrage opportunity between international and Chinese domestic ore as price level is reduced, the spread could widen with the onset of higher ore capacity. Fortescue expects prices to stay in the $110 per ton to $130 per ton region on the back of stable demand from Chinese steel mills.

Lastly, we believe that as global growth prospects and sentiments and the rest of the world are beginning to improve, existing vessel availability could be absorbed by traditional raw material importers like Japan, Europe and South Korea. Indicatively, manufacturing activity in Japan expanded at its highest level in 2 years to a seasonally adjusted 52.3 PMI in June. At the same time, the Eurozone flash manufacturing PMI came in at 50.1, beating estimates and signaling potential growth.

Turning to Slide 15. We believe that a number of short and long-term catalysts will impact the drybulk market. Although Brazilian iron ore exports were down slightly year-over-year, looking at recent historical data, Brazilian ore exports have risen dramatically in the second halves of both 2011 and 2012, posting increases of 24% and 23% when compared to the first half of their respective years.

Construction on China's infrastructure projects could potentially support higher needs for steel also. The Chinese government just raised its fixed asset investment target for railways over the next 3-year period.

Overall, target rail spending is to increase by CNY 500 billion from the prior plan. The 2013 target was raised by 6% to CNY 690 billion, signaling that the government is actively trying to maintain its GDP growth target of 7.5%. The majority of this increase, however, will be felt over the next 2 years as CNY 460 billion has been added to planned spending for 2014 and 2015.

On the coal front, China's proposal to ban low calorific imports could result in greater ton miles as sourcing from Indonesia could be displaced by Australia and Colombia. We believe that the Indian coal trade will also be a significant catalyst moving forward. To date, India has experienced substantial increases in steam coal imports as electricity needs have risen.

Going forward, we also believe that India's increased steel production could result in higher coking coal imports due to a lack of high-quality domestic reserves.

On the supply side, as volatility and charter rates continues and scrap steel prices remain at decent levels, we believe scrapping of additional vessels could continue in 2013, following the trend of the prior 2 years.

On Slide 16, we talk more about the demand side fundamentals. Global steel production was up 2% in the first 6 months of the year. Leading the way in Asian steel production were China, India and Japan. Since we reported that production has rebounded in mid-July as daily steel production increased to 2.13 million tons, slightly up from 2.08 million tons during the first 10 days of the month.

With regard to India, steelmaking capacity is targeted to rise from 80 million tons per annum to 200 million tons per annum by 2020, as more projects are geared towards expanding steel and power plants. In Japan, the lower yen has boosted export demand, which has turn lifted steel output.

Moving on Slide 17, on the left side of the page, it will show the key expansion plans of iron ore producers as recently revised by their respective companies. The combined expansion plan through 2017 aggregates it to 410 million tons per annum, or approximately 37% of 2012 seaborne ore trade.

Most of the projected growth in iron ore export capacity in 2013 is expected to come from Australia, specifically Rio Tinto, Fortescue and BHP Billiton. As a result, Australia's Bureau of Resources and Energy Economics forecasts an increase in iron ore exports of 16% in 2013 and 2014.

As more ore comes to market and the price arbitrage potentially widens, Chinese domestic producers are going to have a difficult time competing internationally due to their high production cost and the lower grade of domestic ore.

Increased exports from Australia combined with reduced Indian exports and lower dependency on China's domestic supplies are expected to lead to iron ore trade growth, accounting for approximately 1/3 of the total increase in drybulk trade in 2013.

On Slide 18, we discuss the trends and supply side fundamentals, which remained mixed. As seen on the bottom left of the page, the remaining order book for 2013 stands at approximately 54.5 million deadweight tons. Of that total, however, 18.2 million deadweight tons, or 14%, have a contract date before 2009 and in our opinion isn't likely to deliver.

Additionally, it is our view that availability for 2015 deliveries at high-quality shipyards is limited, as there are few slots remaining, if any, at the current time. This development would help out -- would help put a ceiling on the order books for 2015 and limit fleet growth to just the existing orders over the next 2 years.

Through the first 6 months of the year, the drybulk fleet has grown by 3%, a much more manageable figure than what has been experienced over the past few years. Scrapping totals will likely come up short of last year's pace, however, new building vessel deliveries are likely to do the same, leading to less overall fleet growth, the positive trend that has continued in the demolition of younger tonnage, particularly in the Capesize sector.

The Handysize fleet shrunk by 9 vessel through June as older tonnage was scrapped. The supply side fundamentals for the Handysize sector remain encouraging, as 20% of the fleet is over 25 years old and the current order book is only 14% of the Handysize fleet.

Lastly, we note that although supply-side fundamentals remain uncertain, strong fleet growth, coupled with projected demand growth are encouraging signals toward reestablishing a more balanced long-term supply-and-demand equation.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Doug Mavrinac with Jefferies.

Douglas J. Mavrinac - Jefferies LLC, Research Division

I just have a handful of follow-up questions. First, over the last several weeks, we've seen the drybulk shipping market really strengthen, with most of the strength being seen in the Capesize market, where rates are up 100%, 200%, which is clearly benefiting your Capesize fleet. However, on a tonnage adjusted basis, your Supramaxes and Handysizes are still outperforming. What does that tell you about the underlying supply-demand fundamentals of the drybulk market in general, if anything? Is that telling that those smaller ships that move more commodities are still outperforming?

John C. Wobensmith

Yes. I mean, I think just from a return on capital standpoint that's the case, Doug. But clearly, Capes have been operating at low revenue levels for quite some time and now we're finally starting to see the impact of a slowdown in deliveries, with demand continuing to grow at sort of 6% per annum. I -- listen, I mean, in the end of the day, the correlation between Capes all the way down to Handysize is pretty high. But obviously, you have periods of time where one may outperform the other.

Douglas J. Mavrinac - Jefferies LLC, Research Division

Right, right. So as we progress and as we see kind of all this new iron-ore production capacity coming online, while it may benefit the Capes first, as we've seen, it should continue to trickle down to the smaller asset classes as well. Is that what you would expect?

John C. Wobensmith

Yes.

Douglas J. Mavrinac - Jefferies LLC, Research Division

Yes. And then as it relates to -- maybe not just the fundamentals but the seasonality of drybulk shipping, we're coming up on the U.S. Grain Trade in September, October. When you look at your fleet mix, are all of those guys going to benefit from that as well? Or will that be most of your Supras and Handies? How do you see your fleet benefiting, if at all, from the upcoming U.S. Grain Trade?

John C. Wobensmith

I think, primarily the Supramax and the Handysize, there certainly will be Panamax gains as well, particularly in the Gulf. There are quite a few Panamaxes that go in there to load grain. We don't have Panamaxes, but in the end of the day, it all gets pushed down to Supramaxes and Handys...

Douglas J. Mavrinac - Jefferies LLC, Research Division

Right, which is the majority of your -- yes, and that's the majority of your fleet, right?

John C. Wobensmith

That's correct.

Douglas J. Mavrinac - Jefferies LLC, Research Division

Got you. And then kind of, John, you made a comment a second ago about return on capital. Clearly, you guys made a couple of acquisitions during the quarter, buying a couple of Handysizes. When you look at why you spent the money on that particular asset class, did it all come down to return of capital and that is where it was most attractive?

John C. Wobensmith

Yes. As it stood at that time and as I mentioned on the previous call, that was a private transaction. They were very high-quality assets, Japanese-built, and we thought it was the right move.

Douglas J. Mavrinac - Jefferies LLC, Research Division

Got you. And then just 2 other questions before I turn it over. These are just kind of more update questions. First, as it relates to your balance sheet, can you remind me about your amortization schedule kind of post the transaction? I mean, any sort of debt due this year, next year, '15? So maybe for the next couple of years, what your amortization schedule is?

John C. Wobensmith

Well, we have the new facility that we put in place, which we'll begin amortizing at $375,000, approximately, a quarter, that amort, assuming the vessels are delivered, say, end of August or early September, that amort begins 3 months after that. On the larger credit facility, it steps down by $1 million semiannually, but that -- you could have -- under the current outstanding, there would be no amortization for this year or next year on that credit facility.

Douglas J. Mavrinac - Jefferies LLC, Research Division

That's what I thought. Great. And then just final question, and this relates to your dividend policy. I know what you guys have been paying out for the last handful of quarters, but we're now starting to see rates strengthening and to the extent that we see a continuation in strengthening rates and that possibly affects your cash flow, how do you guys think about paying out a dividend in a better environment? I mean, will it be pegged to earnings, will it be pegged to cash flow, will it be a combination of a variety? How do you think about that going forward?

John C. Wobensmith

Yes. I mean, listen, traditionally, it's been tied to net income. As you know, we've had negative net income for the last few quarters. The Board has elected to continue to pay a dividend. We certainly would anticipate as the market improves -- our goal would be to increase the dividend, but, specifically, very difficult to talk about it at this point.

Douglas J. Mavrinac - Jefferies LLC, Research Division

Right, right. It would just depend upon how the market plays out. But it is -- I mean, you still anticipate maybe pegging it to kind of just earnings and cash flow and that sort of stuff, just kind of market conditions?

John C. Wobensmith

I think it's very easy to say that the strategy of the company is to be a dividend payer as well as a growth platform. And so those are 2 key things that we want to focus on.

Operator

[Operator Instructions] And at this time, there are no other questions. I'll turn it back to our presenters for any closing remarks.

John C. Wobensmith

Thank you very much, operator. Thank you, everyone, for participating. Bye-bye.

Operator

That concludes today's conference call. We appreciate your participation.

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