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Executives

Sophocles Zoullas - Chairman and CEO

Adir Katzav - Chief Financial Officer

Analysts

Eagle Bulk Shipping, Inc. (EGLE) Q2 2013 Results Earnings Call August 8, 2013 8:30 AM ET

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q2 2013 Eagle Bulk Shipping Inc. Earnings Conference Call. My name is Marie, and I will be your operator today. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder this conference call is being recorded.

And now, I’d like to hand the call over to Sophocles Zoullas, Chairman and Chief Executive Officer. Please proceed.

Sophocles Zoullas

Thank you and good morning. I would like to welcome everyone to Eagle Bulk Shipping’s second quarter 2013 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 risks and uncertainties. You should not place undue reliance on these forward-looking statements.

We refer all of you to our filings with the Securities and Exchange Commission 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 three you will note the agenda for the today’s call. I will first review our second quarter 2013 results and highlights. We will then proceed with an update on our commercial operations and will finally present our current views on 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 was fairly uneventful during the second quarter with all asset classes posting modest increases in rates over the prior period. Freight as a whole was impacted by several offsetting forces.

South American grain exports which early on in the quarter provided a needed boost to the sub-cape sized asset classes came to a seasonal end during May, particularly effecting Panamaxes. Supramaxes which also move significant amounts of grain cargoes were less impacted by this seasonal effect, thanks to a robust minor bulk trade and strong Indonesian coal exports.

Capesizes continue to experience severe pressure during most of the quarter but in June a pick up in Chinese iron ore exports helped push rates higher, albeit from very low sub-OpEx levels.

New building deliveries totaled 15 million deadweight tons during the second quarter or approximately 180 vessels, representing a substantial decrease of 30% sequentially and down 55% year-over-year. The Baltic Dry Index or BDI averaged 888 points for the quarter representing increase of 12% sequentially and a decrease of 13% year-on-year.

Turning to Eagle Bulk, the company reported a net loss of $3 million or $0.18 per share for the second quarter of 2013. Given our short-term chartering strategy, our earnings continue to be highly correlated to the spot market.

Net revenue for the quarter was $44.2 million. EBIDTA for the quarter amounted to $38.6 million. Fleet utilization which is calculated as the number of operating days divided by the number of available days remained at an impressive level of close to 99.8%.

In regards to our settlement with KLC, I’m pleased that we recorded an additional gain of $25.6 million during the quarter. In addition to the $33.1 million we recorded during the first quarter. Adir will discuss the terms of the settlement in more detail later on in the call.

Please turn to slide seven for an update on our commercial operations. Eagle Bulks’ fleet totals 45 vessels comprised of 43 Supramaxes and two Handymaxes and is considered one of the largest and most homogenous in the industry with an average age of just 6.1 years.

We employ an opportunistic and dynamic approach to chartering, utilizing a mixture of long-term time charters, contract of affreightment or COAs, short-term voyages and index charters.

Given that we are still hovering at or near the trough of the shipping cycle, we are staying short in tenor and will remain this strategy until there is further improvement and normalization in charter rates.

As of June 30, our chartering position for the second half of 2013 was as follows, 28% of our fleet was either fixed on time charter, voyage charter or performing COA business. 2% was indexed to the Baltic Supramaxes Index or BSI and approximately 70% was open for charter.

On slide eight, we illustrate our cargoes for the second quarter, which totaled almost 5.3 million tons. The composition was 52% in minor bulks and 48% in major bulks. Coal remains our top cargo with almost 1.8 million tons carried during the quarter. We primarily carried coal from Indonesia destined for both China and India but we also moved product from South Africa, Columbia and Australia.

Other cargoes carried during the quarter included sand, representing over 650,000 tons, Alumina and Bauxite which totaled almost 600,000 tons and Agricultural products which amounted to over 500,000 tons. In total, we carried over 15 different cargoes during the quarter. This can be attributed to the Supramaxes’ known versatility in being able to load and discharge cargo using onboard cranes, for being able to navigate in smaller ports and for its optimal size in matching cargo stems.

Please turn to slide 10 for a review of the industry fundamentals. As I mentioned earlier in the call the drive bulk market during the second quarter improved slightly over the prior period thanks to improved seasonal factors in both supply and demand. New building deliveries dropped during the quarter post the seasonal spike realized during the prior period, allowing the market to better observe new supply.

The sub capesize sectors benefited from strong South American grain exports, which came to a seasonal end in May. Supramaxes continue to benefit from the firm demand for minor bulks and the large Indonesian coal trade.

For the second quarter, Supramaxes averaged $9,300 per day representing an increase of 15% over the prior period, outperforming both Panamaxes and Capesizes by 19% and 50% respectively. Panamaxes averaged $7,800 per day for the quarter while Capesizes averaged $6,200 per day. Supramax outperformance can be attributed to the better relative supply-demand fundamentals and to its relative flexibility as outlined earlier.

On slide 11, we take a detail look at past deliveries in the future orderbook. As mentioned earlier in the call, new building supply growth remains at high levels but deliveries are past their peak which occurred during the second quarter of last year and are coming off rapidly.

July deliveries totaled 4.5 million deadweight tons, down 67% from their peak level in June last year. On the new order front, there has been noticeable pick up in contracts placed in 2013 as compared to last year. New orders through July totaled 30 million deadweight tons or roughly 330 vessels of which almost 55% relate only to Capesizes.

The orderbook as a percent of the fleet outstanding stands at 18%, down 77% since peaking in 2008. We believe the pick up in orders this past year is due to an improved sentiment and conviction by owners on the future market.

I would like to also point out that quality shipyards are now more or less booked through 2015. And we have already witness second hand prices move up anywhere from 5% to 15% in recent months.

Please turn to slide 12 for review of the current market fundamentals. The second quarter has been very much a continuation of dynamics exhibited during the previous period. Rates remain range bound on the back of subdued trade activity, due to Ramadan, Indian monsoon season and the general summer lull.

The quarter-to-date average for Supramaxes is $9,500 per day, an increase of 2% over the prior period. Panamaxes have been averaging $8,600 per day, an increase of 10% over the prior period. Capesizes have benefited from the recent pickup in Chinese Iron Ore imports and our currently averaging $13,200 per day, about double the prior period which was below OpEx levels.

Chinese Iron Ore Inventories currently stand around 77 million metric tons, down 23% year-on-year. We view this as a medium-term positive for both iron ore and coal imports. Lastly, a bumper harvest in North America is expected to increase exports for grain products providing further support for Supramaxes and Panamaxes in the fall. Looking forward, we believe risks related to any serious macroeconomic shocks continue to evade, vessel supply growth is coming off quickly, demand remains healthy but also choppy in the short term.

On slide 13, we discussed long-term demand fundamentals. Our thesis has not changed and we continue to view the fundamentals as healthy, especially for coal. Global urbanization, as depicted in the chart on the left side of the slide, is expected to drive increased long-term demand for both minor and major bulk dry commodities.

Steel production is projected to increase 40% by 2020 leading to increase demand for both iron ore and metallurgical coal. Over 450 gigawatts of new coal fueled-power capacity is scheduled to come online by 2017. This equates to over 1.4 billion tons in incremental coal demand which 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 and the long-term fundamentals remain intact.

I will now turn over the call to Adir who’ll review our financial performance.

Adir Katzav

Thank you, Soph. Please turn to slide 15. This is a summary on our second quarter results of operations. Our net revenue for the second quarter was $44.2 million, compared to $48.5 million for the second quarter of 2012. The year-on-year decrease in revenue is due to a loss for charter rates.

Our operating income for the quarter was $17.7 million compared to an operating loss of $11.1 million for the second quarter of 2012. Our cash interest expense for the quarter was $11.3 million compared to $10.1 million for the second quarter of 2012. Our non-cash interest expense for the quarter was $9.4 million that includes PIK interest of $7.3 million and a deferred financing cost of $2.1 million compared to $1.9 million for the second quarter of 2012.

EBITDA, as adjusted for exceptional items as defined in our debt agreement, was $38.6 million for the quarter compared to $10 million in the second quarter of 2012. Net loss for the quarter was $3 million or $0.18 per share.

Please turn to slide 16 for a summary of our balance sheet. Cash at the end of the quarter was $19.6 million, an increase of $0.4 million quarter-on-quarter.

Please turn to slide 17 for an update on KLC. As we have previously mentioned in January, we reached a comprehensive agreement for early termination of 13 vessels charters out to KLC. On March 28, 2013, the Korean court approved an amendment to the KLC rehabilitation plan after receiving a favorable vote from the concerned parties. As part of the amendment on May 9, 2013, we received additional KLC common shares which are subject to six months lock-up.

Their shares replace a note receivable previously recorded in the first quarter of 2013. Deferred market value of the shares upon issuance was in excess of the receivable fair value. As a result, we recorded an incremental gain of $25.6 million in the second quarter of 2013.

The total positive impact from KLC termination agreement amounted to $58.7 million of which we recognized $33.1 million in the first quarter of 2013, and $25.6 million in the second quarter of 2013.

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

Question-and-Answer Session

Sophocles Zoullas

We’d like to thank everyone for joining us for our second quarter 2013 call and we look forward to keeping everyone posted on updates in the future. Thank you very much everyone.

Operator

Thank you, ladies and gentlemen. That concludes the conference call for today. Thank you for joining us and you may now all disconnect.

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