Paragon Shipping's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Paragon Shipping (PRGNF)

Paragon Shipping, Inc. (PRGN) Q4 2013 Results Earnings Conference Call March 14, 2014 9:00 AM ET


Rudy Barrio - Allen & Caron

Michael Bodouroglou - Chairman, President and CEO

Robert Perri - Chief Financial Officer


Doug Mavrinac - Jefferies

Noah Parquette - Maxim Group

Fotis Giannakoulis - Morgan Stanley


Good day, and welcome to the Paragon Shipping Fourth Quarter and Year-End 2013 Results Conference Call. All participants will be in a 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.

And I would now like to turn the conference over to Rudy Barrio of Allen & Caron. Please go ahead.

Rudy Barrio

Thank you, Emily. Good day, everyone, and welcome to Paragon Shipping’s investor conference call to discuss its financial results for the fourth quarter and year ended December 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 couple of items I would like to cover. Many of you received a copy of Paragon Shipping’s year-end results press release. It was disseminated yesterday afternoon and if you did not receive a copy of the press release, it is posted on Paragon Shipping’s website at and in the Investor Relations section of our website at 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 pass code 10042306. 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.

Further we would like to remind everyone that the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Some of the statements made during this call 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 filing with the Securities and Exchange Commission, all of which are available at

I would now like to turn the call over to Robert Perri. Good day, Robert.

Robert Perri

Good morning Rudy, thanks, and good morning everyone. Today I’ll briefly give you the highlights of our fourth quarter and year-to-date 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 fourth quarter and year ended December 31, 2013 financial results, before ending with our closing remarks.

Joining me on the call today is our Chairman, President and CEO, Mr. Michael Bodouroglou and we both will be available for questions at the end of the presentation.

Please turn to slide number four. In the fourth quarter of 2013 we reported net revenues of $15.6 million, adjusted EBITDA of $4.7 million and an adjusted net loss of $1.8 million or $0.10 per share. Since our last earnings conference call we have been very active. Following the completion of our $34.5 million public offering in September we agreed to purchase a total of four Eco-Design Ultramax newbuilding drybulk carriers. In addition we agreed to cancel one of our two 4,800 TEU containerships newbuilding contracts at no cost to us to transfer the deposit to the remaining vessel, the Box King reduces contract price from the original $57.5 million to $55 million. In January 2014, we took delivery of the Proud Seas our fourth Handysize vessel and increased our current operating fleet to a total of 14.

In February, we completed a $42.4 million public offering, the proceeds of which we indicated will be used for further fleet expansion. It took us three weeks to find an enter into shipbuilding contracts for three Kamsarmax newbuilding that increased our newbuilding program to a total of eight vessels, 7 drybulk and one containership. In addition, we entered into a firm commitment with HSH for a $47 million secured loan facility for the refinancing of the Friendly Seas and the partial financing of our first two Ultramax newbuilding drybulk carriers that are delivered in 2014. And in addition, we agreed to extend the existing waiver and amend the definitions of certain financial covenants with UniCredit and HSBC respectively giving us even more financial flexibility.

On slide five, we summarize our current fleet and fleet growth expectations. Today, we operate 14 vessels in three size classes with an average age of 7.5 years compared to the industry average of 9.3 years. Our drybulk newbuilding program secures us fleet growth with expected deliveries between the second quarter of 2014 and the fourth quarter of 2015.

We also have one 4,800 TEU containership under construction for which we have granted Box Ship the option to acquire and our preference is to sell this vessel before delivery. Our drybulk fleet will expand to 21 vessels in five size classes by the end of 2015, upon completion of our newbuilding program and pro forma including the containership, the fleet average age would decrease to 6.3 years, while our carrying capacity will increase by approximately 550,000 deadweight tons for a total of 1.4 million deadweight tons. The contractual cost of our current newbuilding program is approximately $256 million out of which we’ve already paid $50 million, resulting in a outstanding capital commitments of $206 million.

For the financing of our newbuilding program we have credit facilities in place for $67.4 million for all of our vessels been delivered in 2014. And we expect to find financing for approximately $93 million for 2015 deliveries, based on 60% leverage as we get closer to the delivery of those vessels.

This results in an expected equity CapEx of $45.5 million through 2015 that will be funded from cash on hand as we currently have $70 million, so we are fully funded.

More importantly we believe the market value of our fleet on a fully deployed basis is around $560 million based on recent transactions which means our current net asset value is over $9.50 per share. So you can see the value preposition our shares offer -- given our share price is over 35% below our intrinsic value.

On slide six, we provide an overview of our chartering strategy. The full details of the charterings of our fleet can be found under the Appendix section of this presentation. The key take away from this slide is that all our vessels are running on short term charterings, which gives us significant flexibility to the spot market as we only have 13% of our revenue days fixed for the remainder of 2014.

More importantly including our newbuilding deliveries, we have over 4,000 open days for the remainder of 2014, which means for every $1,000 increase in charter rates we [earn] an additional $4 million in revenues almost all of which goes straight to our EBITDA.

This shows the type of leverage we have to an improvement in the drybulk market. And this number increases to over 7,000 open days and 8,000 open days in 2015 and 2016 respectively as we take delivery of our newbuildings.

The graph on slide seven compares Paragon’s fleet wide average daily time charter equivalent rate since 2009 versus the average time charter rates for vessel types we own. We wish to emphasize the fact that our chartering strategy has continually outperformed the market since 2009 by an average of over 30% annually and we expect to continue to be able to outperform the market going forward.

Thus, at this time in this cycle we will employ our vessels on short-term time charters and voyage charters. And unless we see a strong improvement in the market we will continue to operate these vessels on a short-term basis as we believe it gives us the flexibility to take advantage of any potential upturn in the market and will continue to improve our returns.

For an update so far in the first quarter of 2014, Panamax and Supramax rate have been averaging approximately $11,000 to $11,500 per day. And Handysize rate that averaged around $10,000 per day.

On slide eight, I want to give you an update on our bank financing. Currently our total debt stands at $203 million, including the recently drawn $25.4 million loan from Nordea, following the delivery of the Proud team.

Our cash position currently stands at $70 million and this translates into a net debt of $133 million, representing a 40% net debt to total capitalization.

The right hand graph presents our outstanding debt and scheduled quarterly loan repayments through 2015. In the third quarter of 2015, we have one loan that matures and a $27.1 million shown on the graph represents the respective Balloon payment. We are currently in negotiations to refinance this loan and hope to have some news on this in the coming months.

As per our financing update, we have agreed to extend our waiver with UniCredit until 2015 and we have agreed to amend the definitions of certain financial covenants with HSBC to a level that gives us significant [leverage] to remain in compliance with this facility for the remainder of the loan.

We also have the new facility with HSH for the two Ultramaxes being delivered in 2014 and we expect to finance our remaining 2015 newbuildings around 60% of the purchase price.

Now let me talk to you about the recent developments in the drybulk market. The left hand chart on slide 9 depicts the average time charter routes of the main drybulk sector since January 2012. As you can see from the above, Cape rates followed by the rates of smaller vessels picked up significantly in the third quarter of 2013 and it remained volatile ever since.

More specifically, Panamax and Supramax rates rose from 7,000 per day to $15,000 to $16,000 per day range and are currently around $9,000 to $12,000 per day today and there has been some positive momentum this past week as we’re seeing the start of the healthy grain season. We also expect the strikes in Colombian coal [boards] to end towards the end of March, which will further hurt -- help boost charter rates for Panamax and Supramax vessels.

We believe that the charter market has more room for improvement as you are now seeing charter is trying to fix vessels for [period] business of more than one year well above current spot rates, which is a positive indication of where expectations are.

Going forward we do not expect rates to improve in a straight line, but for the market to continue to be volatile although maintaining the upward trend. The S&P market has also been strong as values have increased notably since our third quarter of 2013 in all size sectors. And the average price of five year old vessel today is up over 40% compared to where the value was at this time a year ago. Nevertheless, values remained at well below their historical averages, so there is a lot of room for further improvement.

On slide 10, we show the projected volume growth of the drybulk cargos through 2014. As you can see, demand remains healthy, growing by more than 5% in 2014 with the largest expected growth from iron ore and steam coal that is being driven by the Far East. In addition, 2013 saw a very good grain harvest from the U.S. and we expect another strong grain season from South America in the U.S. this year, which will be a boost for Panamax and Supramax.

On slide 11 you can see that the order book currently stands at only 21% of the existing fleet, which is a low figure. And for the full year 2014 and 2015, we expect a net fleet growth of 5.2% and 4.9% respectively. At this point, the order book is pretty much fixed for 2014 and 2015, with the exception of any slippage that may occur. So we have a good feeling for what the maximum supply growth will be over the next few years.

2013 was also another solid year for scrapping as well with over 22 million deadweight tons going to the breakers. Although we expect there will a slowdown in the amount of vessels scraped as charter rates continue to improve.

The graph on slide 12 presents the drybulk year-over-year trade growth and net fleet growth since 2001 and includes forecast for 2014 and 2015. In 2013, the market was close to equilibrium and the oversupply from the previous years has already started getting worked out at the market. As long as the order book remains manageable, we should see a recovery to continue at least through 2015 as another period where demand seems to exceed supply.

Let me now proceed with a quick analysis of our financial results for the fourth quarter and year ended December 31, 2013. Please turn to slide 13. During the fourth quarter of 2013, we operated an average of 13 vessels at a time charter equivalent rate of $11,804 per day, which equates to net revenues of $15.6 million, an increase of 20% year-over-year. And we operated our fleet at a 98.7% utilization rate compared to 98.1% for the same period last year.

During the quarter, we wrote down our investment in Box Ships along with the values of the shares of Korea Line Corporation that we had received in our settlement agreement. This resulted in a one-time non-cash expense of $3.8 million or negative $0.22 per share.

In relation to the cancellation of our 4,800 TEU containership, we wrote-off the capitalized expense of $200,000 or $0.01 per share. There were also regular non-cash items including a $300,000 expense relating to the amortization of share-based compensation and a non-cash gain of $175,000 related to the mark-to-market valuation of our interest rates swap contracts, which is netted against the actual cash payments made under those swap agreements during the quarter.

In summary, for the fourth quarter of 2013, the non-cash items totaled $4.1 million or a negative $0.24 per share and excluding these our adjusted EBITDA was $4.7 million and our adjusted net loss was $1.8 million or $0.10 per share. For the full year of 2013, the non-cash items totaled $11.8 million, while adjusted EBITDA was $19.7 million and adjusted net loss was $5.2 million or about $0.40 per share.

On slide 14, we go into our conclusions. In conclusion, we believe the market has turned the corner and we are starting to see the makings of a solid recovery in the drybulk market for at least the next two years, as demand remains strong and order book is at manageable levels. As a company, we continue to work hard to improve our profitability, while at the same time [issuing] the company to take advantage of any opportunities as they arrive.

Our Ultramax and Kamsarmax drybulk newbuildings will significantly increase and diversify our fleet and our efficient capital structure will give us the flexibility to execute on our strategy of conservative growth through the cycle.

In addition, our charter policy gives us significant leverage to the market and creates immediate value to our shareholders as rates improve going forward. Most importantly, we believe that our shares are significantly undervalued and offer a very attractive industrial proposition to investors.

Thank you for your attention. And I will now turn the call back over to the operator for any questions.

Question-and-Answer Session


Thank you. We will now being the question-and-answer session. (Operator Instructions). And our first question comes from Doug Mavrinac of Jefferies. Please go ahead.

Doug Mavrinac - Jefferies

Great, thank you operator. Good afternoon Michael and Rob. Just had a handful of follow-up questions for you guys, with the first for you being more on the drybulk shipping market itself and then the last for you on Paragon specifically. The first one is on the iron ore trade, obviously in the market there has been recently a lot of concern about what’s happening in China, you’ve seen iron ore prices falling fairly dramatically in recent days, yet when you look at drybulk shipping rates, they are actually quite firm having strengthened significantly over the last few weeks. So my first question is can you talk about how the recent kind of anxieties in China have or have not affected the drybulk shipping market? And how can rates rise when iron ore prices fall?

Michael Bodouroglou

Well very simply, we do not go very much into detailed analysis over these factors, Doug. We are prepared to have, to maintain a long-term view of what is happening in China and that is that we take the view that every urbanization and the development that is underway in China is not going to stop any time soon, they will continue for the foreseeable future. Of course there are going to be micro events which affect the sentiments and create volatility in the market. But the long-term view we take as far as drybulk commodity demand is concerned, which originates from China, India, Southeast Asia and Africa is going to be very healthy for the foreseeable future.

And as far as we are concerned, the driver of our market, the dominant driver of rate in our market would be the supply and not the demand. But since, on the specific question, the lower it is always in my mind at least that the lower the iron ore price is, the more advantageous it becomes for iron ore users and users in China to import iron ore from even farther destinations on Brazil as opposed to actually mine their own which has a very high cost of mining. So, I think lower, the lower the prices of iron ore, the better are the prospects for iron ore trade.

Doug Mavrinac - Jefferies

Right. Yes. That's what I was thinking as well with iron ore to $105 a ton, if the marginal cost of production in China is $120, those guys are shutting down and it makes the [Australian] and Brazilian exports that much more attractive. So that sounds like it's consistent with your view as well?

Michael Bodouroglou


Doug Mavrinac - Jefferies

Got you, got you. That's actually very helpful and actually kind of hearing you guys talking about the supply availability being more important than the user demand is very helpful too as we kind of go forward. And then Rob, when you talk about the recent uptick in some of the smaller asset classes it seem the beginning of the South American grain trade, it has been kind of a little bit delayed, but you are starting to see some signs in terms of increased pictures that the South American grain trade is starting to begin?

Robert Perri

Yes, definitely yes.

Doug Mavrinac - Jefferies


Robert Perri

And the reason this creates a lot of facts and we have seen this many times in the past, the historical sort of reputation and you like that whenever charters who have let’s say they have a better sort of forward view of the market than ship owners. I mean this is a -- they control the trade, they see inquiries about their commodities, they see -- they take positions, they see what the clients want. And whenever they’re eager, they’re willing to fix forward long-term at rate significantly higher than current spot rate, then they obviously expect the market to strengthen. And this gives us comfort for the quarters ahead.

Doug Mavrinac - Jefferies

Yes, And you guys even mentioned, I think Rob in your prepared comments about how high time charter rates are relative to spot rates. And really one of the impressive things from my standpoint is how deep the market is. I mean we’ve seen a lot of time charter contracts signed at these high rates. Are you guys getting an increase in the number of inquiries? I mean you obviously have some ships either in the spot market or on short-term charters about to expire. Are people calling you up and saying hey, look at my -- will you be willing to fix the ship for a long period of time; are you getting those types of calls as well?

Michael Bodouroglou

Absolutely, yes. And frankly sometimes we [struggle] in dilemma. I mean to put it in more -- in terms of numbers, as Rob mentioned in the presentation, our average time charter rate for 2013 was $10,700. Current one year time charter rate, [not for this] current time charter rates are about $3,000 to $4,000 higher than that. So, if we fixed -- if we took a decision to fix all our vessels on a time -- on a one year time charter period and achieve the $3,000 to $4,000 more per day, this would actually double our EBITDA roughly just by doing that. But we think we are more optimistic than many of our charters. And we want to wait and see, we don’t want to rush into decision that may cause us, give us significant upside potential which we think that is out there.

Doug Mavrinac - Jefferies

Right, got you, very helpful Michael. And then just final question before turning it over. Obviously, recently you announced the acquisition of three Kamsarmaxes, my question is, was there something particularly about this asset class that you found particularly attractive or was it just an attractive deal and you are looking to kind of diversity your exposure across the drybulk shipping spectrum?

Michael Bodouroglou

When you take a look at the composition of our fleet, you will see that most of our ships are Panamaxes and Supramaxes. Kamsarmaxes are of course the Panamaxes of tomorrow. So, we will continue; I think it was a natural choice for us to order also not only Ultramaxes but also diversifying to the Kamsarmax as well. These are the main asset classes including Handys as well that we like to own and operate. We thought that we like very much the slots, the delivery times, they are only 2015, and we also like the specifications of the vessels and the price.

Doug Mavrinac - Jefferies

Got you. That’s all very helpful. Thank you for the time.

Michael Bodouroglou

Thank you.

Robert Perri

Thanks Doug.


The next question is from Noah Parquette of Maxim Group. Please go ahead.

Noah Parquette - Maxim Group

Thanks. Good afternoon, guys. My first question was, can you talk a little bit about the container vessels; what you see your options are; what looks attractive to you just to remove that overhang? Thanks.

Michael Bodouroglou

Yes. As we have said in a number of occasions, this vessel will not -- the plan is that Paragon will not end up owning this vessel. So, our preference is to sell it. And we are out in the market to explore opportunities and check at which level, we can sell the vessel. We need the preference, although we could also decide to take delivery, which is not our preference. It will depend on what kind of purchase price we would be able to achieve.

Noah Parquette - Maxim Group

Okay. And then on the most recent acquisitions of three Kamsarmaxes, those are great delivery time slots in 2015. Can you talk about how you are able to get further slots, and if there are more slots like this available in shipyards; is that something that the broader market has to look as 2015 supply under report? Thanks.

Michael Bodouroglou

The reason why we were able to get these slots is that we had discussions with a particular yard over a prolonged period of time, although we only finalized discussions when we announced the acquisition. So, it’s not something that happened overnight.

It also I think, without bragging too much about it, I think it also has to do with our relationship that we have built as a company with many of the first class Chinese yards. And regarding availability of 2015 slots, I don’t think -- it hard for me to say that there are not any, but I can very comfortably say that are very, very either are any, because most -- we continue irrespective of the fact that we just placed orders for these three Kamsarmaxes that you mentioned.

We are continuously speaking to yards; we are continuously exploring and monitoring offers and availabilities. And the information, the feedback that we get from at least the top tier [CBRs] is that there are no slots available for 2015, although nobody can rule out the fact that they may be hiding some slots for a later date. Although -- the fact is that we are getting way into 2014, we are approaching the end of March, so even physically; it becomes difficult for shipyards to actually start negotiating deals and delivery in 2015.

Noah Parquette - Maxim Group

Okay. That color is very helpful. Thank you very much.

Robert Perri

Thanks Noah.


(Operator Instructions). And our next question comes from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

Fotis Giannakoulis - Morgan Stanley

Yes. Hi Michael, hi Rob. And congratulations for the good quarter. I want to ask you about your new buildings; if you can give us a little bit more color about the shipyard installment; how much money you will have to pay upfront and how much upon deliver? And also what are your thoughts about chartering both in your buildings and the other vessels, at what point are you considering putting your vessels into longer term charters?

Michael Bodouroglou

Hello Fotis, thanks for the question. The deal that we have done with the yard is to pay 30% upfront and balance of the money on delivery. The plan that we will hold upto 60% in order to take delivery of these vessels. And we are confident that we have, we can fund the rest when the time comes.

Regarding chartering -- and these are as you know (inaudible) they have better specifications, specific consumption specification, designs. And this is first class shipyard, which is very well known for its punctuality. It’s not the easier shipyard to negotiate, contracts [needs] to be further -- they are not the most flexible time [cycle] but they are very liable in terms of delivering what they promise in writing.

Regarding our chartering activity, as we have said in the past, our chartering policy depends not so much on what happens to the market today, but mostly on what we expect will happen to the market in the near to mid-term future.

So, for as long as we take the view that the market is really not worth swing, so to speak, we will be very reluctant to lock-in significant deals. We will be chartering our six [boats] those in the water and those will be delivered and new buildings will be delivered, on a spot or very short-term basis.

Fotis Giannakoulis - Morgan Stanley

Thank you, Michael. One more about the new buildings. The prices, although they have come slightly higher the last year, they still look; they are still 50% below the peak levels. Are there any thoughts of additional expansion and whether this expansion will be on new buildings or second hand vessels? At what point you think that the prices might not be as attractive as what you found them with your recent acquisition?

Michael Bodouroglou

Well, I think that at the moment that asset values become higher than the historical average. I think it becomes a difficult call and one should be very careful, before they play it a role. So as long as we are at levels below historical values, the decision making of making an investment, I think it is easier. Whether values will continue to climb and at what pace, I think it is difficult to guess. It would depend on how the market actually develops the charter market in particular. But my personal expectation is that we will see, we will continue to see asset values going up.

And the plan, probably the most interesting part of your question concerns our appetite to grow. The plan is yes to grow the company. And we will -- the plan is to grow the company with either ships in the water or newbuildings, of course provided as we reconsider the acquisitions valuable and accretive to the company.

Fotis Giannakoulis - Morgan Stanley

Thank you, Michael. Would you mind reminding us what is the historical average of a Panamax vessel versus the $30.6 million that you ordered, just to have an idea at what levels you think that prices will start not being that attractive and then how far away are we from that point?

Michael Bodouroglou

I think it’s around the $35 million mark.

Fotis Giannakoulis - Morgan Stanley

Okay. Thank you, very clear. And regarding the financing can you also explain to us what was the rationale of the newbuilding, the follow-on offering. I understand that your stock is significantly undervalued right now. What was the trade that you have to think about between issuing shares below NAV and also acquiring additional vessels?

Michael Bodouroglou

Well, the rationale is that we understand that over a long period Paragon shares have been significantly undervalued. We take the view that also in discussion with -- our view is also formulated by discussing with investment bankers and people like yourself [shipping] analyst. We’re telling you that one of the reasons why our net asset value, our share price has not been trading well is the size of the company when suddenly it’s important to grow the company, to grow the market cap of the company. And in order to do that when your share price is traded below net asset value you’ll not have many choices other than issuing stock below your net asset value.

However, this is always relevant with respect to what happens to your share price long-term. So if at the end of the day we achieve to have a stock traded at net asset value or above net asset value, I think our previous shareholders, our regional shareholders will also be happy about it.

Fotis Giannakoulis - Morgan Stanley

Okay. Thank you very much, Michael. I appreciate your time.

Michael Bodouroglou

Thank you, Fotis.

Robert Perri

Thanks Fotis.


(Operator Instructions). I am showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Perri for any closing remarks.

Robert Perri

Thanks everyone for joining us today. And we look forward to talking to you at our next conference call. Have a good day everyone. Have a good weekend.


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

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