Baltic Trading (BALT) Q1 2014 Results - Earnings Call Transcript

May.12.14 | About: Baltic Trading (BALT)

Baltic Trading Ltd. (NYSE:BALT)

Q1 2014 Earnings Conference Call

May 8, 2014 8:30 AM ET

Executives

John Wobensmith – President and CFO

Apostolos Zafolias – IR

Analysts

Douglas Mavrinac – Jefferies LLC

Omar Nokta – Global Hunter Securities

Operator

Good morning, ladies and gentlemen, and welcome to the Baltic Trading Limited First Quarter 2014 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. Instructions will follow at that time. A replay of the conference will be accessible at any time during the next two weeks by dialing 888-203-1112 or 719-457-0820, and entering the passcode 3356720.

At this time I will turn the conference over to the company. Please go ahead.

Unidentified Corporate Participant

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 estimate, project, expect, anticipate, budget, 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 Securities and Exchange Commission, including without limitation, the company’s Annual Report on Form 10-K for the year ended December 31, 2013, 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

Good morning. Welcome to the Baltic Trading’s first quarter 2014 conference call. With me today is 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 questions.

Starting on slide four I will begin by reviewing Baltic Trading’s highlights for the first quarter. During the first quarter we benefited from the successful integration of our two newly acquired Capesize vessels and two Handysize vessels into our operating platform while positioning the company and to further expand its modern high quality fleet. We also continued to implement our fleet deployment strategy that provides the ability to capitalize on the fleet rate increases.

For the first quarter we declared a dividend of $0.01 per share increasing the cumulative dividend declared by the company to $1.10 per share since going public March of 2010. As we maintained our focus on returning a substantial portion of cash flows to shareholders over the long term our financial results were affected by a volatile rate environment. For the three months period ended March 31, 2014 Baltic Trading recorded a net loss of $3.5 million or $0.06 basic and diluted loss per share.

I will discuss our financial performance in more detail later on the call. Baltic Trading’s cash position at the end of the first quarter was $39.5 million. During the first quarter we exercised our option to acquire two additional Ultramax newbuildings to be renamed the Baltic Scorpion and the Baltic Mantis under the same specifications and purchase price as the two Ultramax newbuildings we previously agreed to acquire in November of 2013. With these four eco-designed vessels combined with the acquisitions of two Capesize and the two Handysize vessels completed in the second half of 2013 Baltic Trading is poised to more than double the size of its fleet on a tonnage basis.

Turning to slide five we provide an overview of our fleet. We are pleased to have taken delivery of four of the eight drybulk vessels that management has agreed to acquire over the past year, marking a new period of growth for our company. Upon the expected delivery of the four Ultramax new buildings between the third quarter of 2014 and the third quarter of 2015 Baltic Trading will own a fleet of 17 drybulk vessels consisting of four Capesize, four Ultramax, four Supramax and five Handysize vessels with a total carrying capacity of approximately 1.3 million deadweight ton. At that time the average age of our fleet will be 4.2 years far below the world average of approximately nine years.

Turning to slide six we provide our estimated capital expenditures related to drydocking for our fleet through the remainder of 2014. In maintaining our focus on earning first class fuel efficient vessels management commenced an initiative to upgrade the fuel efficiency specifications for certain vessels in Baltic Trading’s existing fleet. This innovative program is expected to substantially increase operating efficiencies while further enhancing our ability to deliver service that meets and exceeds the highest industry standard.

During the first quarter we successfully installed the upgrades on three of our vessels; the Baltic Cougar, the Baltic Panther and the Baltic Wind, all three of which completed their respective planned drydockings. For the second quarter of 2014 we expect three additional vessels to be drydocked, two of which are to implement these fuel efficiency upgrades as outlined on this slide.

Turning to slide eight we present our financial results. For the first quarter ended March 31, 2014 the company generated revenues of $13.1 million. This compares with revenues for the first quarter of 2013 of $6 million. The increase in revenues for the first quarter of 2014 compared to the prior year period is due to higher spot rates achieved by our vessels and the increase in the size of our fleet. Company reported a net loss for the first quarter of 2014 of $3.5 million or $0.06 basic and diluted loss per share. This compares to a net loss of $5.1 million or $0.23 basic and diluted loss per share for the first quarter of 2013.

Key balance sheet items as presented on slide nine include the following: our cash position was $39.5 million as on March 31, 2014; our total assets were $553.6 million, consisting primarily of cash and cash equivalents in our current 13 vessel fleet. Our EBITDA for the three months ended March 31 was $3.1 million representing an EBITDA margin of 23.5% of revenues.

In terms of our built-in fleet growth we intend to use a combination of cash on hand, future cash flow from operations and commercial bank debt to finance the acquisition of our four Ultramax newbuildings.

Moving to slide 10 our utilization rate was 99.5% for the first quarter of 2014 compared to 100% in the year earlier period. Our time charter equivalent rate for the first quarter of 2014 was $11,299 per day, this compares to $6,685 per day recorded in the first quarter of 2013. The increase in TCE rates resulted from higher spot rates achieved in the first quarter of 2014 versus the same period last year for the vessels in our fleet as well as the addition of two Capesize vessels to our fleet.

For the first quarter of 2014 our daily vessel operating expenses were $5,599 per vessel per day versus $4,771 per vessel per day for the first quarter of 2013. The increase is due to higher maintenance related expenses incurred during dry docking and higher crew cost. We know that our daily vessel operating expenses for the first quarter of 2014 were above our 12 month budget established at the beginning in the year, primarily due to expenses related to scheduled drydockings of three of the 13 vessels in our fleet during the quarter.

In the second quarter of 2014 we expect to drydock an additional three vessels. We believe daily vessel operating expenses are best measured for competitive purposes over a 12 month period in order to take into account all the expenses that each vessel will occur over a full year of operation. Based on estimates provided by our technical managers and management views we expect daily vessel operating expenses for 2014 to remain at $5,400 per vessel per day on a weighted average basis for the entire year.

On slide 11 we discussed our dividend for the first quarter. As I mentioned earlier Baltic Trading declared a first quarter dividend of $0.01 per share. The dividend is payable on or about May 27, 2014 to all shareholders of record on May 20, 2014. Including the first quarter dividend Baltic Trading has declared cumulative dividend of $1.10 per share since completing its IPO in March of 2010.

On slide 12 we present our anticipated breakeven levels. For the second quarter of 2014 we estimate our daily vessel operating expenses to be $5,600 per vessel per day on a weighted basis on an average number of 13 vessels for the quarter. Our daily vessel operating expense budget for the second quarter of 2014 reflects our updated drydocking schedule. We expect our daily free cash flow breakeven to be $11,672 and our daily net income breakeven rate to be $13,986.

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

Apostolos Zafolias

Thank you John. On slide 14 we outline some of the recent developments and demand side fundamentals of the drybulk market. During the first quarter of 2014 Australia’s major ore producers continued to implement their capacity expansion projects. This planned expansion was enabled further by milder wet season as compared to what has been experienced in the recent years. Increased iron ore availability coupled with fewer weather related disruptions led to strong export volumes with China being the main recipient. Chinese iron ore imports were 19% year-over-year during the quarter as a significant portion of the commodity was sourced from Australia specifically Port Hedland while shipments to China rose 35% in the first quarter.

The second largest iron ore exporting nation Brazil saw shipments increase by 6% year-over-year to 71.8 million tons during the first quarter. However this was a substantial drop from the fourth quarter of 2013 total of 95 million tons. This declined in export volume from Brazil reduced tonne-mile to partially offset the positive impact of Australia’s iron ore expansion on Capesize freight rates.

With an abundance of iron ore in the market along with Chinese port stockpiles at levels nearly 50% higher than a year ago iron ore prices have been pressured to the lowest points since mid-March falling to approximately $105 per ton. This subsequent decline was exacerbated by uncertainty surrounding China’s economy and reports detailing that the China Banking Regulatory Commission put pressure on banks to implement tougher lending requirements for iron ore input loans and the government pursuit to limit charter banking.

The impact of this move is so uncertain that according to Reuters that they believe that around 30 million tons of the ore held at Chinese ports is tied to financing deals. Additionally the Chinese government has attempted to rein in over capacity in the steel industry in an effort to reduce emissions. As a result the growth rate of Chinese steel production slowed increasing by only 2.4% during the first quarter versus a growth of nearly 8% in 2013. However global steel production ex-China, specifically in the European Union and Japan continued to strengthen carrying over the second half of 2013 performance into the first quarter of 2014. The European Union and Japan increased steel production by 6.7% and 3.5% respectively during the January to March period.

Furthermore there have been several factors impacting smaller class vessels so far this year. Specifically the Indonesian government imposed restrictions on mineral ore exports has hurt [liner Balt] trades affecting the Supramax and Handysize classes. On top of that the delayed onset of the South American grain season has pressured Panamax earnings as a build-up of charters has been positioned in the Atlantic Basin. Reports of cancelled cargoes and delay in the Argentinean harvest have been some of the drivers of this delay.

Turning to slide 15 we outline some of the key components of the supply side fundamentals. We are continuing to see that the deceleration of new building deliveries into 2014 which is a trend that originated in the second half of 2012 and carried over to the following year. In 2013 the dry bulk fleet grew by only 6%, the slowest pace in that decade. So far this year, newbuilding vessel deliveries declined by 28% for the first quarter year-over-year.

Lastly we note that augmented levels of vessel ordering has taken place recently causing a current order book [inaudible] to 2009 to increase to 21% of the current fleet. This concludes our presentation and we will now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we will take our first question from Doug Mavrinac with Jefferies.

Douglas Mavrinac – Jefferies LLC

Great, thank you operator. Good morning guys. I just have a handful of follow-up questions. First being a follow-up to what Apostolos was through in terms of the industry information. Clearly spot rates have been in decline for the last handful of months. But there seems to be a disconnect between what’s going in the spot market versus say what’s going on within the time charter market where one year rates have been signed at between $25,000 and $30,000 a day. So what I was interested in is getting you guys’ take on kind of what is the fact that the term market being so firm, what does that tell you about the market’s expectations about where rates can go over the next say 12 months?

John Wobensmith

Yeah, Doug It’s a good question. Clearly there is a big difference in Capesize market between spot and time, but I think one year rates are somewhere around $24,000, $25,000 today. That clearly is anticipating a stronger second half in the Capesize sector. I think where there is a disconnect though is you got the Capesize sector which is heavily dependent on iron ore and coal versus the smaller ships the Panamaxes and Supramaxes, which I still think are in over supply situation and we are not seeing that contango in the Panamax and Supramax one year rates.

So it’s pretty exclusive to the Capesize, I think it’s in anticipation of normal seasonality that occurs in the second half of the year. There is a lot of volume coming on from the mining companies on the iron ore front that will benefit the Capesize sector.

Douglas Mavrinac – Jefferies LLC

Got you, got it. And then just as a segue, John from that to may be what you guys are seeing, I mean are you guys seeing an increase in the time charter enquiries from charterers or is it kind of as lukewarm as the spot market or are you guys seeing some of that too, in terms of incoming enquiries?

John Wobensmith

To be honest with you over the last few months that’s tailed off. I think that what I am not sure if owners really want to fix it at these levels in the Capesize sector but we haven’t seen as many enquiries over the last couple of months, it’s definitely quieted down.

Douglas Mavrinac – Jefferies LLC

Got you. Okay, got it. So, that’s interesting so when you and you mentioned a bit ago about the amount of iron ore coming online later this year and how it’s expected to affect the market. Over the last couple of years I think around this time you guys were really accurate in terms of timing when you expected the projects to come on-stream and when you expected rates to have a correspondingly positive impact. As far as what you are seeing about when do you expect some of these mines to come online to add additional capacity, to additional demand for Capesizes. I mean do you have – is it end of 2Q, 3Q what does your crystal ball tell you?

John Wobensmith

I mean look, I mean most of the stuff is out in the public domain. I would say it’s weighted more, just like we saw last year it’s weighted more to the second half of the year.

Douglas Mavrinac – Jefferies LLC

Got you, got you. Okay, great. And then just one final question before turning it over. You guys did some very well timed acquisitions last year, a number of them. When we look at kind of how the cycle is playing out and asset values are up pretty decently this year in the Cape market up anywhere from 13% to 32% depending upon the age. What are your thoughts about future acquisitions going forward giving where we are in the cycle?

John Wobensmith

Okay, I still think prices have gotten a little bit ahead of themselves right now. We obviously we think we bought at some decent prices and values have moved up since we did the deals at the end of last year. I think they’ve gotten a little like I said a little ahead of themselves compared to where charter rates are today. So we are going to take a little bit of a breather and see where things shake out at this point.

Douglas Mavrinac – Jefferies LLC

Got you. Very helpful.

John Wobensmith

But not mention we still have four ships right to take delivery of, so we still have growth for Baltic just from what we have agreed to.

Douglas Mavrinac – Jefferies LLC

Okay, that’s very helpful. Thanks John.

Operator

We will go next to Omar Nokta with Global Hunter Securities.

Omar Nokta – Global Hunter Securities

Thank you. Hi John, hi Apostolos.

John Wobensmith

Good morning.

Apostolos Zafolias

Hi

Omar Nokta – Global Hunter Securities

Good morning. Yeah I just wanted actually I wanted to follow-up on Doug’s question and then your comments. Obviously [charter terms] definitely picked up a quite a bit of steam and what you think about going a little beyond your typical age range would you go – do you see value potential in may be 10 year or 12 year of ship or that’s just, is that kind of mucking up the story a little bit?

John Wobensmith

Yeah, I think to use your phrase I think that mucks up the story a little bit. I think that – look for the time I mean we did a lot of acquisitions last year and again I think we did them at attractive prices. We still have four to take delivery of. I think again if we were to do additional transactions you would obviously look for a combination of capital from the equity markets as well as debt and I just think compared to where the share price is, first is where values are it just doesn’t make financial sense right now.

Omar Nokta – Global Hunter Securities

Okay, that’s fair. And then just also I wanted to get a sense of how do you put three ships into drydocking Q1 and upgrade it and this – I don’t know if it’s too early to get a sense but may be if you could just provide us with how those are coming out?

John Wobensmith

I mean look so far we are pleased with it. I would tell you and I will tell you the numbers then I am going to put a huge caveat on it, it seems to have finished. We are seeing savings of around 15%. Now having said that it’s a short period of time, the ships had been in well I will call bad weather quite a bit ore import. So even the [inaudible] have been fewer than one would hope. But as I said where so far things looks pretty good. We are happy with the upgrades.

Omar Nokta – Global Hunter Securities

Okay. So 15% obviously still early but 15% if I remember correctly you had mentioned an expectation of 5% to 10%.

John Wobensmith

Yeah, like I said we are pretty happy with it. But I have to put the caveat out there that is the short period of time and I think you need a good six to nine months after the drydockings to make sure you have accurate measures.

Omar Nokta – Global Hunter Securities

Okay, alright, thank you that’s it for me.

Operator

(Operator Instructions). And we will go next to [Matteo Staten] with Morgan Stanley.

Unidentified Analyst

Good morning gentlemen and thank you for the update. I have a question actually regarding the South American grain season because I mean the Panamax rates and all have been very low this year and also the smaller vessel sizes. So I was wondering if you could may be give us some color there what you see there, have cargoes been cancelled or is it just slow to start, should we expect those cargoes to come later, what are your thoughts on that?

John Wobensmith

I think there is a few things there that are affecting that market. One, as you pointed out there have been credit issues in China where you have seen cancellation of cargoes. But I think ultimately those cargoes are going to come to the market particularly on the soyabean side. I still would say that the second factor is that you still have an oversupply of ships in the Panamax in particular but also the Supramax market that’s still working at Sao Paulo.

And then the third I think a lot of people positioned ships down there anticipating a big boom and because of all those ships that have been put down there its kept a little bit of a lid on it, but again I do think you are going to start to see a little more of a pick up going into the first part of June. But I am not sure if it’s going to be the massive congestion and boom that we saw last year.

Unidentified Analyst

Okay. Well, thank you very much. That was it for me, thank you.

John Wobensmith

Okay, thank you.

Operator

And we will go next to [Herman Helden with RS Retail Markets].

Unidentified Analyst

Good afternoon guys. Just a follow-up question on the upgrades, if you take the Baltic Jaguar where do you think you will fix [VSIC] with the kind of index fixtures after the earthquake?

John Wobensmith

Tough to tell. I mean the Baltic Jaguar we are drydocking this quarter. So we haven’t done those upgrades yet and we always want to see on a ship by ship basis how it’s going to perform. We certainly have sister vessels but I think I would like to refrain from putting a number out there until we actually get through the upgrades.

Unidentified Analyst

Yeah, sure, because the reason I am wondering is obviously just – index and with the upgrade if you have 15% increase in rates is that kind of one way or one measure until call it multiple to the index, which kind of makes it clear to see what the real savings from the [inaudible] et cetera?

John Wobensmith

Yeah, like I said I mean I wish we had some more contrary data on the other ships, 15% number I caveat it. We really want to see once the muni staffs and the pole systems are on how the individual ship performs and then we can figure out what we are going to do on the charter market.

Unidentified Analyst

Yeah, sure. And also you have seen recently the Baltic exchange within starting to quote 2014 Capesize Index which is trading at premium will you kind of, doesn’t it make sense with your modern Capesizes to benchmark them to the new index or how do you think about I know it’s fairly new, so I am just kind of curious about it?

John Wobensmith

It’s fairly new in the other indexes eventually going to go away so all of, any Capes that we do on the spot market related to time charters are going to eventually be quoted on that new index. Having said that in mind, keep one of the big differences between those two indexes is the size of the ship and fuel efficiency. So by nature of being an index those ships are priced against the 172 ship that’s in the current or the old index if you will. So that’s why we have ships that are trading at a premium to that index.

Unidentified Analyst

Okay, that’s all.

John Wobensmith

Actually everything eventually everything is going to be quoted off of that new index, no doubt.

Unidentified Analyst

Okay, so I mean it’s kind of just again like multiple you acquired for the benchmark with depending on kind of the size of your ship it’s not going to have earnings impact?

John Wobensmith

It shouldn’t but again by just nature of the index but we will see how these ships are now put the new one.

Unidentified Analyst

Okay, well thank you very much.

John Wobensmith

Okay, thanks.

Operator

At this time there are no more questions. This concludes the Baltic Trading conference call. Thank you, and have a nice day.

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