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Paragon Shipping Inc. (NASDAQ:PRGN)

Q1 2014 Results Earnings Conference Call

May 20, 2014, 9:00 am ET

Executives

Rudy Barrio - Investor Relations, Allen & Caron Inc.

Robert Perri - Chief Financial Officer

Michael Bodouroglou - Chairman of the Board, President, Chief Executive Officer

Analysts

Omar Nokta - Global Hunter

Josh Nahas - Foxhill Capital

Operator

Hello, and welcome to the Paragon Shipping first quarter 2014 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.

I would now like to turn the conference over to Mr. Rudy Barrio. Please go ahead, sir.

Rudy Barrio - Investor Relations, Allen & Caron Inc.

Thank you. Good day, everyone, and welcome to Paragon Shipping's investor conference call to discuss its financial results for the first quarter ended March 31, 2014. 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 a couple of items we would like to cover. Many of you received a copy of Paragon Shipping's first quarter results press release. It was disseminated yesterday afternoon. If you did not receive a copy of the press release, it is posted on Paragon Shipping's website at www.paragonship.com and in the Investor Relations section of our website at www.allencaron.com. It is posted on Yahoo! Finance and most financial sites as well. 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 10045612. 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 this call and will continue for seven days.

Further we would like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Some of the statements made during this call may 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 www.sec.gov.

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

Robert Perri

Hi. Good day, Rudy. Good morning, everyone. Today I will briefly give you the highlights of our first quarter, 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 first quarter ended March 31, 2014 financial results, before ending with our closing remarks. Joining me on the call today is our Chairman, President and CEO, Michael Bodouroglou and we both will be available for questions at the end of the presentation.

Please turn to slide number four. In the first quarter of 2014, we reported net revenues of $13.4 million, adjusted EBITDA of $0.3 million and an adjusted net loss of $6.5 million or $0.31 per share. During the first quarter, we accomplished many of our previously announced objectives. In January, we took delivery of the Proud Seas, our fourth Handysize vessel that increased our current operating fleet to a total of 14 vessels. Following the completion of our $42.4 million public offering in February, we ordered a total of three more Eco-Design Kamsarmax newbuilding drybulk carriers with scheduled deliveries between the second quarter of 2015 and the fourth quarter of 2015. That increases our drybulk newbuilding program to a total of seven vessels.

Subsequent to the first quarter, we completed the documentation for our previously announced loan agreement with HSH and we also completed the documentation and upsized our new syndicated facility lewd by Nordea to $160 million from the previously announced $120 million. More recently, we entered into an agreement to sell the 4,800 TEU containership newbuilding to an unrelated third-party for a net amount of $41.2 million.

The sale of the respective vessel and its transfer to the new owners is expected to be concluded by the end of May 2014. In May, we also agreed with the shipyard to reduce the contract price for the containership by an additional $770,000 reducing the price to $54.2 million from the previous $55 million. After taking into consideration this rate reduction, to sell the vessel will result in a positive net cash inflow to the company of approximately $10 million.

In addition, we mutually agreed with China Development Bank to cancel the corresponding credit facility for that facility. And last but not least, our Board of Directors has authorized an amount of up to $10 million to be used to buyback common shares in the open market over the next 12 months in an effort to increase shareholder value as we believe we are trading well below our net asset value.

On slide five, we summarize our current fleet, our fleet growth expectations and what we believe is a conservative calculation of our net asset value or NAV per share. Today we operate 14 vessels in three size classes with an average age of 7.7 years, which compares favorably to the industry average of 9.4 years. Owing the sale of our containership newbuilding, our remaining newbuilding program consists of four Ultramax and three Kamsarmax drybulk carriers with expected deliveries between the second quarter of 2014 and the fourth quarter of 2015. Our fleet will expand by 50% to 21 vessels in five size classes by the end of 2015 and pro forma the fleet average age would decrease to 6.4 years.

Excluding the containership, the contractual cost of our current newbuilding program is approximately $201 million out of which we have already paid $59 million resulting in outstanding capital commitments of $142 million. For the financing of our newbuilding program we have two credit facilities in place for a total of $112.4 million and in addition, we expect to be able to enter into financing for 60% of the market value of our third Kamsarmax newbuildings as we get closer to the delivery of this vessel, which is scheduled for the fourth quarter of 2015.

This results in new expected equity CapEx of $10 million through 2015 that will be funded from cash on hand. More importantly, we believe the market value of our fleet on a fully deployed basis is $565 million based on recent transactions which means our current net asset value is $9.35 per share. Therefore you can see the value proposition that our shares offer given that our share price is about 35% below our current intrinsic value.

On slide six, you can see an overview of our chartering strategy. The full details of the charters for our fleet can be found under the appendix section of this presentation. The key take away remains that all our vessels are running on short-term charters, which gives us significant flexibility to the spot market. More importantly, on a fully diluted basis, we have over 7,650 open days, which means for every $1,000 increase in charter rates, our revenues increase by more than $7.6 million, almost all of which goes straight to our EBITDA. This shows the type of leverage we have to improvement in the market.

On slide seven, I want to give you an update on our bank financing and leverage. Currently our total debt stands at $200 million and our cash position is $29 million. This translates into a net debt of $171 million, representing a 48% net debt to total capitalization.

In April, we completed the documentation for HSH for the refinancing of the Friendly Seas and the partial financing of two Ultramax newbuilds that are expected to be delivered in the second and third quarter this year. We also completed the documentation to increase the size of the syndicated loan with Nordea, as mentioned before.

Both of these new covenant life facilities improve our balance sheet by reducing our overall leverage and leave only the Kamsarmax newbuilding at the end of 2015 to be financed. At the same time, they increase our financial flexibility by having no dividend restrictions and include no earnings maintenance related covenants going forward.

Slide eight presents a comparison between our debt repayment profile before and after the new loan facility with HSH or Nordea. The left hand graph presents our outstanding debt and our scheduled quarterly loan repayments through the end of 2015 before the respective refinance. As you can see from the chart, in the third quarter of 2015, we had one loan maturing at $27.1 million and the graph represents their respective balloon payment.

With our new facilities in place, we can now refinance this balloon through 2020 and the resulting debt amortization is depicted on the right hand graph. As you can see, we have extended our loan profile and reduced our debt repayment obligations by up to $22.6 million for the two-year period between 2014 and 2015 and reduced our quarterly installments by $200,000 per quarter.

Now let me talk you about the recent developments in the drybulk market. On slide nine, we show a comparison between demand and supply prospects of the drybulk market. As you can see, demand remains healthy, growing by more than 5% in 2015. Brazilian and U.S. exports have actually been exceptional with a record of 20 million tons of grains, soybeans and soybean meal shipped in March, but the market was slumped by the mass exodus of vessels bouncing from the Pacific.

The arrival of these vessels from the Pacific has returned to normal at a time when grain loaning should start to increase. Brazilian exports and the Argentinean grain season, which is April to September, are expected to be record years in terms of volume exported but there have been delays due to political and financial reasons.

The good news is that the grain is a perishable cargo, so the delays cannot last for forever and we are starting to see increases in the number of cargoes coming out of the region as we speak. In addition, the negative margin for grain in China, which is also led to cancelled cargoes is also reportedly improving. We expect the Indian coal demand to be strong towards the end of the third quarter as India's coal imports tend to get a boost the back-end of the monsoon months. And at some point the Panamax and Supramaxes will also benefit from the Chinese iron ore restocking cycles. All these points lead us to be bullish on the second half of this year.

On the supply side, the order book currently stands at only 21.5% of the existing fleet which is a low figure and for the full years 2014 and 2015, we expect net fleet growth of around 5% per year. At this point, the order book is pretty much fixed for 2014 and 2015, with the exception of any slippage. So we have a good feeling for what the maximum supply growth will be over the next two years.

In 2014 year-to-date scrapping remained significant with over 4.5 million deadweight tons going to breakers. Nonetheless, we expect there will be a slowdown in the amount of vessels scrapped if rates improve as we expect them to.

The left hand graph on slide 10 depicts the average time charter routes in the main drybulk sector since January 2013. Currently Panamax and Supramax rates are around $8,000 and $9,500 per day respectively down from their highs of $16,000 and $15,000 per day at the end of the fourth quarter. 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 over time.

Despite this volatility, the S&P market has remained strong as values have increased notably since the third quarter of 2013 in all size sectors and the average price of a five year old vessel is now up over 40% compared to where the values were the same time a year ago. Nonetheless, values still remain well below their historical averages, so there is a lot of room for further improvements.

Slide 11 provides an analysis of Paragon's operating performance for the first quarter of 2014. During the quarter, we operated an average of 13.9 vessels at a time charter equivalent rate of $8,557 per day and a utilization rate of 98.9%. In addition, there were two drydockings in the first quarter of 2014 versus one of the year ago period, which resulted in increased drydocking expenses.

Total vessel operating expenses, which include operating expenses plus drydocking costs, G&A expenses and management fees, were $7,717 per vessel per day which represents 13.5% decrease year-over-year despite our increased drydocking expenses that many companies amortize. Excluding drydocking costs, our TVOE for the first quarter was $6,539 per vessel per day which is one of the lowest in the industry and down over 20% from the year ago period.

Please turn to slide number 12 for some remarks on our financial performance. As of March 31, 2014, based on the increased probability of selling the 4,800 TEU containership, we recorded a non-cash impairment loss of $15.7 million or negative $0.75 per share related to the write down to fair value of the contract price of the respective vessel.

In addition, we wrote down our investment in Box Ships which resulted in a one-time non-cash expense of $2.8 million or negative $0.14 per share. There was also the regular non-cash items including $1.1 million expense related to the amortization of share-based compensation and a non-cash gain of $177,000related to the mark-to-market valuation of our interest rate swaps, which is netted against the actual cash payments made under those swap agreements during the quarter.

In summary, for the first quarter of 2014, these non-cash items totaled $19.4 million or negative $0.93 per share and excluding these adjusted EBITDA $0.3 million and adjusted net loss was $6.5 million or $0.31 per share.

On slide 13, in conclusion, ladies and gentlemen, we believe the market has turned the quarter 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 the order book is at manageable levels. We believe that the company is now positioned to take advantage of the opportunities as they arise. Our Ultramax and Kamsarmax drybulk newbuildings will significantly increase and diversify our fleet and our efficient capital structure gives us the flexibility to execute on our strategy of conservative growth through the cycle.

In addition, our chartering policy gives us significant leverage in the improvement in the market and creates immediate value to our shareholders as rates improve going forward. More importantly, we believe that our shares are significantly undervalued and offer a very attractive investment proposition to investors and also for ourselves which is why we started the $10 million share buyback program.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Mathis (inaudible) of Morgan Stanley. Please go ahead.

Unidentified Analyst

Good morning, and thank you for the update. I wanted to ask you about the canceled cargoes, and if you could maybe give us a bit more color there, because that's been a big issue, I guess, in the Panamax market. What is driving the import margins there? And if could maybe expand that a bit further and whether you think these cargoes will actually materialize and if China will start importing more? Hello?

Michael Bodouroglou

Hello, yes. Well, obviously one of the reasons why we had weak rates in the first quarter and they continue until now is because of finance related in China. That's one of the reasons. Of course, the other is, it was the grain season that was delayed as we mentioned in the presentation plus of course these bonding, the medium bond on the bulk side and (inaudible). So we are expecting that these things will gradually phase out and together with the historically stronger third and fourth quarters, we are expecting a much healthier second half of the year.

Unidentified Analyst

So although rates have come down, have you seen asset prices correct at all? Or have you seen asset prices come down? And do you think there will be those rates, these weaker rates will create any interesting buying opportunities maybe in the second hand or newbuilds market?

Michael Bodouroglou

No, we haven't seen any softening in the second hand asset values, neither in the newbuilding prices. So we do not expect, of course it will all depends on how the market plays out. Right now, obviously a lot of people are cautious because, let's face it, nobody, including myself, we were not expecting rates to be as weak as they are today as we speak. I think it will all depend on how rates evolve going forward. If people take the view that the recovery of the drybulk sector is not coming which I will definitely not argue, then of course this is going to impact asset values, well both second hand and newbuildings. However, if you expect that that rates would strengthen going forward because recovery has started and because the fundamentals are in favor or rates, then I think the opposite will happen. Asset values will go stronger.

Unidentified Analyst

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

Michael Bodouroglou

Thank you.

Robert Perri

Thank you.

Operator

(Operator Instructions). Our next question comes from Omar Nokta of Global Hunter. Please go ahead.

Omar Nokta - Global Hunter

Hi, good afternoon, Michael and Rob.

Michael Bodouroglou

Good afternoon, Omar.

Robert Perri

Hi. Good morning.

Omar Nokta - Global Hunter

I just wanted to ask just a couple of questions. One on the, you did make a comment in the press release about, you guys have obviously been very busy refinancing the existing fleet, getting financing for the new ships, you have got the containership off your books now, the prospects of the dividend, I know it is probably little too early currently to institute something, but just wanted to hear your thoughts on what you think about the dividend? What the potential of it could be? And perhaps when you are thinking about that? If that's more, say, 2015 event or so?

Michael Bodouroglou

Yes. Well, as we have been telling the market all along, we have been cleaning our house. We have been spending the last three years cleaning our house. Normalizing our balance sheet further, renewing sanction of our loan facilities that would be expiring soon, maturing soon by new ones, bigger ones as well as with lighter covenant with the intention being that we lower our cash flow breakeven as a fleet. We have also said, clearly I think, I hope what our strategy would be concerning the container vessel that were still left with the company. So we sold that. We have been doing actually what we have been telling people and we said that we will be looking to reinstate the dividend at some point but this would be a factor of, obviously, rates. So, first we clean up the house, cash flow breakeven, and then of course we will be looking at our dividend policy in conjunction with our (inaudible). If rates go stronger, which is definitely our expectation, then we want to have the company suitably positioned and it is suitably positioned. This is what we have been working towards, as I said, in the last two years. We want to be ready to revisit our dividend policy without anything stopping us, like covenants or other excuse.

Omar Nokta - Global Hunter

No, that makes sense and obviously you have been "cleaning house" and the company is very much, in our view, at least in much better shape. Does it make sense for me to come away thinking that, here in the near-term, as you clean things up, you have gotten much better, your liquidity is much better, you would concentrate probably on going to work on the buyback program and then once the market starts to really show signs of longevity, that you go the dividend route?

Michael Bodouroglou

Yes. Basically because we don't want, as we have been saying people. I think that the dividend is meaningful. Paying the dividend is a meaningful decision only if we believe as a company, and of course the market is that this can be sustainable and this is very much how we are thinking going forward. It will all depend on the market, but we want to make sure that our cash flow breakeven is low enough so that even in a modest market, we still generate enough cash to (inaudible) our obligations and also reward shareholders with dividend.

Omar Nokta - Global Hunter

Okay. Thanks, Michael. Also, I just wanted to follow-up on the renewal strategy of the fleet. You definitely have been modernizing, but you do have a handful of older vessel. You have three of those pre-2000 Panamaxes. Those seem to be coming up on their special survey. I just wanted to get a sense, have those gone into drydock and/or are you looking to sell those ships and perhaps just take the cash from them and you need that for further growth.

Michael Bodouroglou

I think one of them is up for drydocking at the end of this year but we are not expecting a major expenditure on that drydocking. The ships are pretty well maintained and we are confident that it is not going to cost more than a few, maybe $300,000, $400,000 at most. Definitely renewing our fleet is a core part of our strategy. Definitely this vessel will be sold at some point. We just want to make sure that the time at which we decide to sell them would be (inaudible), timing and it makes no sense, actually, to sell them now because, as I said, we believe that asset values will grow stronger for as long as our market thesis is correct but if it is stronger, healthier second half of the year, I think asset values will also follow.

Robert Perri

Omar, just to clarify as well, the Calm and Deep which is two of the 15 year-olds, went to drydock in the first quarter and then we have one upcoming in the fourth quarter for the other 15-year-old ship.

Omar Nokta - Global Hunter

Okay. All right. Thank you. That's it for me.

Robert Perri

Thanks, Omar.

Operator

Our next question comes from Josh Nahas of Foxhill Capital. Please go ahead.

Josh Nahas - Foxhill Capital

Hi. Good morning, guys. Just two quick questions. One, I understand not instituting a regular dividend until your cash flow position you want to be but I wondered if there was any consideration that the liquidity of the stock during the buyback that occurs, maybe a special dividend and what the thought was between that and do you think that it will impact any of the liquidity?

Robert Perri

We looked at a few different things, quite honestly, if you can see when they decided to implement the dividend as stock was starting to trade below $5 a share. We thought it was getting absolutely out-of-control and we do think supporting the share price is important especially even where we are now because it is still very cheap. That being said, a special dividend is a bit more complicated, especially because there is really no catalyst, let's say, for it. So this gives us, the special dividend you pay, and then it is out there and it is done. We feel like doing this over a period of a full year, depending on how the share price trades much is a better use of the capital than to just pay directly to shareholders on a one-off dividend type thing. At least that was our reasoning. It is hard to say, when we start paying a dividend, we just think it's better to make sure it's sustainable for the long-term.

Josh Nahas - Foxhill Capital

Right. Okay and then secondly, with the events in Ukraine, are you guys seeing any seems like there is a pickup in increase in the grain trade out of Latin America over to Europe?

Michael Bodouroglou

Well, the grain rates out of Latin America have strengthened in the last couple of weeks. They are not where we -- we are not happy but we want to see rates significantly higher and I think we will. However it is a change from the previous levels. I think this is also due to the fact that not so many ships available for the cargo that comes out. We see now more cargoes coming out of Latin America and less ships are available for them. Then the main reason is that ships were not incentivized to ballast all the way to South America because of lower payment. So most ships that stayed in Asia and trying local employment there.

Josh Nahas - Foxhill Capital

Okay. That answers my questions.

Michael Bodouroglou

Thank you.

Robert Perri

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Robert Perri for any closing remarks.

Robert Perri

Thanks everyone for taking the time and supporting Paragon and we look forward to talking to you next quarter. Have a good day, everyone.

Operator

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

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