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Baltic Trading Limited (NYSE:BALT)

Q2 2014 Earnings Conference Call

July 31, 2014 08:30 AM ET

Executives

John Wobensmith - President, CFO, Secretary, Treasurer and CAO

Apostolos Zafolias - VP-Finance, Genco Shipping & Trading Ltd.

Analyst

Douglas Mavrinac - Jefferies

Noah Parquette - Canaccord

Sherif Elmaghrabi - Morgan Stanley

Operator

Please stand by, we're about to begin. Good morning, ladies and gentlemen, and welcome to the Baltic Trading Limited second 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 today's passcode 5117708. At this time, I will turn the conference over to the Company. Please go ahead.

Unverified Company Representative

Good morning. Before we begin our presentation, I'll note that in this conference call, we will be making certain forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements use words such as anticipate, budget, estimate, expect, project, intend, plan, believe and other words and terms of similar meaning in connection with a 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 the 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 Baltic Trading's second quarter 2014 conference call. With me today is Apostolos Zafolias. I will begin today's call by reviewing our second 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.

Beginning on slide 4, we review Baltic Trading's highlights for the second quarter. During the second quarter, we continued to implement our fleet deployment strategy that provides the ability to drive future performance upon improvement in the prevailing freight rate environment, while preserving a cost effective operating platform and sound capital structure. For the second quarter, we declared a dividend of $0.01 per share increasing the cumulative dividend declared by the company to a $1.11 per share since going public in March 2010.

As we maintained our focus on returning a substantial portion of cash flow to shareholders over the long term, our financial results continued to be affected by the challenging market conditions in the drybulk industry.

For the three month period ended June 30th, 2014, Baltic Trading recorded a net loss of $5.7 million or $0.10 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 second quarter was $27.3 million.

Turning to slide 5, we provide an overview of our fleet. Since the Company's inception, we have focused on building a modern fleet of drybulk vessels that adhere to the highest industry standard. In maintaining our efforts to expand Baltic Trading's high quality fleet, we plan on taking delivery of two Ultramax newbuildings in the second half of 2014 and two additional eco-design vessels of the same specifications in 2015.

Upon completion of our expected fleet growth, 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 1.35 million deadweight tons. At that time, the average age of our fleet will be 4.2 years, far below the world average of approximately nine years.

Importantly, the Company's current vessels remain employed on spot market related time charters with multinational companies, including Cargo International and SwissMarine Services, positioning Baltic Trading to maximize utilization while earning rates closely correlated with the various Baltic dry indices; and eventually benefit from the positive long-term demand for the global transportation of iron ore, steel and other core commodities.

Turning to slide 7, we present our financial results. For the second quarter and six months period ended June 30, 2014, the Company generated revenues of $10.7 million and $23.8 million respectively.

This compares to revenues for the second quarter of 2013 and six months ended June 30, 2013 of $6.4 million and $12.4 million respectively. The increase in revenues for the second quarter of 2014 compared to the prior year period is due to the increase in the size of our fleet and higher spot market relates achieved by our Capesize vessels.

The Company recorded a net loss for the second quarter of 2014 of $5.7 million or $0.10 basic and diluted loss per share. The net loss for the 6 months ended June 30, 2014 was $9.2 million or $0.16 basic and diluted loss per share.

This compares to a net loss of $4.6 million or $0.19 basic and diluted loss per share for the second quarter of 2013 and a net loss of $9.7 million or $0.41 basic and diluted loss per share for the six months period ended June 30, 2013.

Key balance sheet items as presented on slide eight include the following: our cash position was $27.3 million as of June 30, 2014. To date, we have paid $28.6 million in vessel deposits mainly consisting of installment payments towards our four Ultramax newbuilding vessels.

Our total assets as of June 30th, 2014 were $546.9 million, consisting primarily of cash and cash equivalents, and our current 13 vessels fleet. Our EBITDA for the three months ended June 30th, 2014 was $1 million.

Moving to slide 9, our utilization rate was 99.9% for the second quarter of 2014 compared to 99.8% in the year earlier period. Our time charter equivalent rate for the second quarter of 2014 was $9,054 per day. This compares to $7,548 per day recorded in the second quarter of 2013. The increase in TCE rates resulted from higher spot rates achieved in the second quarter of 2014 versus the same period last year for the Capesize vessels in our fleet, as well as the addition of two Capesize vessels to our fleet.

For the second quarter of 2014, our daily vessel operating expenses were $5,353 per vessel per day versus $5,187 per vessel per day for the second quarter of 2013. This increase was primarily due to the timing of the drydocking of three of the 13 vessels in our fleet during this period. In maintaining our focus on owning first class fuel efficient vessels, management commenced an initiative to upgrade fuel efficiency specifications for certain vessels in Baltic Trading's existing fleet. This innovative program is expected to increase operational efficiencies, while further enhancing our ability to deliver service that meets or exceeds the current highest industry standard.

During the second quarter, we successfully installed the upgrades on two of our vessels, the Baltic Leopard and the Baltic Jaguar, bringing the total vessels in which we have installed fuel efficiency upgrades to five. Additionally, with the completion of the Baltic Jaguar drydocking in June, we've completed our planned drydocking schedule for the year. While our daily vessel operating expenses for the six months ended June 30, 2014 was $5,475 per day, which is slightly above our budget set forth at the beginning of the year, due to the timing of our front loaded drydocking schedules. As we have stated in the past, we believe daily vessel operating expenses are best measured for comparative purposes over a 12 months period in order to take into account all the expenses that each vessel will incur over a full year of operation.

Daily vessel operating expenses for the second quarter of 2014 were below our revised Q2 2014 budget. Based on estimates provided by our technical managers and management's expectations, we expect daily vessel operating expenses for 2014 to be $5,400 per vessel per day on a weighted average basis.

On slide 10, we discussed our dividend for the second quarter and provide an overview of our ongoing dividend policy. As I mentioned earlier, Baltic Trading declared a second quarter dividend of $0.01 per share. The dividend is payable on or about August 21st, 2014, to all shareholders of record on August 14th, 2014. Including the second quarter dividend, Baltic Trading has declared cumulative dividends of $1.11 per share since completing its $228 million IPO in March of 2010.

Moving to Slide 11, we present our anticipated breakeven levels. For the third quarter of 2014, we estimate our daily vessel operating expenses to be $5,325 per vessel per day on a weighted basis, of an average number of 13.01 vessels for the quarter.

We expect our daily free cash flow breakeven to be $9,163 and our daily net income breakeven rate to be $13,677.

Our low breakeven levels are testament to Baltic Trading's efficient cost structure and serve as a core differentiator for our Company.

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

Apostolos Zafolias

On slide 13, we outlined some of the recent developments for the quarter and demand side fundamentals of the drybulk market. In summary, lower Brazilian iron ore fixtures for the first half of this year versus the second half of 2013, a de-stocking period for coking coal in China, fewer soybean exports out of Argentina, and the Indonesian mineral ore ban all contributed towards a softer freight rate environment during the second quarter. The effect of these factors were exacerbated by [indiscernible] present in the drybulk market.

Throughout the course of 2014, the main driver in terms of cargo export volumes have been iron ore, as capacity expansion by Australian miners have aggressively come online during that first half of this year.

This low-cost high-quality material, produced internationally, has led China to increase import volumes by almost 20% through June of this year. Furthermore, Brazilian export volumes have been strong as well, registering an 8% year-over-year increase, as Vale it has been able to increase production due to improved mine productivity and fewer weather-related disruptions.

While Brazil's first half 2014 iron ore export total is strong, it is still 15% lower than the second half 2013 total. Nevertheless, the increased first half volume from Brazil and Australia aided in improving the average of the Baltic Capesize Index through June to $14,135 versus $6,136 over the same period the year before.

More recently however, lower fixture activity in the Atlantic has hampered Capesize earnings.

The increased global supply of iron ore has also led to a significant decline in the pricing of the commodity. According to Clarkson, tightening margins have resulted in a reported cut of 20% to 30% of China's iron ore mining capacity and production at approximately one third of these domestic mines is uneconomical at current levels. Furthermore, Macquarie Commodity Research reported that China's use of domestic iron ore is at the lowest point since mid-2009.

As a result of the diminished price of iron ore, margins of steel producers have improved, thus leading to increased capacity utilization on Chinese steel mills. Still production globally has increased by 2.5%, mainly led by increases of 9.1% in South Korea, 3.8% in the European Union and 3% in China. Specifically in China however, steel production growth has slowed from last year's pace of 7.5%, as the Chinese government has attempted to rein in overcapacity in the steel industry and reduce emissions.

On a positive note, steel stockpiles have been on a steady decline since peaking in March and currently stands at 13.2 million tons or 18% lower than a year ago. While steel stockpiles have been diminishing, China's iron ore port and inventories have remained near historical high in absolute terms, currently standing at 101.3 million tons or 39% higher year-over-year.

When examined on a days-of-consumption basis relative to the level of steel production, the inventory numbers appear more reasonable, representing approximately 27.6 days of consumption based on 62% ethic content.

Dating back to 2009, historical average days of consumption of China's iron ore port inventories is 26.7 days. While augmented iron ore export volumes from Australia and Brazil have been a positive catalyst in the drybulk space, rates have remained under further pressure through the first half of 2014 due to a number of other factors.

At the forefront, the Indonesian mineral export ban continues to weigh in smaller class vessel earnings. Additionally, weaker than expected grain and soybean exports out of South America, specifically Argentina, have negatively impacted the Panamax and Supramax sectors.

Due to sovereign debt issues, Argentine farmers have been stockpiling soybeans as a hedge against high inflation leading to a 25% drop in combined grain and soybean exports through June of this year.

On a coal front, China's steam coal input growth has slowed to 8% through June, due to increased hydropower production, while coking coal imports have declined by 20% year-over-year through June, in part due to destocking by Chinese steel mills.

As mentioned earlier, the Chinese government has been trying to control domestic pollution. As a result, restrictions have been placed on low quality coal imports, which mainly impact thermal coal shipment produced by Indonesia. However, sourcing from further ton mile origins that provide a higher quality product is possible.

Turning to slide 14, we have outlined some of the key components of the supply side fundamentals. Newbuilding vessel deliveries have continued to decline through the first half of 2014 and are 26% lower year-over-year. While the pace of deliveries has decelerated from peak years, vessel scrapping has also slowed with deletions down 47% year-over-year.

The combination of reduced deliveries and demolitions has resulted in a year-to-date fleet growth of approximately 3% in 2014, when compared to the fleet at the end of 2013. Indicatively, net fleet growth for the same period last year when compared to the fleet at the end of 2012 was approximately 4%. Lastly, we know that while newbuilding vessel contracting significantly increased at the end of 2013 and the first quarter of 2014.

Ordering has slowed since and is actually down 5% year-over-year towards the first half of 2014 on a tonnage basis. The influx of ordering, however, has still pushed the order book less contracts prior to 2009 to 23% of the current drybulk fleet.

This concludes our presentation and we'll now be happy to take your questions. (Operator Instructions)/

Question-and-Answer Section

Operator

We'll take the first question from Doug Mavrinac from Jefferies.

Douglas Mavrinac - Jefferies

I just had a few follow up questions and the first couple are actually on topics that you guys mentioned in your prepared remarks, as it pertains to the market.

And the first is on the South American grain exports and Apostolos, in your commentary, you guys highlighted how we have seen a reduction in those exports year-over-year and some of the causes for that being the debt crisis that's taking place down there.

My question is, how do you guys see that being resolved? Because if I'm not mistaken, those grains are perishable and it seems as though that can only go on for so long, but what are you guys hearing or thinking as it pertains to how bad particular situation as it pertains to the South American grain exports could be resolved in the coming months?

John Wobensmith

Look those grains are eventually going to come to market. It will be interesting to see if they come to market at the same time the U.S. grain season really starts up and going at the potential of lifting Panamax and Supramax rates towards the end of the year. But look, eventually that grain is going to come to market. They can't -- they are not going to let it perish. I highly doubt that.

Douglas Mavrinac - Jefferies

And then my second question is similar and that it's a follow-up to some of the commentary and Apostolos' remarks, you guys mentioned how Brazilian iron ore exports were down yet we noticed that Vale recently reported that their 2Q production was up 13% year-over-year. So, my question there is, what are you guys hearing, what are you thinking as it pertains to that disconnect of exports being down yet production being up?

Is that something that has to come into -- do those two things have to start to correlate where if you're producing more, you just can't sit on it, you have to start shipping it. I mean what are your thoughts on how Brazilian exports should evolve between now and year-end?

John Wobensmith

Yes, look, we think you are going to see them again pick up in the second half. I think the actual comment that Apostolos was making was that if you look at first half Brazilian iron ore exports versus second half of last year they're down by 15%, which would argue that there should be quite a boost coming into the second part of the year from Brazil. And as you know, Doug, that with that leverage as far as ton mile demand could push Cap rates up.

Douglas Mavrinac - Jefferies

And then just the last couple of questions are more on the M&A front, from the standpoint that last year, you guys very aggressive pursuing acquisition opportunities and making very well-timed vessel acquisitions.

My question is how does that landscape look today versus say last year, when you were able to scoop up some attractively-valued assets? Are there as many opportunities out there as there were last year or where do we stand on that front?

John Wobensmith

Look, in terms of value, I think the value is coming back in, we think it's an attractive time to acquire again. Having said that, we are not seeing as many transactions out there as we saw basically from April through December of last year. Our focus right now is getting debt financing in place for these four Ultramaxes. And we have term sheets that we are negotiating right now. And we want to get those closed and then get those first two ships delivered September or October, just in the coming months.

Douglas Mavrinac - Jefferies

Then just final question, more on the corporate M&A front, we saw the corporate M&A transaction over the last couple of months and the result was a pretty significant player that came about as a result of that particular transaction.

My question is, at this point in the cycle, do you think that drybulk shipping sector is ripe for more corporate M&A activity? And when you look at what's behind those and some of the benefits, what would the benefits be of additional M&A if you did in fact see it?

John Wobensmith

Look, our view is that there is definitely more to come. I think what people are starting to understand, just from a capital raising, cost of capital standpoint, bigger is better. And so I think you're going to see more of this. There obviously are, a lot of private equity funds that have ships and I think they're sort of sitting around trying to figure out what to do with five, 10 ships that they have.

Operator

We'll take our next question from Noah Parquette from Canaccord.

Noah Parquette - Canaccord

Thanks. I just wanted to follow up on Doug's question on M&A. Obviously, consolidation is a hot topic now. With Genco coming out of bankruptcy, I have to ask, do you still see value as Baltic operating as a standalone company or do we see the potential of combining those two fleets down the line?

John Wobensmith

There's obviously been a lot of talk about that for quite some time. I don't know what to say about it, Noah. We don't have any plans at this point to do anything but if it's something that makes sense, we're going to look at it.

Noah Parquette - Canaccord

And I just wanted to ask about the fuel efficiency program that you are doing. So, you have some more real world data points now. What efficiency numbers are you seeing from these investments?

John Wobensmith

I would say we are pretty confident with about a 7% savings overall. It's probably a little higher in balance and it's slightly lower loaded but on average, for a 12-month period, somewhere around 7%. I think what's interesting is, two of the 53s that were trading or are trading in the Klaveness pool, were earning somewhere around 85, 87 pool points before the upgrades, after the upgrades, those ships are earning somewhere around 98, 99 points. So, from an earnings standpoint in that pool, it's been obviously a benefit.

Noah Parquette - Canaccord

Okay. And then just a quick like housekeeping thing, what's your progress payments right now as of Q2 on the balance sheet?

Apostolos Zafolias

Its $28 million, I would say to date.

Operator

We'll take our next question from Sherif Elmaghrabi with Morgan Stanley.

Sherif Elmaghrabi - Morgan Stanley

You talked about the major factors that contributed to softer rates, things like the decreased Brazilian ore exports, weaker Chinese coal demands, grain exports. Which of these drivers do you expect to start turning around first, and which of the vessel classes do you think will see a faster recovery?

John Wobensmith

I think our view is that Capes are going to see a faster recovery because of the Brazilian iron ore coming back into the market. We still think Australia is going to boost their numbers into the second half.

We also think you're going to see a recovery on the coal side, that's been one of the factors that's been missing from the market which we believe has hurt Panamaxes in particular and Capes.

So I would say we are more positive on Capes in terms of rates coming back quicker.

Sherif Elmaghrabi - Morgan Stanley

Okay. And we have seen spot drybulk rates fall below breakeven levels and you have explained the reasons for some of the weakness, but on the other hand, time charter rates, despite the decline, are a little bit higher. Why is that, are you entertaining the thought of changing your deployment strategy to fix any of your vessels?

John Wobensmith

No, we're not entertaining changing the strategy of the Company. But I agree with you and I think that that in terms of what charterers are seeing, that that would indicate positive rates going forward, right?

Sherif Elmaghrabi - Morgan Stanley

How do you see the ability of the market to fund the current order book given the current rate environment? Like how many drybulk vessels do you see coming on by the end of 2015 compared [indiscernible] order book? Have you started seeing lay-ups or scraping of the relatively younger assets?

John Wobensmith

No. we haven't seen any of that. I still think even though rates are depressed, I still think that there is a level of optimism out there for the end of this year and certainly going into next year. So, we're not seeing distressed type transactions, if that's your question.

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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Source: Baltic Trading's (BALT) Q2 2014 Results - Earnings Call Transcript
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