Paragon Shipping's (PRGN) CEO Michael Bodouroglou on Q2 2014 Results - Earnings Call Transcript

Sep. 3.14 | About: Paragon Shipping (PRGN)

Paragon Shipping Inc. (NASDAQ:PRGN)

Q2 2014 Earnings Conference Call

September 3, 2014 09:00 ET


Rudy Barrio - IR, Allen & Caron Inc.

Michael Bodouroglou - Chairman, President and CEO

Robert Perri - CFO


Noah Parquette - Canaccord Genuity


Good day, and welcome to the Paragon Shipping Second Quarter 2014 Results Conference Call and Webcast. All participants will be in listen-only mode. (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.

Rudy Barrio

Well, thank you, Kate. Good day, everyone and welcome to Paragon Shipping’s investor conference call to discuss its financial results for the second quarter ended June 30, 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 I would like to cover. Many of you received a copy of Paragon Shipping’s second 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 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 e-mail it to you.

As mentioned earlier by Kate, 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 10050640. 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 filings 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 day, Rudy, thank you, and good morning, ladies and gentlemen. Today, I will briefly give you the highlights for the second quarter followed by an update on the latest company developments as well as our views on the drybulk industry. I will then present the more detailed overview of our second quarter and six months ended June 30, 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 will both be available for questions at the end of this presentation.

Please turn to Slide #4. In the second quarter of 2014, we reported revenues net of voyage expenses and commissions of $9.7 million, adjusted EBITDA of $0.9 million and an adjusted net loss of $5.6 million or $0.23 per share. During 2014 year-to-date, we have strengthened the company’s balance sheet while our focus remains on improving our cash flow breakeven rates. Subsequent to the second quarter of 2014, we entered into supplemental agreements with several of our lenders, pursuant to which we either extended the waiver period or in some instances eliminated completely the EBITDA related covenants.

In addition, in August 2014, we completed an offering of $25 million of senior unsecured notes due 2021 and we intend to use substantially all of the net proceeds from this offering of approximately $23.9 million for the repayment of existing indebtedness, including the $7 million prepayment to Unicredit in return for a streamlined repayment profile and the removal of all, but the leverage related covenants from the respective loan agreement. Last but not least, we continue to slowly buy back our shares as we believe we are trading well below our net asset value. And so far we have purchased and canceled 30,000 of the company’s common stock, shares in the company’s common stock.

On Slide 5, we summarized 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 8 years compared to an industry average of 9.1 years. Currently, our newbuilding program consists of four Ultramaxes and three Kamsarmax drybulk carriers with expected deliveries between the third quarter 2014 and the fourth quarter 2015. Our fleet will expand by 50% to 21 drybulk vessels in five size classes by the end of 2015 and pro forma the fleet average age will decrease to 6.4 years.

The contractual cost of our current newbuilding program is approximately $201.2 million, out of which $62.6 million has already been paid resulting in an outstanding capital commitment of $138.6 million. For the financing of our newbuilding program we have two credit facilities in place for $112.4 million. In addition, we expect we will be to finance 60% of the market value of our third Kamsarmax newbuilding with a new credit facility as we get closer to the delivery of this vessel, which is scheduled for the fourth quarter of 2015. This results in an expected equity CapEx of only $6.2 million through 2015 that will be funded from the cash on hand. More importantly, we believe the market value of our fleet on a fully deployed basis is around $475 million based on the recent transactions which means our current net asset value is $7.25 per share therefore you can see the value propositions that our shares offer given that our share price is about 30% below where our intrinsic value is today.

Slide 6 provides 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 takeaway remains that all of our vessels are running on short-term charters which gives us significant flexibility to the spot market. More importantly, on a fully delivered basis we have over 7650 open days which means for every $1000 increase in charter rates our revenue increases by more than $7.6 million almost all of which goes straight to our EBITDA. This shows the type of leverage we had to improve in the market.

On Slide 7, I want to give you an update on our debt financing and leverage. Currently our total debt stands at $212 million and our cash position is $39 million. This translates into net debt of $173 million representing a 51% net debt to total capitalization. In April, we completed the documentation for the $47 million loan facility with HSH for the refinancing of the Friendly Seas and the partial financing of our first two Ultramax newbuildings that are now expected to be delivered in late September 2014. We also completed the documentation for the new $160 million syndicated loan led by Nordea for the refinancing of six of our vessels in our operating fleet along with the financing of the remaining two Ultramax newbuilds and two of our Kamsarmax newbuilds that are expected to be delivered in the second quarter of 2015.

Pursuant to these new loan facilities, we have completed the refinancing of seven vessels in our operating fleet. More specifically in June and July we drew a total amount of $94.4 million that was used for full repayment of the then outstanding indebtedness of the respected vessels of $102 million in aggregate. Both of these new covenant life facilities improve our balance sheet by reducing our overall leverage and leave only one last Kamsarmax newbuilding to be financed. At the same time they increase our financial flexibility by having no dividend restrictions and include no EBITDA or earning maintenance related covenants going forward. In addition, subsequent to the second quarter of 2014, we entered into supplemental agreements with Bank of Ireland and HSBC pursuant to which for one facility we removed the EBITDA covenants completely and the other one we extended the waiver until the end of 2015.

On Slide 8, presents a comparison between our debt repayment profile before and after the use of net proceeds for our latest notes offering. But only for what is currently finalized and we are still working with several banks to improve this further. As you can see from left hand graph following the refinancing of the vessels net new debt – net of new debt proceeds $8.5 million in the aggregate, as shown in purple has been prepaid. In addition we intend to use substantially all of the net proceeds of our latest notes offering for the further repayment of our existing indebtedness.

Pursuant to our agreement with Unicredit which we expect to finalize later this month, the financial covenants related to the minimum debt service coverage ratio, the minimum market value adjusted net worth, and the maximum leverage ratio will be eliminated until the maturity of the loan. In addition pro forma for the $7 million of prepayment, our scheduled debt repayments will be reduced by about $900,000 per quarter for the remainder of the loan. These moves have reduced our cash flow breakeven on a fleet wide basis down to about $12,800 per day from $13,500 per day and we are currently in negotiations with several of our remaining lenders to further reduce debt repayments – for further debt repayments in exchange for [lighter] [ph] covenants and lower debt amortization profile that will assist us in reducing the company’s cash flow breakevens going forward.

Now, let me talk to you about the recent developments in the drybulk market. On Slide 9, we show the projected volume growth of the drybulk corridors through 2016. As you can see, demand remains healthy growing by 4.5% through 2016 with the largest expected growth of iron ore and steam coal that is being driven by the Far East. More specifically, expectations are for a very strong fourth quarter for iron ore as the Brazilian and Australian producers ramp up production. In addition, grain season out of the U.S. is expected to be very strong this year. This is just starting to hit the market and should accelerate through October.

Another positive sign for the market is that the Chinese stores of bauxite and nickel ore have depleted and we are seeing them come back into the markets. Importing bauxite from Australia and India increases ton mile demand as Indonesia continues their ban, and nickel ore exports out of the Philippines have recently ramped up significantly, which is a trend we expect to continue.

Regarding the coal market, imports of coal into India have ramped up and will continue to do as internal coal production has been hindered by the monsoon season and inventories remain at very low levels. The unknown factor is China. There has been a push for the Chinese to support their internal coal production despite the poor quality. This was doable during the summer as hydrothermal power was at a seasonal peak, but now that this has come to an end we expect imports of coal into China to increase significantly as internal production will not be able to meet the demand and cheaper alternatives are available internationally. All the above signs point to a strong fourth quarter. So, we remain optimistic that this recent rally will continue.

On Slide 10, you can see that the order book currently stands at 23.5% of the existing fleet. And for the full year of 2014 and 2015, we expect the net fleet growth of 6.4% and 6% respectively. At this point, the order book is pretty much fixed through 2016 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 8 million deadweight tons going to the 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 11 depicts the average time charter routes of the main drybulk sector since January 2013. For the second quarter of 2014, the drybulk market and more specifically the market for Panamax vessels was weaker than expected. The BPI average for TC routes in the second quarter was $6,304 per day compared to $10,427 per day in the first quarter of 2014 and $7,775 per day in the second quarter of 2013, which represents a decline of 39.5% and 18.9% respectively.

Third quarter-to-date Panamax rates have averaged $5,379 per day and are currently around $7,200 per day. Supermax rates have averaged about $8,022 per day and currently around $10,300 per day, while Handysize rates have averaged about $5,700 per day and are currently around $6,700 per day. So as the market is improving, it is very much a fourth quarter event. Following this volatility in the time charter market, the asset values declined knowingly since the beginning of 2014, yet they continue to remain up over 20% to 30% year-over-year. Overall, current values are well below their historical averages, so there is lot of room for further improvement.

Slide 12 provides an analysis of Paragon’s operating performance for the second quarter and first six months of 2014. During the quarter, we operated an average of 14 vessels at a time charter equivalent rate of $7,870 per day and a utilization rate of 98.6%. On a daily basis, total vessel operating expenses, which include operating expenses, drydocking costs, G&A expenses and management fees, were approximately $6,950 per vessel per day for the second quarter of 2014, which represents a 12% decrease year-over-year mainly as a result of the company’s cost control efficiencies and economies of scale of having a slightly larger fleet. Total vessel operating expenses were approximately $7,331 per vessel per day for the six months ended June 30, 2014 were 12.7% lower year-over-year.

Please turn to Slide 13 for certain remarks on our financial performance. In the second quarter of 2014, we recorded a non-cash loss related to the dilution effect from the company’s non-participation in the public offering of Box Ships, which was completed in April. In addition, as of June 30, the difference between the fair value and book value of our investment in Box Ships was considered other than temporary and therefore the investment wasn’t there. Both these items resulted in a one-time non-cash expense of $3.1 million or negative $0.13 per share. We also had a non-cash gain of $0.4 million for the sale of the 4,800 TEU containership, following the $0.8 million discount in the contracted price that was agreed with the shipyards as discussed earlier.

Following the refinancing of the six vessels by Nordea, we also recognized one-time expense of $1 million related to the write-off of the unamortized financing cost for the net existing indebtedness. There are also regular non-cash items, including $200,000 expense related to amortization and share based compensation and a non-cash loss of $108,000 related to the mark to market valuation of our interest rate swap contracts which is netted against the actual cash payments made under those agreements during the quarter. In summary, for the second quarter 2014, the non-cash items totaled $4.1 million or a negative $0.16 per share. And excluding these adjusted EBITDA was $0.9 million and the adjusted net loss was $5.6 million or $0.23 per share.

On Slide 14, in conclusion ladies and gentlemen, we believe the market will continue to improve as demand remains strong and the order book is at manageable levels. We also believe that the company is positioned to take advantage of any opportunities as they arrive. Our Ultramax and Kamsarmax newbuild program 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. And then just as our chartering policy gives us significant leverage to an improvement in the market and creates an immediate value to our shareholders as rates improve going forward. However, it is important to note that the third quarter looks to be similar to the second quarter in terms of time charter rates and net revenues overall. Nevertheless we will continue to see a reduction in our daily running costs as we expand the fleet further and continued to reduce of cash flow breakeven levels so that we can be in a position to start paying dividends to our shareholders once the market recovers. More importantly we believe that our shares are significantly undervalued and offer a very attractive investment proposition to investors.

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

Question-and-Answer Session


We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from (indiscernible) from Morgan Stanley. Please go ahead.

Unidentified Analyst

Hello gentlemen. Thank you for taking my call. Just had a couple of quick questions for you, can you please go into little more detail regarding what you see is the biggest factor driving the Panamax recovery in the second half of the year?

Michael Bodouroglou

Yes. One, we think it’s going to be I think the grain season out of North America. There are a few things actually – a few factors that would drive we believe Panamax rates to healthy levels, one is the grain season which appears to be very good, very strong harvest in the US and Canada. The other is we are expecting stronger coal imports into China and also India and we are also expecting a gradual substitution of nickel ore and bauxite which were banned from Indonesia as we all know, we are also expecting a gradual substitution of these trades that have been lost from other sources which we expect to be faded away.

Unidentified Analyst

Okay, great. Thank you. And then my second one is as you mentioned overall asset values are below their historical averages, are there any thoughts of making acquisitions this year ahead of a possible recovery?

Michael Bodouroglou

Acquisitions, we are always monitoring the market for possible opportunities. However, I think that at the point, yes we have implemented our growth strategy so far. The way - allow me to say how I look the current position - how I look at the current position of the company, which is the result of the strategy which we have implemented over the last two years. In the next quarters, we are taking delivery of seven newbuildings that is we are increasing our fleet capacity by 60% in the next quarters and we are talking about acquisitions actually starting to hit low values, eco-ships, modern and efficient vessels. At the same time, we are doing these by being modestly levered, 50%. We have spent a lot of time dealing with our banks. So, we are going ahead actually with basically no covenants rather than asset value covenants. We are liquid and we are really expecting for a market upturn so that we capital…

Unidentified Analyst

It’s okay, that’s it for me. Thank you.


Just a moment please. It looks like we are having a technical difficulty and we will rejoin the speakers momentarily.

Michael Bodouroglou

Thank you.


Thanks for your patience. The speakers have rejoined. Our next question is from Noah Parquette from Canaccord Genuity. Please go ahead.

Noah Parquette - Canaccord Genuity

Thanks. Hi, Michael and Rob. My question was really related to, I mean you talked about your NAV is a little over $7 and you are trading at $5 now and you look at that your options to bridge that gap between say dividend or reinstitution growing the fleet or share repurchase, can you just talk a little bit about what’s the most attractive strategy for you to kind of bridge that valuation gap?

Michael Bodouroglou

I think it’s a question of investors really being aware of - that’s our view anyway – of being aware of the actual situation, or the financial situation and the upside potential of the company going forward should the market improve. Actually, our share price was trading at a premium to NAV until late August of 2013 when we announced an equity offering. I mean, that was a marketed deal. It was expecting SEC comments, so the deal was out there for two or three weeks and I think this is what hammered, this is what actually punished our stock price. And I think ever since our stock price has been trading at a discount. I think it’s a question of making people aware of what we have done in the company, what the upside potential is for the company, and of course we are – we would be naïve to expect that this will happen without an increased confidence in the market, in the drybulk market going forward.

Noah Parquette - Canaccord Genuity

Okay. And then when you talk about reinstituting a dividend, I mean, how do you think of the role of the dividend and the equation of returning value to shareholders is, would you characterize it as a modest dividend or would you put a large portion of the cash flow towards that, just give us a little bit more clarity on your thoughts?

Michael Bodouroglou

Well, we haven’t actually completed our thought process in that department, but maybe I should remind you that when Paragon went public for the first time in 2007, it was – we have been distributing most of our free cash as dividend and have done that for a good period of time and we stopped - we actually suspended paying a dividend when the drybulk market went into shambles. We do believe in rewarding the shareholders through a dividend and we will do that as soon as the market allows for it. And actually what we have been doing in the last few quarters is to make sure that we can start doing that sooner rather than later by reducing our cash flow breakeven. That’s what we have been doing as Robert also mentioned in our presentation and we continue to work towards this direction.

Noah Parquette - Canaccord Genuity

Yes. And then you have done a great job of lowering the vessel OpEx. Can you just tell us a little bit more specifics about how you went about that and whether these numbers we are seeing now are sustainable going forward?

Michael Bodouroglou

As Robert mentioned, I think it’s we have renewed the number of our loans with new facilities. The amortization profile of these facilities are more linear. We have also [carried] [ph] out prepayments. It’s – yes, we have also reduced our OpEx by being - buttoning down the hatches and doors. So as the fleet increases, our G&A cost, which are sort of standards are divided by a large number of vessels. So, our G&A cost per vessel per day is also dropping as well.

Noah Parquette - Canaccord Genuity

Okay, thanks.


(Operator Instructions) There are no questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Robert Perri for any closing remarks.

Robert Perri

Thank you everyone for taking the time for the conference call today. We look forward to talking to you during our third quarter conference call later this year. Thank you very much everyone.


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

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