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Paragon Shipping Inc. (NASDAQ:PRGN)

Q2 2012 Results Earnings Call

August 23, 2012 9:00 AM ET

Executives

Rudy Barrio - Allen & Caron, IR

Anastassis Gabrielides - Attorney

Michael Bodouroglou - Chairman and CEO

Analysts

Noah Parquette - Global Hunter Securities

Operator

Good morning. And welcome to the Paragon Shipping Second Quarter 2012 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 Rudy Barrio of Allen & Caron, Investor Relations. Please go ahead.

Rudy Barrio

Thank you, Emily. Good day, everyone. And welcome to Paragon Shipping’s investor conference call to discuss its financial results for the company’s second quarter ended June 30, 2012. Presenting this morning is [Anastassis Gabrielides] of Paragon Shipping.

Before we start the call there are couple of items I would like to cover. Many of you received a copy of Paragon Shipping’s earnings result press release. It was disseminated earlier today.

If you did not receive a copy of the press release it is posted on Paragon Shipping’s website at www.paragonship.com and the Investor Relations section of our website at www.allencaron.com. It is also posted on Yahoo! Finance and most financial sites. You may also call our office in New York at 212-691-8087 and we will email it to you.

As mentioned earlier, this call is being recorded. A replay will be available shortly after the call for eight days and maybe access from North America by calling 877-344-7529 and entering passcode 10017773. International callers should dial 412-317-0088. This call is also being broadcast live over the internet and maybe accessed via Paragon Shipping’s website. A replay of the webcast will be available shortly after the call and will continue for eight days as well.

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 www.sec.gov.

I would now like to turn the call over to Anastassis Gabrielides. Good day, Anastassis.

Anastassis Gabrielides

Good day, Rudy, and good day to you ladies and gentlemen. And welcome to Paragon’s earnings conference call for the second quarter and six months ended June 30, 2012. We shall start our presentation with our financial highlights. We will then update you on the latest company developments since our last conference call, as well as on our views on the drybulk industry.

We will then proceed with a quick analysis of our financial results and will conclude with a brief summary. After the presentation, Michael Bodouroglou, the Chairman and CEO of our company and myself will be available to answer any questions.

Please turn to slide four. This slide presents Paragon’s financials highlight for the second quarter and first half of 2012. During the second quarter of 2012, we operated an average of 10.8 vessels, compared to 11.8 vessels during the year ago period.

This decrease in the number of vessels relates to the sale of the Box Voyager, the Box Trader and the CMA CGM Kingfish to Box Ships, as well as the sale of the Crystal Seas to a non-related third-party in 2011. This decrease is offset by the delivery of our first newbuilding vessels, the Prosperous Seas and the Precious Seas in the second quarter of 2012.

Our net revenue from the second quarter of 2012 was $11.9 million, down from $23.6 million in the year ago period, due to the renewal of several of our time charters at lower rates.

Our EBITDA for the quarter was $6.3 million, while we reported net income of $0.2 million. When these results are adjusted for non-cash items, our adjusted EBITDA was $6.6 million and our adjusted net income was $0.5 million or about $0.01 per share.

Slide five provides an overview of the length of the remaining charter period for each of our vessels. Full details of the charter for our fleet can be found under the Appendix section of this presentation, based on latest delivery dates, our fixed revenue days currently stand at 97% in 2012, 69% in 2013 and 35% in 2013 -- ‘14. Overall, the average remaining term of our charters is 1.9 years.

As of June 30th, after taking into consideration, all recent developments and based on latest delivery dates, while excluding of holidays due to second scheduled drydockings, we have secured time charter revenues of approximately $58 million, out of which $24 million is scheduled for the current year 2012.

On slide six, we present some remarks on our leverage. Currently, our total debt stands at $207 million, while our cash position stands at $23 million. This translates into net debt of $184 million, representing a moderate 58% net debt to total capitalization.

The continue market downturn, which has been more severe than anticipated has further depressed vessel prices and has impacted our rechartering rates. As of June 30, 2012, we are not in compliance with the EBITDA coverage ratio covenant contained in one of our loan agreements and the security cover ratio contained in four of our loan agreements.

As a result, our company maybe required to prepay indebtedness, provide additional collateral in the form of cash or other property, or request our lenders for waivers or amendments. Our company is currently in discussions with its lenders in order to address the issue in a mutually beneficial way.

Now let us provide you with an industry update. The left hand graph in slide seven depicts the fluctuation of the average time charter routes of the main drybulk sectors since January 2011. In early 2012, BPI fit the lowest level seen in 25 years. Time charter rates rebounded in the second quarter, but have since fallen back to depressed levels.

Predictably, the sale and purchase market -- in the sale and purchase market, asset values continue to decline, the larger the size the steeper the slope. Analyst predicts that chartering market will continue to be depressed through 2012 and ‘13.

On the top left hand graph of slide eight, you can see that the vast majority of the order book relates to the larger vessels such as Capes and Panamaxes. We expect that 2012 will be quite challenging regarding the number of newbuilding deliveries that are expected to take place.

On the top right hand slide -- on the right hand side of the slide, we see the relationship between the existing global fleet and the order book. The graph showing line depicts the order book as a percentage of global fleets in 2000 -- year 2000.

Currently, the aggregate capacity of the existing fleet is more than 665 million deadweight tons, while about 160 million deadweight tons are in order. The relevant ratio is 24%, down from more than 70% in late 2008.

The decrease in the order book is clearly a positive sign. However, since the beginning of 2012, more than 800 vessels totaling 68 million deadweight tons have been added to the fleet.

On the other hand, scrapping so far this year stands at 18 million deadweight tons. Despite this number, actual deliveries should still be significant and they are concerned for the drybulk industry, hence we do not expect to see a recovery in the market before the end of 2013.

Let me now proceed with a quick analysis of our financial results for the second quarter and the first half of 2012. Please turn to slide nine. Due to a number of non-cash items that affect our results, I would like to walk you through our adjusted net income and EBITDA for the second quarter of 2012.

We believe these performance measures show a clear picture of the company’s cash earnings. However, these measures are not recognized by U.S. GAAP. We start from our U.S. GAAP results and adjust those figures to exclude non-cash items in order to arrive at our adjusted figures.

During the second quarter, these non-cash items include a $0.8 million expense relating to the amortization of share-based compensation which is included in G&A. In other income, there is a non-cash gain of $0.5 million relating to the mark-to-market valuation of our interest rate swap contracts which is netted against the actual cash payments made under those swap agreements during the quarter.

In summary, the non-cash items totaled $0.3 million and excluding these, Paragon produced an adjusted net income of $0.5 million or about $0.01 per share. If we add back interest expense and depreciation charge, our adjusted EBITDA for the quarter was $6.6 million.

Turning to our semi-annual results on slide 10, the non-cash items include a $1.6 million relating to the amortization of share-based compensation. In other income, there is a non-cash gain of $0.9 million relating to the mark-to-market valuation of our interest rate swap contracts.

In summary, for the six months ended June 30th, 2012, non-cash items totaled $0.7 million and excluding these, Paragon produced an adjusted net income of $1.6 million or about $0.03 per share. If we add back interest expense and depreciation charge, our adjusted EBITDA for the first half of 2012 was $13.7 million.

Slide 11 provides an analysis of Paragon’s operating performance for the first half of 2012. The total fleet average net daily time charter rate was $12,618. Total vessel operating expenses which include the operating expenses plus G&A expenses and management fees were $6,779 per day. These results in a vessel free cash flow from operations of $5,839 per day. I would like also to point out that we reported nearly 100% utilization rate, 99.5%.

Slide 12, in conclusion, ladies and gentlemen, market still shows significant weakness, which we expect to continue through 2013 when the overcapacity problem should start to recede. As a company, we continue to execute our strategy of fleet renewal and conservative growth through the current downturn in the drybulk market.

We have a proactive approach with our lenders and we are taking all necessary steps to position the company in the event that the current downturn is prolonged. We are confident that our company will weather the current storm and will emerge stronger.

Thank you for your attention. And I will now turn the call back to the operator for questions. I also wish to remind you that our Chairman and CEO, Michael Bodouroglou, is standing by to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from Noah Parquette of Global Hunter Securities. Please go ahead.

Noah Parquette - Global Hunter Securities

Thank you. My first question was just on G&A expense. You guys have done a great job of bringing that down from previous levels. Can you talk about where you see that going forward? Are you comfortable at this current level?

Michael Bodouroglou

Anastassis?

Anastassis Gabrielides

Well, we are making every effort to reduce our expenses and keep them at a low level. I cannot -- we cannot make any promises but clearly we are very careful with our expense side.

Michael Bodouroglou

If I can also add to this, if you compare our G&A expense, total vessel operating expense, when you compare ours against our peers, I think you will see that we are amongst the most efficient ones. Now, there is a limit down to which one the company we can lower its operating expenses before crossing the threshold line and decrease quality to unsustainable levels.

We are a quality supporter. We have a quality operation. And we will make sure that we remain so. But, as Anastassis said, we are making every effort to reduce costs and we are, and hopefully you can see that by comparing our results to others.

Noah Parquette - Global Hunter Securities

And then going on to the loan you have outstanding to TEU, what are your plans there? Is that something that you expect to be repaid this year or can you just talk a little bit about that?

Anastassis Gabrielides

The loan is due in April of next year and we expect it to be repaid in time.

Noah Parquette - Global Hunter Securities

Okay. And then just going on to your containership newbuilds, what are you thinking there? I know you have some time but can you talk about that?

Michael Bodouroglou

What is the question regarding? What was the question about?

Noah Parquette - Global Hunter Securities

Your containership newbuilds for late 2013.

Michael Bodouroglou

Yeah. Well, we have, as you know, the Paragon has undertaken to actually sell those to a third-party or Box Ships.

Noah Parquette - Global Hunter Securities

Okay.

Michael Bodouroglou

And Box Ships does have the right of first refusal at the market price or at the cost to Paragon, whichever is higher. And so there is no reason to expect that this will change.

Noah Parquette - Global Hunter Securities

Okay. And then just one last question, it looks like the Diamond Seas is one of your older ships and it is coming off charter next quarter. Is that something you can consider selling or is that part of a renewal program?

Michael Bodouroglou

Well, actually we did complete -- I am happy to say that we did that in time a couple of years ago when we sold our 395 big ships. And I’m happy to say that we sold them at levels which are considerably higher to existing levels. Now Diamond Seas is a fine ship and we are expecting that the market downturn is not going to last forever.

We are expecting that as soon as the current order book, the outstanding order book, which is reducing by the day, by the way, is delivered. We are bound to see for as long as demand continues to be strong out of Asia, which I believe it will. We are expecting a market upturn and I think it’s not very good policy to -- it’s a modern vessel.

It is not a very old vessel for drybulk ship standards. And there is no reason to I think to sell a fine ship at depressed levels. Luckily, we can say that because we have liquidity. We are in a current depressed market.

I think we are in a position and it is a position we like to be in that we can burn cash in order to service all our obligations, cover our operating expenses and also cover our loan repayments. And it is a nice position to be in. We have cash to burn and at some point we are expecting the market to recover.

Noah Parquette - Global Hunter Securities

Does that ship have debt attached to it or do you know the number offhand?

Michael Bodouroglou

Sorry?

Noah Parquette - Global Hunter Securities

Does that ship have debt attached to it or you don’t know that number offhand?

Anastassis Gabrielides

That ship is financed along with two other vessels and the total amount outstanding for the three vessels is $52 million.

Noah Parquette - Global Hunter Securities

Okay. That’s really, really helpful. All right. Thank you, guys.

Michael Bodouroglou

Thank you.

Operator

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Gabrielides for any closing remarks.

Anastassis Gabrielides

Thank you, Emily. And thank you all for participating in our earnings conference call and we look forward to welcome you all in our next quarter’s earnings call. Thank you.

Operator

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

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