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Baltic Trading Limited (NYSE:BALT)

Q3 2012 Earnings Call

November 01, 2012 10:00 am ET

Executives

John C. Wobensmith - Principal Executive Officer, President, Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer

Apostolos Zafolias

Analysts

Douglas J. Mavrinac - Jefferies & Company, Inc., Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the Baltic Trading Limited Third Quarter 2012 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, and instructions will follow at that time. A replay of the conference will be accessible any time during the next 2 weeks by dialing (888) 203-1112 or (719) 457-0820, and entering the passcode 3425276.

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

Unknown Executive

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 anticipate, budget, estimate, expect, project, 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 filing with the Securities and Exchange Commission, including, without limitation, the company’s Annual Report on Form 10-K for the year ended December 31, 2011 and the company’s subsequent reports with the SEC.

At this time, I would like to introduce John Wobensmith, the President and Chief Financial Officer of Baltic Trading Limited.

John C. Wobensmith

Good morning. Welcome to Baltic Trading's Third Quarter 2012 Conference Call. I will begin today’s call by reviewing our third quarter highlights as outlined on Slide 2 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, I will review Baltic Trading's highlights for the third quarter. During the third quarter, we continued to operate a modern fleet of drybulk vessels that are employed on spot-market-related time charters. We also declared a dividend for the third quarter of $0.01 per share representing our 10th consecutive dividend since going public. While we maintain our focus on preserving a cost-effective operating platform and a balance sheet with low debt in support of our ability to provide shareholders with quarterly dividend, our financial results continued to be affected by the challenging market conditions across the drybulk industry. For the 3 months ended September 30, 2012, Baltic Trading recorded a net loss of $4.8 million or $0.22 basic and diluted loss per share.

I will discuss our financial performance in more detail later on the call. Consistent with our fleet deployment strategy that provides the ability to increase the company's earnings potential when freight rates improve, we fixed the Baltic Leopard, a 2009-built Supramax vessel, on a spot-market-related time charter with Resource Marine at 95% of the Baltic Supramax Index. The duration of the spot-market-related time charter is for a minimum of 18.5 months to a maximum end date of May 30, 2014. We also extended the spot-market-related time charter for the Baltic Wolf, a 2010-built Capesize vessel with Cargill International S.A. for 21.5 to 26.5 months. The rate for the spot-market-related time charter is based on 100% of the Baltic Capesize Index.

Turning to Slide 5, we provide an overview of our current fleet. Baltic Trading is dedicated in owning and operating a modern high-quality fleet of drybulk vessels that adhere to the highest industry standards. Our current 9-vessel, 672,000 deadweight ton fleet consists of 4 2009-built Supramax vessels, 2 2010-built Capesize vessels and 2 2010-built Handysize vessels and 1 2009-built Handysize vessel with an average age of 2.8 years, far below the world average of approximately 10 years.

The company's vessels currently trade on the spot-market-related time charters as multinational companies, 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 third quarter and 9-month period ended September 30, 2012, the company generated revenues of $6.3 million and $20.2 million, respectively. This compares to revenues for the third quarter of 2011 and 9 months ended September 30, 2011, of $10.9 million and $30.4 million, respectively. The decrease in revenues for the third quarter of 2012 compared to the prior year is due to lower spot market rates achieved by our vessels.

The company recorded a net loss for the third quarter of 2012 of $4.8 million or $0.22 basic and diluted loss per share. The net loss for the 9 months ended September 30, 2012 was $12.9 million or $0.58 basic and diluted loss per share. This compares to a net loss of $0.2 million or $0.01 basic and diluted loss per share for the third quarter of 2011 and a net loss of $2.2 million or $0.10 basic and diluted loss per share for the 9-month period ended September 30, 2011.

Key balance sheet items, as presented on Slide 8, include the following: Our cash position was $3.3 million as of September 30, 2012; our total assets as of September 30, 2012, were $368.1 million, which consisted primarily of cash and cash equivalents and our 9-vessel fleet.

Moving to Slide 9, our utilization rate was 99.2% for the third quarter of 2012 compared to 98.8% in the year-earlier period. Our time charter equivalent rate for the third quarter of 2012 was $7,193 per day per vessel. This compares to $12,773 recorded in the third quarter of 2011. The decrease in time charter equivalent rates resulted from lower spot rates achieved in the third quarter of 2012 versus the same period last year for the vessels in our fleet.

For the third quarter of 2012, our daily vessel operating expenses were $5,171 per vessel per day versus $4,888 per vessel per day for the third quarter of 2011. Daily vessel operating expenses for the 9 months ended September 30, 2012, were $5,058 per vessel per day versus $4,784 per vessel per day for the 9 months ended September 30, 2011. The increase in daily vessel operating expenses for the third quarter of 2012 compared to the prior year is primarily due to higher expenses related to maintenance, lube consumption and purchases of stores and spare parts. We note that our third quarter of 2012 daily vessel operating expenses is below our budget set forth at the beginning of the year.

As we have stated in the past, we believe daily vessel operating expenses are best measured for comparative purposes over a 12-month period in order to take into account all the expenses that each vessel will incur over a full year of operation. Based on estimates provided by our technical managers and management's expectations, we expect daily vessel operating expenses for the fourth quarter of 2012 to be $5,300 per vessel per day on a weighted average basis.

On Slide 10, we discuss our dividend for the third quarter and provide an overview of our ongoing dividend policy. As I mentioned earlier, Baltic Trading declared a third quarter dividend of $0.01 per share. The dividend is payable on or about November 21, 2012 to all shareholders of record on November 14, 2012. Baltic Trading has declared cumulative dividends of $1.01 per share since completing its $228 million IPO in March of 2010.

Moving to Slide 11, we present our anticipated breakeven levels for the fourth quarter of 2012. We estimate our daily vessel operating expenses for the fourth quarter of 2012 to be $5,300 per vessel per day, our daily free cash flow breakeven to be $8,262 and our daily net income breakeven to be $13,352.

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

Apostolos Zafolias

Thank you, John. I'll start with Slide 13, which points to the Drybulk Indices. Represented on this slide is the overall Baltic Dry index. During the third quarter of 2012, the BDI showed relative weakness, driven by increased vessel supply, as well as negative sentiment on the rate of growth in emerging economies. The Index reached a quarterly low of 661 on September 12, that has since rebounded to 1,026, primarily due to iron ore restocking in China and a considerable reduced rate of vessel deliveries in the second half of the year.

On Slide 14, we summarize recent developments in the drybulk freight market beginning with the supply side of the equation. As a result of continued low rates and in an attempt to combat excess tonnage, scrapping has been on a record pace increasing by 31% for the 9 months to September 2012 as compared to the same period last year.

Although the majority of the vessels scrapped have been Handysize and Supramax vessels due to the older age of those fleets, we have also observed younger vessel demolitions, especially in the Capesize sector. We highlight that 27 of the 64 Capesize vessels scrapped year-to-date were built from 1990 to 1995. We believe this trend to be -- to prove crucial to a quicker recovery in the Capesize sector as 16% of the Capesize fleet was built in 1995 or earlier. The depressed rate environment has also kept new vessel orders to a minimum, pushing the order book to its lowest level in 8 years, currently at 22% of the fleet. Existing order deliveries peaked in June of this year and have since considerably slowed down, resulting in marginal net additions to the tune of less than 2% for the third quarter.

On the demand side, Chinese iron ore imports continued to grow, registering an 8.6% increase for the 9 months to September. Iron ore imports may continue at healthy levels for the remainder of the year as stockpiles have decreased to the lowest point since July of 2011, and the Chinese government continues to stimulate the domestic economy as evidenced by the recent approval of 60 infrastructure projects totaling over $150 billion in September.

Chinese steelmakers are reentering the market, leading to increase iron fixtures and a level of support for the Capesize sector. The displacement of Chinese ore by imported ore continues to positively affect the drybulk market, as evidenced by September rebound in iron ore export from Brazil augmenting ton miles. This trend may continue going forward as ore prices have been trading in the $100 to $120 per ton range, making it harder for domestic suppliers to compete.

The Metallurgical Mines Association of China estimates that 42% of Chinese ore production is unprofitable at prices less than $100 per ton and reported that 40% of the iron ore mines suspended operations in September due to their inability to remain profitable at lower observed prices.

On the coal front, Chinese imports of the commodity were hampered by an increase in hydropower production in the third quarter as there were several tropical storms that occurred during that period. Chinese coal fixtures have, however, picked up again in October as stockpiles in China's largest coal port, Qinhuangdao, have come under pressure due to the scheduled maintenance of the Daqin Railway.

Turning to Slide 15. We believe that a number of short- and long-term catalysts will impact the drybulk market. China's 12th 5-year plan remains a long-term catalyst due to its related infrastructure programs, as well as the urbanization and development of the central and western regions. With the upcoming change in government leadership in November, it remains to be seen whether additional strict stimulus measures will be instituted.

Seaborne trade may also be positively affected by plant volume expansion as iron ore miners plan to increase production and invest into higher capacity port facilities over the next few years. Higher imported volumes could further induce a price arbitrage between domestic and imported ore prices, thereby enhancing ton miles in the long run.

On the supply side, as volatility and charter rates continues and scrap steel prices remain high, we expect to continue to see increased scrap mill vessels. The year-to-date period has already registered a record of 28.4 million tons scrap.

On Slide 16, we talk more about the demand side fundamentals. Chinese steel production increased approximately 2% during the first 9 months of the year as compared to 2011, while urban fixed asset investment rose 20.5%. As China's urban population continues to expand in the years to come, fuel consumption is expected to be even greater as the Chinese urban household has a 10x to 15x higher steel intensity than a rural household.

In line with urbanization, China's Ministry of Railways increased 2012 plant infrastructure spending to CNY 516 billion or $83 billion while the Ministry of Transportation is working towards expanding its network of high-speed railways to total over 11,000 miles by 2015 from just over 4,000 miles at the start of this year.

And in regards to housing, China's Ministry of Land and Resources plan to build 36 million units of affordable housing by the end of 2015. This year's affordable housing construction target has been increased by 2 million units to 7 million units, which is expected to be met, as 4.8 million units have already been completed to date.

India's growth potential going forward bodes well for the drybulk market also. Steel production in India has grown 5.6% year-to-date and is expected to grow an additional 5% in 2013, according to the World Steel Association. Growing steel demand and limited iron ore export availability from India is also forcing Chinese steel mills to source imported ore from longer ton mile origins.

Moving to Slide 17. On the left of the page, we saw the key expansion plans of iron ore producers as recently revised by the respective companies. The combined ore expansion plans through 2016 accumulate to 426 million tons per annum or 41% of 2011 seaborne iron ore trade.

Iron ore production from the world's 4 largest mining companies: Vale, Rio Tinto, BHP Billiton and Fortescue increased 5% through the first 9 months of 2012 compared to the same period of the prior year. Production from Australian miner, Fortescue, increased 35% over that same timeframe as port and mine expansion plans begin to ramp up.

In Brazil, third quarter operations recovered from earlier weather-related disruptions and exports increased 5% in Q3 as compared to the prior quarter. Overall, Brazilian ore exports were down 3% for the year but have picked up as of late, leading to tighter availability of Capesize vessels in the Atlantic.

Going forward, expert from both Brazilian and Australian mines may increase as miners bring greater miles of iron ore into the market. According to Australia's Bureau of Resources and Energy Economics, the country's exports are forecast to grow by 10% in 2012 and 9% in 2013, reaching 483 million tons and 528 million tons, respectively. The main destination of these ports is China, in which iron ore shipments set another monthly record in September. Chinese ore imports from Australia increased 19% in September year-over-year, amounting to 34.5 million tons. Low international ore prices, together with export limitations in India, continue to make Australian ore, as well as Brazilian and South African ore, much more attractive to buyers.

On the coal side, demand may increase in the medium term as a result of both higher steel production and power consumption. Domestic coal supply continues to fall short of the demand in India leading to coal imports rising 18% from April to September of this year when compared to the same period last year. The domestic coal supply and demand gap is expected to be close to 200 million tons in the year ending March 2013 and could expand to as much as 250 million tons by 2017.

On Slide 18, we discuss the supply side fundamentals which remain uncertain. Although we expect the order book to be less cumbersome in 2013 and beyond, it still remains at approximately 22% of the existing world fleet. Newbuilding orders have, however, decreased by 52% through the first 9 months of 2012, and only 2 Capesize newbuilding vessels have been contracted since the end of March of this year. Declining newbuilding activity along with stronger steel prices have put pressure on shipyard margins, increasing the potential of bankruptcies by some of the less-established Chinese yards.

We believe scrapping will continue to play a significant role throughout 2012 and into 2013, especially if volatility in the freight rate environment persists, as 18% of the world fleet is 20 years or older.

As illustrated on the graph at the bottom right of the page, 2011 and 2012 to date have been record years for scrapping with 23.1 million deadweight tons and 28.4 million deadweight tons scraped, respectively. Notably, the Handysize fleet year-to-date has had 6.5 million deadweight tons scrapped versus 8.6 million deadweight tons delivered. This represents a scrap to delivery percentage of 76, which is by far the highest of any vessel class in the drybulk sector.

Additionally, in the third quarter of this year, the Handysize fleet had a net subtraction of 6 vessels. Lastly, we note that the Capesize order book now stands at 53.9 million deadweight ton, which represents a 49% decrease year-over-year, and the lowest volume in orders since mid-2007.

This concludes our presentation, and we will now be happy to take any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And it does look like we have a question from Doug Mavrinac, Jefferies & Company.

Douglas J. Mavrinac - Jefferies & Company, Inc., Research Division

I just had a few follow-up questions, with these kind of being more short-term-oriented with most of the big picture questions answered on the last call. And the first one relates to port congestion. Obviously, we've seen a big uptick in Capesize pot chartering activity over the last 4 to 6 weeks. Have we started to see a corresponding impact on port congestion, either in Australia or in China, as activity levels have started to pick up?

John C. Wobensmith

Yes, Doug, we've seen a little bit of an increase, but I expect that to continue over the next 30 days.

Douglas J. Mavrinac - Jefferies & Company, Inc., Research Division

Got you. Got you. And historically, port congestion is typically good for the market because it removes ships, presumably.

John C. Wobensmith

Absolutely. Definitely.

Douglas J. Mavrinac - Jefferies & Company, Inc., Research Division

Got you. Got you. And then similarly, some comments were made as far as Chinese coal imports picking up and railways potentially being shut down temporarily. Have we started to see any sort of demand draw into the Chinese coastal trade from Chinese flagships operating in international market, making their way into the coastal trade? Has that started to happen yet?

John C. Wobensmith

We haven't seen any individual candidates go into that market yet, but that market seems to be firming as well. You could definitely expect that.

Douglas J. Mavrinac - Jefferies & Company, Inc., Research Division

Got you. Got you. Perfect. And then just kind of bigger picture. Obviously, demand is starting to pick up as referenced by -- or evidenced by the uptick in activity levels and rates. We know supply growth is starting to slow so the market fundamentals seem to be getting better. Presumably, time charter activity could be picking up in front of that. If time charter activity does start to pick up, what sort of effect does that have on the spot market? Is it such that you take ships out of the spot market because they are now on time charter contracts? And what is the impact of an uptick in time charter activity on the sport market?

John C. Wobensmith

The vessels don't necessarily go away. I mean, obviously, companies are tying up ships for their use long term. So it would be -- it washes itself out, I think, but sentiment definitely improves as you see some of the bigger iron ore players, in particular, take vessels under 1-, 2-, 3-year charters. So that will help up.

Douglas J. Mavrinac - Jefferies & Company, Inc., Research Division

Got you. Okay. Perfect. Perfect. And then finally, Baltic-specific. Can you just remind us when your next debt repayment obligation is for the company?

John C. Wobensmith

Well, there is a $5 million step-down on availability in the middle of November. But just to put numbers on it, we have $101.2 million outstanding. Right now, we have $135 million of availability. So the availability steps down to $130 million, but there is no actual repayment. It's just the step-down on availability.

Operator

[Operator Instructions] There are no further questions in the queue. That does conclude today's question-and-answer session. On behalf of Baltic Trading Limited, we appreciate your participation. This concludes today's conference.

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