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Paragon Shipping Inc. (NASDAQ:PRGN)

Q3 2012 Earnings Call

November 07, 2012, 01:00 pm ET

Executives

Rudy Barrio - Allen & Caron, Inc. IR

Michael Bodouroglou - Chairman, CEO & Interim CFO

Analysts

Natasha Boyden - Global Hunter

Operator

Good morning and welcome to the Paragon Shipping Third Quarter 2012 Earnings Conference Call. All participants will be in 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. Please go ahead.

Rudy Barrio

Thank you, Val. Good day, everyone and welcome to Paragon Shipping’s investor conference call to discuss its financial results for the company’s third quarter and nine months ended September 30, 2012. Presenting this morning is [Anastassis Gabrielides] of Paragon Shipping.

Before we start, there are couple of items I would like to cover. Many of you received a copy of Paragon Shipping’s earnings results press release that was disseminated earlier this morning. 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 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 copy will be available shortly after the call for seven days and maybe accessed from North America by calling 877-344-7529 and entering passcode 10020281. 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 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 www.sec.gov.

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

Unidentified Company Representative

Thank you Rudy, and good day ladies and gentlemen. Today, I will briefly give you the financial highlights from the 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 third quarter and nine months ended September 30, 2012 financial results before ending with our closing remarks. Joining me on the call today is our Chairman and CEO, Michael Bodouroglou. We will both be available for questions after the end of this presentation.

Please turn to slide four. During the third quarter of 2012, we operated an average of 12 vessels at a time charter equivalent rate of $11,574 per day which equated to net revenues of $12.9 million, adjusted EBITDA of $6.4 million and adjusted net loss of $138,000 or negative $0.02 per share.

For the nine months ended September 30, we operated an average of 10.9 vessels at a time charter equivalent rate of $12,418 per day which is equaled net revenues of $37.4 million, adjusted EBITDA of $20.1 million and adjusted net income of $1.5 million or $0.25 per share.

During the quarter, we were required to write-down our investment in Box Ships, along with the value of the shares of Korea Line Corporation that we had received in our settlement with them. This resulted in a one-time non-cash expense of $18.3 million or negative $3 per share which we have eliminated from our adjusted results along with the rest of our recurring non-cash items that we will discuss in more detail later in this presentation.

Slide 5 provides an overview of the length of 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 earliest redelivery dates, our fixed revenue days currently stand at 79% for the remainder of the year, 54% in 2013 and 7% in 2014. Overall, the average remaining turn of our charters is 0.8 years or 9.5 months.

As of September 30th, after taking in to consideration all recently developments based on earliest redelivery dates and excluding of hire days due to scheduled drydockings we have secured time charter revenues of approximately $45.5 million, out of which $11 million is secured in the fourth quarter of 2012. Currently, we're focused on employing redelivered vessels of short-term time charters and unless we see an upturn in the market, we will continue to operate these vessels on short-term basis.

On Slide 6 I would like to make some remarks on our leverage. Currently, our total debt stands at $203 million, while our cash position stands at $20 million. This translates into net debt of $183 million, representing a 63% net debt to total capitalization.

The market downturn which continues to be very severe has further depressed vessel values and has impacted our rechartering rates. As of September 30th, we are not in compliance with several covenants contained in our loan agreements, as a result we may be required to prepay indebtedness, provide additional collateral overall payments, waivers and amendments with expected terms of the loan agreements.

We are still in prolonged discussions with our lenders in order to address these issues in a mutually beneficial way. To be clear, we do not want to secure short-term waivers, but want a longer term solution that will improve our cash flow while elevating our covenant issues.

Slide 7, as far as the vast strategy to protect the company in this downturn, we have secured several amendments from the shipyard in which we have ordered our new buildings that will further improve our cash flow going forward. Firstly, we have postponed the delivery of our next handysize vessel HUL 612 until the fourth quarter of 2012 and based on latest updates on the shipyard, we expect the vessel to be delivered in January 2013. We have also postponed the delivery of our last handysize drybulk carrier HUL 625 until the fourth quarter of 2013.

Lastly, we have postponed the delivery of the 4,800 TEU containerships from the fourth quarter of 2013, until the second quarter of 2014. In addition, we have restructured the apportionment of the advances already paid amounted vessels under constructions so that when we take delivery of our next handysize, we will meet very little equity for the delivery installment.

Now let us provide you with an industry update. The left front graph in slide 8 depicts a fluctuation of the average time charter routes of the main drybulk sectors since January 2011. In early 2012 [BDI] achieved the lowest level since 25 years and tested these levels again in the summer. Our low charter rates for capesize vessels has started to rebound, the charter market is still considered to be rather depressed since the rates for smaller vessels have not followed the same trend.

Predictably in the S&P market assets value continue to declined, at this stage Panamax values have taken to harvest feet and have declined at the faster rate as our all other sectors due to the increased over supply over the respective market.

On the top left hand is also slide 9, you can see that the vast majority of the order book relates to capsize and Panamax vessels. On the top right hand side, we see the relationship between the existing global fleet in the order book. The [gross insurance] line depicts the order book as the percentage of the global fleet since the year 2000. Currently the aggregate capacity of the existing fleet is more than 670 million deadweight tons with about a 148 million deadweight tons on order.

The eleventh ratio is 22% down from more than 70% in late 2008. The decrease in the order book is clearly a positive sign. In addition scrapping so far stands at 25 million deadweight tons and this year deletions should be at record levels. Overall however, net additions to the fleet should still be significant and they are concerned for drybulk industry. Hence we do not expect to see a recovery in the market before 2015.

The graph of slide 10, super imposes the required fleet growth to meet a rising demand together with the actual supply. The light green area shows shortages of vessels, while the pink shows the service of vessels on an annual basis which is not cumulative, which is that from 2008 to 2010, the supply of vessels exceeded demand and plus balance the shortages of vessels we had previously from 2005 to 2008. Post 2010 however the overall supply has been consistent and created this big area in red which is causing the collapsing rates.

Unfortunately the red area of over supply is expected to persist during 2013, albeit at a smaller rate before it gives way to green in 2014. So this overall supply may get worse before it starts getting any better. But as long as the order book remains weak, we should see some recovery from 2015. In other words, we have another one or two years of downside ahead of us. Let us now proceed with a quick analysis of our financial results for the third quarter and nine months of 2012.

Please turn to slide 11. Due to a number of loan cash items that affected our results, I would like to walk you through our adjusted net income and EBITDA. We believe these performance measures to show a clearer picture of the company's cash earnings. However, these measures are not recognized by US GAAP.

During the third quarter, the most significant non-cash items was a non-cash loss recorded on non-investment affiliate. This loss is broken down firstly due in to a non-cash loss of $2.9 million that relates to the dilution effect from the non-participation in Box Ships share offering which was completed on July 18 and secondly into a non-cash loss of $14.4 million that relates to the difference between the fair value and the book value of the investment in Box Ships which was considered to be other than temporary and was therefore impaired.

There was also a significant change in the fair value of the shares of [KLC] which we also considered as other than temporary and therefore we recorded a non-cash loss of $1 million. There were also regular non-cash items included a $0.8 million expense relating to the amortization of share based compensation which is included in G&A and in other income and the non-cash gain of $0.4 million relating to the mark-to-market valuation of our interest rate swap contracts which is netted against the actual cash payments made under these swap agreements during the quarter.

In summary, for the third quarter the non-cash items totaled $18.6 million and excluding these adjusted EBITDA was $6.4 million and adjusted net loss was $138,000 or $0.02 per share. For the first nine months of 2012 the non-cash items totaled $19.3 million while adjusted EBITDA was $20.1 million and adjusted net income stood at $1.5 million or about $24 per share.

Slide 12 provides an analysis of Paragon’s operating performance for the first nine months of 2012. The [weak] average net daily time charter rate was $12,418. Total vessel operating expenses which include the operating expenses plus G&A and management fees were at $6,982 per day. This results in a vessel free cash flow from operations of $4,439 per day. However after debt service and dividend received from affiliates, we ran at an average growth rate of $1,159 per day.

On a more positive note, I would like to point out that we reported 99.5% utilization rate. Slide 13, in conclusion ladies and gentlemen the market still shows signs of weaknesses that we expect to continue through 2013 and till the over capacity problem should start to receive in 2014. As a company we continue to execute on our strategy of fleet renewal and conservative growth through the current downturn in drybulk market. We have a proactive approach with our lenders and we're taking all necessary steps to position the company in the events of the current downturn is prolonged as we expect it to be. We're confident that our company will emerge stronger from the current crisis.

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

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Natasha Boyden of Global Hunter.

Natasha Boyden - Global Hunter

Michael just wanted to ask a couple of questions related to the company. The first one is as obviously you took that in (inaudible) state, and I am just wondering what caused you to decide that this was a permanent impairment now.

Rudy Barrio

Sorry, Natasha, we didn’t get the question. Your line is not very good, could you repeat it?

Natasha Boyden - Global Hunter

Yeah, I was just wondering what made you decide that this was now the permanent impairment on the [TU] stake.

Michael Bodouroglou

The current price in our books of the Box Ships shares was at $11 and clearly the way that the market has developed recently at the end of the quarter, it stood shy of $6 was a big difference and indeed, also looking at the projections of all you guys, you have taken down the price targets of the company from what it was during the previous quarter. So we thought it was prudent to recognize the impairment now.

Natasha Boyden - Global Hunter

Okay, fair enough. And then just staying on TU, the $14 million (inaudible) to TU is still outstanding, can you give us a timeframe on how and when you expect that to be repaid?

Michael Bodouroglou

The loan matures in April next year and we currently expect bulk ships to repay that loan.

Natasha Boyden - Global Hunter

Okay, great and you said April next year?

Michael Bodouroglou

In April next year, the second quarter.

Natasha Boyden - Global Hunter

Okay. And then just turning to the cash on hand of the company, you have about $20 million of cash on the balance sheet in the quarter end, can you just breakdown for us how much about is restricted cash and how much of that is available?

Michael Bodouroglou

Around $3,150,000 is free cash and the remainder is restricted.

Natasha Boyden - Global Hunter

Okay, great. And lastly about the (inaudible) size that’s coming in the delivery in 1Q, 2013; what do you intend to do is ship in terms of your [employment] strategy, obviously the rates do you expect the rate environment to stay low based on some of your slides and I am assuming that you would want to put that ship to long-term contract at a such low rate, so what is it early on acquiring (inaudible) some of the other reasons of that [shift]?

Michael Bodouroglou

You hit the nail on the head Natasha there as you said the current environment is quite low. So we will not be interested in securing a long-term charter for that vessel at numbers that do not make sense. So unless we see a market improvement which frankly we do not expect, we will charter here out on short-term on a case-by-case basis.

Operator

(Operator Instructions) And it appears we have no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Anastassis for any closing remarks.

Unidentified Company Representative

Thank you. And thank you all ladies and gentlemen for dialing in this morning. And we hope to, seeing, talking to all of you next quarter, good bye.

Operator

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

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