Globus Maritime Ltd. (NASDAQ:GLBS) Q3 2014 Earnings Conference Call December 8, 2014 9:30 AM ET
Georgios Karageorgiou - Director, President, CEO and CFO
Nikos Kalapotharakos - Financial Controller
Nicholas Bender - Wunderlich Securities, Inc.
Thank you for standing by, ladies and gentlemen, and welcome to the Globus Maritime conference call on the Third Quarter and Nine Months 2014 Financial Results. We have with us Mr. George Karageorgiou, President and Chief Executive Officer; and Mr. Nikos Kalapotharakos, Financial Controller of the Company. At this time, all participants are in a listen-only mode. There will be presentation followed by a question-and-answer session. [Operator Instructions] I must advise you the conference is being recorded today, Monday 8th December 2014.
This communication contains forward-looking statements as defined under U.S. Federal Securities laws. Forward-looking statements provide Globus' current expectations or forecast of future events. Forward-looking statements include expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical fact or that are not present facts or conditions.
Words or phrases such as anticipate, believe, continue, estimate, expect, intend, may, ongoing, plan, potential, predict, project, will or similar words or phases or the negatives of these words or phases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements.
Globus' actual results could differ materially from those anticipated in forward-looking statements for many reasons specifically as described in Globus' filings with the Securities and Exchange Commission. Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date of this communication.
Globus undertakes no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this communication or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks Globus describes in the reports it will file from time to time with the Securities and Exchange Commission after the date of this communication.
And I now pass the floor to one of your speakers today, Mr. Karageorgiou. Please go ahead, sir.
Thank you, operator. Welcome to our conference call, and thank you for joining us today to discuss Globus' operating and financial results for the three months ended September 30, 2014, and the first nine months of the year. I’m George Karageorgiou, President and CEO of Globus Maritime, and with me today is Nikos Kalapotharakos, our Financial Controller.
For those of you that just joined, [technical difficulty] please note that with Nikos Kalapotharakos, our Financial Controller. For those of you that just joined [technical difficulty] and the two notable trends that we see are first, short-term pessimism [ph] associated with the traditional weakness experienced in the first quarter of every year. And two, the forward rates for 2015, ’16, and ’17, pointing to a steady very low earnings market for a long period.
The fall of the BCI’s TC average last week below $8,500 a day had an obvious negative influence on the market decelerating the positive movement of the other dry-bulk segments.
Although average freight rates have improved compared to the average levels of Q3, they’re still well below expectations built up before the last quarter. This is clear by now -- it is clear by now that this supporting market will continue into the New Year as well. Under the current freight environment and with rates looking unable to bounce back for a longer period, it seems that investment interest is scaling back currently.
In the new building sector, a very strong 2013 in terms of orders and the equally strong beginning of this year as well originally allowed ship builders to become more relaxed as their slots were fully booked for 2015 and the first half of 2016. As the last quarter of 2014 is nearing to its end, the lack of demand for securing new slots and the increasing number of non-effective orders has changed the sentiment dramatically though, pushing yards to come more accommodating and to become more accommodated in the price expectations and even offer substantial discounts in certain cases.
As a matter of fact, top Chinese ship yards are currently willing to offer Ultramax and Kamsarmax slots at 27 million and 29 million respectively. But even prices like these, are considered too expensive in order to attract the attention of owners who could be considering new building order.
In the same spirit, resale candidates are also facing lack of interest as the current freight market is not tempting enough for an owner to pay any premium and could soon present us with some buying opportunities. At the same time, the downward correction of demolition prices during the past weeks by more than $50 to $60 per long ton has had an immediate effect on older assets.
Although given the high demolition prices reach this year, even after such corrections the current levels of $430/$440 per long ton offered in the Indian subcontinent for dry-bulk units are still relatively attractive. Therefore vessels built up to 1995 are currently in the market for scrap related prices with small differentiations relating to their size, special survey in dry docking positions and also delivery place. Tonnages built within the first decade of 2000 enjoyed the most interest as these vessels trade at heavily corrected prices which are comparable to the levels reached in 2012.
The soft turning of the Japanese currency has simultaneously brought additional sale candidates in the market with buyers concentrating in modern Japanese built tonnage with a view that a quick profit could be locked by what looks like another mini-cycle in terms of asset values.
Vessel prices are very close to bottom levels reached back in the December 2012 to January 2013 period, while the freight rate market has been fairing at better levels compared to that period, possibly implying opportunities to be found in the second-hand market.
Slide 7 shows how demand and supply had developed so far according to Clarksons and what the prospects are for next year with trade data indicating around 4.1% increase in Dry Seaborne trade compared with 2014. On the supply side, 5.5% increase in the net fleet growth similar basically to what we’ve experienced in 2014 is expected also for next year, but with the Panamax fleet growing slower and the Ultramax fleet faster than this year.
Overall, we’re expecting a slight addition to the over supply of tonnage that we’ve experienced in the last five years. However, one should note that the average rate of increase for the next two years in non-vessel categories will be around 5%, approximately half of the growth percent that’s experienced between 2011 and 2013.
Slide 8, shows the major things that impact the market currently. The most important current development is the replacement of Chinese domestic iron ore with imports. As with iron ore prices below $70 per ton, many Chinese mines have struggled to continue production. This situation will not improve soon, since mining costs usually increase during the winter.
In the last six months, Chinese preconsumption has not grown. Though iron ore trade still expanded as inefficient domestic producers were displaced by cheap import resulting in an approximately 140 million ton increase of iron ore imports over last year. The iron ore trade may not grow as fast in 2015, but as a larger share of newly produced cargo will be coming from the Atlantic we might see an increase in ton mile demand. Furthermore, the recent rate cuts in China might reignite steel consumption growth.
The second development happens in the coal market as India replaces China as the growth driver in this trade. India now imports more coal than China and further expansion of Indian coal imports is expected as power grid investments allow higher utilization of cost of plants in order to meet internal power shortages.
Having said that, we should not forget that China continues to be a significantly [indiscernible] market in the winter months with the power to move the market and as Chinese coal prices have been recently increasing, the price arbitrage that makes import attractive has widened significantly. With lower coal production and hydro output in the winter, imports of Chinese coal could rebound over the coming months.
Last, [indiscernible] the U.S. grain exports of the last few weeks are expected to continue into Q1 and together will struck [ph] more volumes that coming out of the Black Sea, these may result in a stronger Atlantic market in Q1. Finally, we should not forget that Chinese bauxite imports are expected to start recovering now that stock price are becoming exhausted.
Slide 9 is very descriptive as it shows the average TC rates of the last four years and how the 2014 spot rates compare to the average rates as well as the earnings range of the last five years. You will notice that almost all vessel sizes are currently earning the lowest or close to the lowest level of earnings of the last five years. We continue to believe that charter rates are likely to improve over the next several months for all dry bulk ship classes as a function of increase of plant volumes of iron ore shipments from Brazil and higher levels of coal trade, particularly, in the event of coal to Chinese winter.
Nikos will now take over in order to discuss our financial results in more detail before I return in order to answer any questions that you might have.
Thank you, George. I’d like now to discuss in more detail the financial results of the Company for the third quarter of the year 2014, which should be read in conjunction with the details that appear on our results released on Friday December the 5th.
So let's turn to Slide number 11, which corresponds to the Company's profit and loss for the period. Early results and operational highlights can be found at Slide number 4, while at Slide number 12, you will find a graph representing a performance analysis for the quarter and nine months period under discussion compared to the corresponding period last year.
During the three months period ended September 30, 2014, our revenue decreased by approximately 17% reaching $6.3 million versus $7.6 million during the same period last year, mainly due to the decrease in the average time charter rates achieved by our vessels during the quarter under discussion compared to the same quarter last year.
Our time charter equivalent rate for the third quarter of 2014 amounted to $7,524 per vessel per day against $10,212 per vessel per day during the same period last year corresponding to a decrease of 26%.
Voyage expenses increased by $0.2 million and amounted to $0.9 million during the third quarter of 2014 against $0.7 million during the same period in 2014. 67% of voyage expenses, approximately $0.6 million constitute the cost of bunkers consumed during periods that our vessels traveled seeking employment. In 2013, $0.4 million consumed during the same period.
Vessels operating expenses for the third quarter of 2014 amounted to $2.4 million or $4,277 per vessel per day versus $2.6 million or $4,774 per vessel per day for the same period last year corresponding to a decrease of 10% or making evident our continued efforts towards operational efficiency.
Total administrative expenses amounted to $0.6 million for the period under discussion versus $0.7 million during the same period last year. This figure includes administrative expenses payable to third-parties, administrative expenses payable to related parties and share-based payment expenses. The decrease in administrative expenses which mainly attributed to a decrease in share-based payment expenses due to the fact that there is no share-based payment incentive plan currently in effect.
Adjusted EBITDA for the third quarter of 2014 amounted to $2.4 million against $3.6 million for the same period last year, corresponding to a decrease of 33%, mainly attributed to the decrease in our net revenue as already discussed.
Deprecation and amortization expense for the third quarter of 2014 increased by $0.1 million and amounted to $1.8 million versus $1.7 million recognized during the respective period last year, corresponding to an increase of 6%. This figure includes depreciation expense with reference to the vessel's cost, depreciation of dry-docking costs and amortization of the fair value of time charter attached to the vessel Sun Globe acquired during the second half of the year 2011. The increase in the deprecation and amortization expense was mainly attributed to the increase in the depreciation of dry-docking costs on a quarter-over-quarter basis.
Interest expense and finance costs decreased by $0.4 million to $0.5 million during the third quarter of 2014 from $0.9 million during the respective period last year, mainly due to the termination of our five year swap agreements during November 2013 and the sharp decrease in our average bank debt from $95.3 million during the third quarter of 2013 to $83.8 million during the quarter under discussion.
As a result of the aforementioned, we’ve achieved a net income of $0.2 million for the third quarter of 2014 versus a net income of $1.2 million for the same period last year corresponding to a decrease of 83%.
So let’s now turn to slide number 14, which corresponds to the company's cash flows for the period. Net cash generated from operating activities during the third quarter of 2014 amounted to $2 million against $2.4 million during the same period last year, corresponding to a decrease of 70%; well we have achieved to minimize the effect of the 33% decrease in our adjusted EBITDA through our effective working capital management.
Net cash used in financing activities during the quarter under discussion amounted to $1.7 million and consisted of $1.2 million of debt repayment and $0.5 million of interest and other finance costs. Net cash used in financing activities during the same period in 2013 amounted to $1.8 million and consisted of $0.9 million of debt repayment, $0.7 million of interest and other finance costs and $0.2 million of preferred dividends paid.
Now if we turn to page 15, you will find information on our liquidity position as of the end of September 2014. So as of September 30, 2014, our cash balances amounted to $6 million, and our outstanding debt amounted to $84.2 million gross of unamortized debt discount resulting in a net debt figure of $78.2 million while at the same time we had an un-drawn amount of $2.2 million available with respect to our shareholders' credit facility. Our net debt to total capitalization ratio reached 54.2% as of the end of September 2014 against 56.4% as of December 31, 2013.
On page number 16 and 17, you will find information on the movement in our net debt balance from March 31, 2013 until September 30, 2014 and the reconciliation of the our net debt cash generated from operations for the respective periods.
I would like now to turn the floor to George, so we can move on to the Q&A.
Thank you, Nikos. Operator, you can open the floor to questions?
Thank you very much indeed, sir. We’ll now begin the question-and-answer session. [Operator Instructions] Thank you. And from Wikborg Sons [ph] -- your first question comes from the line of Andreas Wikborg [ph]. Your line is now open, sir.
Yes. Hi, good morning. I was wondering if, from your perspective that 2014 turned out to be as good a year as you expected, and what is your outlook looking forward?
Thank you, Andreas [ph]. Well, unfortunately 2014 has not proven to be as successful as we were expecting, and as I think everybody was expecting in a market. And the reasons are mostly associated with the difference that we had between supply and demand. In the beginning of the year we were expecting that supply and demand would be balanced to around 4%, 4.5% each. Unfortunately when -- as the year progressed, we believe that the trade growth is expected to be around 4%, where fleet growth is going to reach around 5%. So we do have a mix-match between supply and demand. On the demand side, although we had significant increases into the iron ore trade volumes. As I said previously of approximately [technical difficulty] later and cheaper date. So these are, I think the five, six reasons why -- that might explain why 2014 did not turn out to be as prosperous as everybody was expecting in the beginning of the year. Now regarding 2015, we have -- the anticipation is that, supply and demand will be more or less even. However we still had to absorb the other capacity that resulted from double-digit increases in all fleet sizes, in all segments of the fleet during 2011, 2013. So, we still have a lot of supply I think to absorb. However, there are a few developments like the substitution of domestic iron ore mining in China and coal mining with exports due to the price differential that exist between domestic prices and imports, which might help us with a better market. Further more, as a lot of new capacity will be coming from Brazil on the iron ore trade next year; that might increase further the ton mile demand for the Capsizes which might have a positive effect also in the smaller sizes. So, all in all, I’m not very pessimistic about next year. This is the fourth year that we are in a market which has not produced the results that everybody was expecting. And eventually I think supply and demand will reach a balance and that will allow for better days to come. I hope that we will see these better days in 2016. Hello?
Do we have any other questions?
We do indeed, and that comes from Wunderlich from the line of Nicholas Bender. Your line is now open, sir.
Good morning, gentlemen. I hope you’re doing well. A quick question, sort of following up towards on your commentary about, really the importation of iron ore and that replacing domestic production in China. Do you feel as though, given sort of broader weakness in the commodity complex that were sort of newer term potentially going to put in a bit of a floor on iron ore prices just given the potential for Chinese imports to increase or do you have some sense that there is still some additional downside anticipated. I realize, I’m sort of asking you what your thoughts are on iron ore prices, but that is I guess the crux of the question?
I can only tell you Nick, what the big mining companies claim and both Vale and BHP believe that the price of the iron ore has corrected too far -- has decreased too far too soon. So, my guess is that we should be seeing a gradual increase in the iron ore prices starting in 2015, and this is what Vale and BHP are expecting.
Right, right. Understood. Another question for -- tangentially related to the broader commodity discussion. Obviously you included that graph of bunker prices in the presentation. Do you have any sense at this point that lower bunker prices potentially changes market dynamics in 2015 or are we still at the point that rates are simply too low near-term to really change any of the slow steaming type of behavior that’s become such a common place thing in the industry over the past couple of years?
As you know Nicholas, high bunker prices usually eat up -- eat away capacity -- supply capacity, because they force the charters to operate the vessels at lower speeds.
In the last three months, we witnessed a very drastic reduction in the prices of bunker fuel. However time charter rates today are at such -- such as low level where I do not see -- we have not experienced yet in our business any requests that will increase the traveling speed of the vessels. So unless we see rates being solidly or being, are gaining double digits, exceeding $11,000, $12,000 a day, I do not foresee that the benefits that they will acquire by them speeding up will be enough to counter balance the savings that they’re having today from a reduced bunker cost.
Right. Yes, that math certainly makes sense. Okay, last one for me. You mentioned some potential opportunity in the secondhand market. Can you refresh us on where you stand with your flexibility to potentially address an opportunity that you see, to see a cash on hand and a little bit of capacity you still have on the credit facility et cetera?
We do not have a lot of cash. We have approximately around $3 million of cash in our bank account at the moment. And whether we do have, as you know a credit facility from our shareholder that we can tuck it into which is an additional $4 million. This might not be enough in order to take advantage of any significant new opportunities that might arise. But we believe that we are approaching a very low state of prices that eventually would present the industry with other opportunities. In order for us to take advantage of these opportunities, we will need to reexamine whether we will -- whether we’ll have enough cash in our balance sheet or we need to do some capital increases. This is a discussion that the Board is continuously making and should we decide to do something like that, we’ll let you know immediately.
Understood. Thanks guys. I appreciate it.
Thank you very much indeed. [Operator Instructions] There appear to be no further questions at this time, so I shall pass the floor back for closing remarks.
Well, I would like to thank everyone for participating in this call, and I’m looking forward to talking to you again in three months time with the year end results for Globus Maritime. Thank you very much. Thank you, operator.
Thank you very much, sir. With many thanks to both our speakers today, that does conclude our conference. Thank you all for participating. You may now disconnect.
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