Eagle Bulk Shipping, Inc. (NASDAQ:EGLE) Q3 2016 Earnings Conference Call November 9, 2016 8:30 AM ET
Gary Vogel - CEO
Frank De Costanzo - CFO
Jonathan Staubo - Fearnley Securities
Good day, ladies and gentlemen, and welcome to the Eagle Bulk Shipping Reports Third Quarter 2016 Results Conference Call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded.
I would like to now introduce your host for today's conference, Mr. Gary Vogel, Chief Executive Officer. Sir, you may begin.
Thank you and good morning. I'd like to welcome everyone to Eagle Bulk's third quarter 2016 earnings call, after what I can imagine was a late night for many. Before we begin the call, I'm pleased to introduce all of you to Frank De Costanzo, who recently joined the company as CFO and will be co-hosting today's call with me.
To supplement our remarks today, I encourage participants to access a slide presentation that is available on our website at eagleships.com.
Please note that part of our discussion today will include forward-looking statements. These statements include those describing our beliefs, goals, expectations, forecast, estimates, and assumptions are entitled to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and are inherently subject to risk and uncertainties. You should not place undue reliance on these forward-looking statements.
The company's actual results may differ from these forward-looking statements for a variety of reasons, many of which are beyond our control. Please refer to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties that may have a direct bearing on our operating results, our performance, and our financial condition.
Please turn to Slide 3 of the presentation and note the agenda for today's call. We will first provide you with a summary of our third quarter results and recent highlights proceed with a more detailed review of our financials, followed by an update on company's performance, and finally end the call with a discussion on industry fundamentals.
Please turn to Slide 5. The dry bulk market continues to normalize on the back of better than expected demand with rates posting a notable increase during the third quarter to an average BSI of just over 7,000 for the period, an increase of 22% quarter-on-quarter. The improvement in the spot market can be attributed to a number of demand factors, the most significant of which is coal into China. Chinese coal imports are up approximately 8% year-to-date as domestic output was curtailed due to regulations which went into effect earlier in the year pushing prices up over 60% and to a three-year high.
It is also interesting to note that Chinese coastal bulk coal freight rates have rallied on the back of this increasing 86% year-to-date. As a result of the increased Chinese coal imports, rates in the Pacific as exhibited by the BSI has two rate posted a significant increase quarter-on-quarter of approximately 34% to average 6,500 for the period.
Notwithstanding this, the line of Supramax market continue to outperform Pacific supported by pet coke out of the U.S. Gulf which has been moving in record volumes and strong exports of grain out of the Black Sea.
On the supply side, new building deliveries totaled almost 11 million deadweight tons during the third quarter or approximately 130 vessels, essentially unchanged from prior period and down approximately 17% year-on-year.
Demolition of older tonnage amounted to only 2.8 million deadweight tons during the quarter or roughly 50 vessels which is significantly less than both the first and second quarters which averaged 11.3 million deadweight tons each for almost 150 ships. The decrease in demolition can be attributed primarily to improving rate environment and weak scrap prices at the start of the period as well.
Please turn to Slide 6. For the third quarter of 2016, Eagle Bulk generated net revenues of $35.8 million; the net loss for the period was $19.4 million or $0.52 per share. Although rates were up 22% quarter-on-quarter, the rate environment remains weak for the correspondingly negative impact on earnings.
Other highlights during the quarter which I have previously announced include the closing of our $88 million private placement common stock offering, the opening of our new European commercial office in Hamburg, and the recruiting of Frank De Costanzo as our new CFO. Frank while introduced at the outset joined us from Catalyst Paper Corporation where he served as Chief Financial Officer bringing more than 30 years of banking, finance, public company, and commodity market experience. We're very fortunate to have Frank and welcome him to the team.
Separately I'm pleased to report that Eagle just received SHIPPINGInsights 2016 Award last month for achievements relating to our efforts on fleet optimization and operating efficiencies. Fuel efficiency and optimization is a very important area of focus for us and we believe it will help drive our performance on a go-forward basis. We are generally; we are proud of the fact that Eagle has been recognized for being on the forefront of industry development and speaks to our goal of developing Eagle as a market leader across the value chain.
On the sale and purchase front, we sold and delivered the Kittiwake to new buyers during the month of September, and as announced, just on Monday, we entered into an MOA for the purchase of a high specific Ultramax built in 2016.
Please turn to Slide 7 for a more detailed discussion on our fleet renewal strategy. Fleet renewals were the most critical aspect of our business strategy and we're pleased with the execution thus far. We sold four of the oldest and smaller vessels in our fleet during 2016 for total gross proceeds of approximately $13.6 million. In addition, we are able to save over $2.6 million related CapEx as all these ships were sold prior to their third special surveys which were coming due. In summary, these sales allowed us to de-lever the balance sheet while increasing 12 months liquidity by almost $10 million.
Lastly the vessel acquisition I just mentioned is notable as Eagle's first ship purchased in over six years. This vessel which has to be renamed the Stamford Eagle is 2016 build high spec Ultramax vessel, which is a NACKS-61 design and is built at Nantong COSCO Kawasaki Heavy Industries a premier shipyard. The purchase price is $18.85 million which we believe is attractive for this type an agent ship as compared to historical levels. The purchase will be funded by cash on hand.
Please turn to Slide 8 for a current snapshot of our fleet. Including the Stamford Eagle depicted in the upper left which is expected to be delivered to the company later this month, Eagle's own fleet will total 41 vessels. Looking ahead, we expect to continue to execute on our fleet renewal strategy selling off some of the older and smaller ships and purchasing newer and more efficient ones.
I would now like to turn the call over to Frank, who will review our financial performance.
Frank De Costanzo
Thank you, Gary, and please turn to Slide 10 for a summary of our third quarter 2016 and year-to-date results. Our revenues net of commissions for the third quarter were $35.8 million, an increase of $10.2 million or 40% quarter-on-quarter. This increase was attributable to both higher market rates and an improvement in relative performance as compared to Q3 2015 revenues were up $6.7 million or 23%.
G&A costs totaled $5.2 million during the period, up 7% quarter-on- quarter due to one-time expenses related to redundancy costs and extraordinary legal expenses but was down 12% as compared to Q3 last year. We incurred an operating loss for the quarter of $11.7 million as compared to an operating loss of $17.3 million for the prior quarter and $17 million for the comparable period of 2015.
Our net cash interest expense for the quarter was $2.4 million relatively unchanged from the prior quarter and down $654,000 as compared to Q3 2015.
Our non-cash interest expense for the quarter amounted to $4.9 million comprised of $2.6 million for the pick and $2.3 million relating to deferred financing on both the first and second lien facilities. It's important to note that the third quarter figure included roughly $900,000 for the prior period.
The company reported a net loss of $19.4 million or $0.52 per share for the third quarter of 2016 as compared to a loss of $22.5 million in the prior quarter and a loss of $20.4 million in the comparable period of 2015.
Please turn to Slide 11 for a review of the change in cash flows. In Q3, net cash used in operating activities was $7.5 million. The negative cash flow from operations was more than offset by the $3.6 million in net proceeds from the sale of two vessels and a $5 million revolver draw. You can see the net cash from Ops has improved each quarter this year from negative $19.5 million in Q1 to negative $7.5 million in Q3 2016.
Let's now turn to Slide 12 for an overview of our balance sheet and liquidity. The company had total cash and cash equivalents of $98.6 million as of September 30. Our total liquidity increased $128.6 million when you add the $30 million of undrawn availability on our revolving credit facility. The increase in liquidity from prior quarter was driven by the previously announced private placement of common stock; we issued 20.9 million shares for net proceeds of $86 million. Total debt as of September 30 stood at $269 million.
Now please turn to Slide 13 for a review of our actual and projected CapEx. We have drydocked eight vessels so far this year representing 20% of our fleet. For the next 12 months, we expect minimal cash outlays relating to CapEx, thanks in part to the sale of the four vessels discussed earlier which were all due for their third special survey drydock.
It's important to note that the Ballast Water Management Convention is set to enter force in September of 2017. In this regard, you will note that we do not have any required drydocks in 2017 after the convention comes into force.
Let's now review Slide 14 for a nine month actual cash breakeven per vessel per day. Our daily vessel operating cost was $4,858 per day, drydock equating to $318 per day and our cash G&A excluding one-time items relating to redundancy costs and extraordinary legal expenses amounted to $1,112 per day. Cash interest expense was $623 per day. On this basis the total cash breakeven for the first nine months was $6,911 per day per vessel. This concludes our review of the financials.
I will now turn the call back to Gary who will continue his discussion of the business and provide context around industry fundamentals.
Thank you, Frank. Please turn to Slide 16. During the third quarter we continue to transform the commercial business model. We increased the percentage of business executed on voyage terms providing us with the opportunity to manage our fleet more effectively and in turn increase our margins as compared to time charter relet. With improving rates, we also increased our forward cover somewhat. And as the market continues to normalize, we will look to further increase that coverage. While still relatively small, our chartered-in book was comprised of 394 days for the third quarter, an increase of more than 100% over the second quarter. We're chartering vessels for a number of reasons including to fulfill cargo commitments, we will take advantage of arbitrage opportunities.
Our TCE for the third quarter was $6,004 per vessel per day, up 36% quarter-on-quarter. As a result of the business changes we're making, I'm pleased to report our relative performance against the market is improving. As of yesterday, our fleet is 75% contracted for the fourth quarter at a TCE of $6,250 per day.
Please turn to Slide 17 for discussion on OpEx. I'm pleased to report that we continued to improve our technical management performance, thanks to structural and strategic changes made starting about a year ago. Assuming our Q4 OpEx equal to that of Q3, we're on track to realize savings of approximately $6 million in 2016 over the prior year. While cost savings are meaningful, it's very important to point out that we're achieving these savings while actually improving the performance and condition of our ships, we're spending on such things as unscheduled CapEx, and a number of intermediate drydocks to renew and upgrade coatings in advance of scheduled drydocks.
As such the $6 million savings I referenced before has come from processed improvements, negotiation with suppliers, and reduction in insurance costs and related initiatives.
Please now turn to Slide 19 for a discussion on market fundamentals. On the supply side, scrapping of older tonnage started off the year at very high pace, the momentum has slowed significantly for reasons outlined earlier on the call. This year through October, 369 ships equating to approximately 27 million deadweight tons have gone to demolition. We're estimating that the total for 2016 to reach over 30 million deadweight tons equating to approximately 4% of the on-the-water fleet. Notwithstanding the general improvements in spot rates, we do believe demolition will pick up again, as scrap rates are now back around 300 per lightweight ton. In addition, the Ballast Water Management Convention entering into force in 2017 will have a material effect on an owner's decision to take older vessels through or will become significantly more expensive third or fourth special survey.
On Slide 10, sorry on Slide 20, we will discuss forward supply. With the exception of some VLOCs there has been virtually no new orders in 2016 and the existing order book continues to diminish as vessels are delivered. Second hand tonnage is still priced at attractive discounts in new buildings. We believe this, plus the fact that financing remain difficult to access, should constrain any material new order. With orders off significantly from the 2013 highs, the order book is shrinking rapidly and currently stands at approximately 13% of the on-the-water fleet which is a 12-year low. It is also important to note that within this order book figure, there is significant number of existing vessels that will likely never get delivered either because owners are walking away from deposits or they're just simply not able to build to their own financial challenges and constraints.
So it is our view that the reported order book figure today is effectively overstated implying that supply-side fundamentals are more favorable than top-line data suggests. With a reasonable assumption for continued scrapping in 2017, as well as slipping and cancellations, net supply growth could affect -- be effectively zero next year potentially negative.
On Slide 21, we provide an overview of Chinese trade demand factors. As mentioned on our Q2 call, China is importing iron ore at an elevated pace, thanks to accommodative measures put in place last year. On the top left-hand corner, we depict monthly Chinese iron ore imports and their 12 year -- 12 month year-on-year change. The uptrend in imports which started last fall has helped push iron ore prices above an all-important technical level of $65 per metric ton. Chinese iron ore inventories are depicted on the bottom left-hand corner of the slide are off their recent peak of $102 million and are currently at $98 million but still above the five-year average of $92 million.
We believe the import momentum could potentially slow in the near-term with stocks being drawn down further. On the top right-hand corner, we depict monthly coal imports; momentum has slowed slightly over the previous quarter but for the year growth is expected at an impressive eight-plus-percent due to reasons outlined earlier on the call regarding a substitution of imports for Chinese domestic production.
On the bottom right-hand corner, we depict Chinese coastal bulk freight index. As you can see the index broke through its five-year average and is now trading at close to a three- year high. We believe this has had a direct effect at helping overall rates for higher in the quarter as more tonnage is used in this large Pacific trade.
Please turn to Slide 22. As mentioned earlier on the call grain exports out of the Black Sea have been fairly robust helping support the Atlantic markets. On the left hand chart, we depict Russian wheat exports which were up approximately 20% quarter-on-quarter. Minor bulks which make up approximately half the trade for Supramax vessels continue to generate consistent trade demand growth and ability to trade in both major and minor bulks is one of the primary reasons why Supramax rates have been relatively resilient or broadly outperforming larger asset classes.
Please turn to Slide 23 for summary on macro demand fundamentals. Trade demand is now expected to grow at over 1.3% for 2016, up about 0.2% from the annual projection last quarter. For 2017, expectations are for demand trade to increase further to approximately 2.1%. As we discussed last quarter, we believe trade demand remains at or same compared to GDP growth and believe any normalization or reversion to the historical mean could lead to drybulk growth between 4% and 5% by 2019.
This concludes our market discussion and I would now like to end the call with a few takeaway points. While rates remain weak and the overall environment is challenging, drybulk rates are improving and so our market fundamentals both on the supply and demand side. We believe Eagle benefits from a solid balance sheet and is well-positioned to withstand a weak rate environment and to capitalize on opportunities as exhibited by our recent equity raise and vessel purchase. And we expect to continue the development of all of our business going forward driving performance both on the top and bottom-line.
I would now like to turn the call over to the operator and answer any questions you may have. Operator?
Thank you. [Operator Instructions].
And our first question comes from the line of Jonathan Staubo from Fearnley Securities. Your line is open.
Thanks. Good morning guys. Two questions from me today, one technical and one on the strategic side. Let's start with the technical, perhaps for Frank; you said that the pending claims for the quarter for $2.6 million which was higher than what we expected the $2.2 million. Could you please comment on that?
Frank De Costanzo
Yes there was about 900K that should have been booked in Q2 that was booked in Q3, so on a go-forward basis, this should be more in line with what you expected.
All right, thank you. And then on the strategic side with respect to further fleet growth and renewal. Have you got any further expectations in the pipeline at the moment or where could you comment on where you are in the process currently?
I think what I can say at this point is that we're actually engaged in a valuating opportunities with the market. But at this stage, it would be premature to speak further with any specificity about ships.
Okay, thanks. And on the financing side for the acquisition which you just did, you said that it's off currently are you planning on adding debt to it at some point?
Yes, right, I think our plan at the moment is given the cash on hand and individual ship acquisitions such as that is to not to plan any leverage but we will evaluate that going forward both in terms of the scale of acquisitions that we do as well as the rate environment on what we think is both appropriate and prudent as it relates to the cash flow from the asset we generate.
Thank you. [Operator Instructions].
And at this time, I'm showing no further questions, I would like to turn the call back over to Mr. Gary Vogel, Chief Executive Officer.
Sure. Thank you, Operator, and thank you everyone for joining us today for our quarterly earnings call. I wish you all a great day.
Ladies and gentlemen thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everybody have a great day.