Q2 2020 Eagle Bulk Shipping Inc Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly we continue to standby. Thank you for your patience, ladies and gentlemen, todays conference is scheduled to begin shortly please continue to buy thank you for your patience.
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Greetings and welcome to the Eagle bulk shipping second quarter 2020, <unk> results conference call.
At this time, all participants are in listen only mode.
We will conduct a question and answer session and instructions will follow at that time.
Please be advised that today's conference is being recorded.
Required any further system. Please press star and then zero.
Oh, and I'd like to turn the call over to Gary Vogel, Chief Executive Officer, and freight because downhill Chief Financial Officer Eagle bulk shipping miscible you may begin.
Thank you and good morning.
I'd like to welcome everyone to Eagle bulk second quarter 2020 earnings call.
To supplement our remarks today I would encourage participants to access a slide presentation is available on our web site at Eagle ships Dot com.
Please note the part of our discussion today will include forward looking statements.
These statements are not guarantees of future performance in our inherently subject to risks and uncertainties.
You should not place undue reliance on these forward looking statements.
Please refer to our filings with the Securities Exchange Commission for a more detailed discussion of the risks and uncertainties that may have a direct bearing on our operating results or performance and our financial condition.
Our discussion today also include certain non-GAAP financial measures, including EBITDA, adjusted EBITDA and T. C. Please refer to the appendix in the presentation and our earnings release filed with the Securities Exchange Commission for more information concerning non-GAAP financial measures and a reconciliation to.
The most comparable GAAP financial measures.
Before we begin with our presentation, we'd like to take a moment to extend our sincere gratitude once again to our vessel cruise who've been severely affected by the logistical restrictions and disruptions caused by the outbreak of covert 19.
Oh, no crude changes have commenced again, we've been able to successfully repatriate about 250 of our seafarers during the past two months.
A number of our colleagues at sea are still working beyond their contractual employment trends.
Remain away from their families. During this unprecedented time.
With regard to our onshore staff I'm pleased to report that the majority of our colleagues based in Stamford, Singapore, and Copenhagen have now returned to working from the offices, albeit and modified schedules and with safety protocols. Although I was very pleased with how well we functioned as a company on a remote basis I believe were much.
More effective when working under one roof and collaborating as a team.
Please turn to slide five.
As we discussed on our last earnings call our markets have been significantly impacted by the outbreak of covert 19.
For the second quarter, the Baltic Supramax index, or B S High average Gs $5484 per day, making it the second lowest period for Supermaxes on record after only Q1 of 16.
Rates were 6250 at the beginning in the second quarter and traded down to a lower 42, all week by April 20 Threerd.
The back of short term shocks to both cargo demand and cargo supply.
With the market under such distress our results were of course negatively impacted.
Eagle generated a net T C for the second quarter of $8038 per day down 20% quarter on quarter, representing a significant beat against the market of almost $3000 per ship per day or roughly 56%.
We were able to achieve this outperformance by continuing to successfully execute our active management approach to trading and by benefiting from operating scrubbers on the majority of our fleet as well as from the realization of fuel spread hedges, we put on early in the year when spreads were wider pre covert 19.
Has addressed during our last earnings call, we hedged about 120000 metric tons, a fuel spread exposure.
Since these hedges were placed during a higher spread environment. The piano contributions from these derivatives is significant equating to almost $10 million of which approximately 8 million has already been realized through the first half for the year either as a result of contracts maturing or through the monetization of positions ahead of expiration.
Well the outbreak of covert 19, and the subsequent OPEC price war have negatively impacted fuel spreads by our calculations, we generated more than $20 million on our scrubber investment in just the first six months.
Well this is less than our original expectations, it's a very meaningful contribution, especially given the global pandemic and its impact of fuel pricing.
Looking ahead as of today, we have fixed about 66% of our available days for the third quarter had a net tc of $9220 per day.
Given the quick and sharp recovery in the B S. I, Yeah, I'd expect it will be able to outperform the market in this quarter.
As we've discussed previously isn't inherent wag in our business and when the market sell off quickly our outperformance tends to improve on a short term relative basis. Conversely, when the market runs out quickly our performance relative to the market tends to lag in the short term.
That is why we have always advocated looking at performance over a trailing 12 month period and as of today, our outperformance versus the index is almost $2000 per ship per day over that period to put this into perspective. This equates to about $37 million of incremental EBITDA as compared with earning just index range.
Please turn to slide six.
Our operating performance has represented by EBITDA was significantly impacted by the market in the second quarter, reflecting the severe weakness and the underlying rate environment.
Well he would die was marginally positive as shown in the graph it would've been significantly negative absent of the roughly $12 million, we were able to generate an outperformance.
We believe our ability to consistently outperform the benchmark index as well as our peer group is a very meaningful differentiator for Eagle.
Please turn to slide seven.
As part of our ongoing fleet renewal program Weve reached an agreement to sell the Golden eye for 2002 built supermac for gross price of $5 million over.
Over the past four years, we have renewed 40% of our fleet having acquired in sold a total of 35 vessels.
He's S&P transactions have vastly improved our if we make up the average size of our ships has increased the average age of our fleet has remained fairly static over the period and as illustrated in the graph on the wall right hand corner the side or fleet emissions profile has significantly improved as measured by fuel consumption per deadweight.
Huh.
We plan to continue to execute on or fleet renewal and growth program on an opportunistic basis.
With that I would now like to turn the call over to Frank will review our financial performance.
Thank you Gary.
Please turn to slide nine for a summary of our second quarter 2020 financial results.
Revenue net of both voyage in charter hire expenses totaled 28.9 million for the second quarter.
The decrease of 31% from the prior quarter.
The quarter on quarter drop in our top line was primarily driven by the sharp decrease in our underlying market caused by the covert 19 pandemic.
In Q2 or TC He came in at 8038, which is $2880 above the adjusted <unk> sorry.
We achieved significant savings in Opex and DNA in the quarter I will provide a bit of color later in my remarks.
We incurred a net loss of 20.5 million in the second quarter equating to a loss per share of 28 cents, both basic and diluted.
Adjusted EBITDA came in at 1.8 million.
Coin in profitability in the quarter is a direct result of these significantly lower market.
Please be reminded that are a hedge positions excluding interest rate swaps do not receive hedge accounting treatment.
Resulting in mark to market changes flowing through the income statement.
Let's now turn to slide 10 for an overview of our balance sheet liquidity.
Total cash.
At the end of June was 98.6 million, representing an increase of 26.4 million as compared to the ended the first quarter.
The increase in cash was driven by 22.5 million in proceeds from the draw down on a revolving credit facilities.
22.6 million in proceeds from the increase in our term loan.
Offset impart by Capex spending on ballast water treatment system installations and remaining scrubber balances.
Which totaled together 4.3 million.
As what was 11.3 million in principal debt payments.
Total gross debt excluding debt issuance costs at June Thirtyth was 550.2 million.
I would note that our term loan three month LIBOR floating rate exposure is now fully hedged at a blended average of 58 basis points by interest rate swaps.
Please turn to slide 11 for an overview of our cash flow from operations for the second quarter of 2020.
At the top of the slide you can see that net cash used in operating activities was 2.7 million in Q2, representing an improvement.
From 12.4 million in cash use prior quarter.
The chart demonstrates the timing driven variability that working capital introduces to cash from operations as depicted by the differences between the dark blue bars, which are the reported cash from ops numbers in the light blue bars with strip out changes in operating assets and liabilities primarily working capital.
I believe it is more meaningful to evaluate cash from ops from a June 2020 year to date perspective, which smooths out some of the noise.
Cash flows used in operating activities was 15.2 million for the first half of the year.
But of changes in operating assets and liabilities are excluded cash used in operating activities would have been 1 million.
The difference can be explained by movements in working capital plus collateral posted on our hedge book.
Please turn to slide 12 for Q2 cash walk.
The chart at the top of the slide lays out the changes in the company's cash balances during Q2.
Revenue and operating expenses are simple look at the operations.
The data the two large bars on the left is positive 2 million essentially our Q2 adjusted EBITDA result.
To the right you will find bars, covering the dry dock cost in capex for scrubbers and ballast water treatment system costs.
The 45 million dollar bar represents a net proceeds from revolving credit facility draws and proceeds from the term loan upsize and finally, the bar totaling 21 million represents the debt principal and interest paid in the quarter.
The chart on the bottom half of the slide displays the changes in the company's cash for the first six months of 2020.
Let's now review slide 13 for our cash breakeven per ship per day.
Cash breakeven per ship per day came in at $10135 for the second quarter $649 lower than Q1.
The decrease was primarily the result of lower Opex dry dock costs and she can a impart offset by an increase in debt principal payments.
Vessel expenses or Opex came in at $4447 per ship per day in Q2.
An improvement of $762 as compared to the prior quarter.
The decrease in Opex per day was primarily attributable to a decrease in spend on stores and spares as well as lower crude travel expenses as a result of the Kobin 19 restrictions.
Dry docking came in at $308 per ship per day in Q2.
$830 lower than prior quarter.
The decrease was the result of a decrease the number of dry docks completed.
Cash DNA came in at $1328 per ship per day in Q2.
$177 from prior quarter.
The improvement was driven by cost saving measures instituted by the company as a response to the cobot 19 pandemic. It is worth noting that our DNA per ship calculation is based on our own vessels.
Whereas we operate a larger fleet, including our chartered in tonnage.
In this regard if we were to include the chartered in days in our calculation.
Q2, DNA per ship per day would've been $1191.
Cash interest expense came in at $1569 per ship per day in Q2, which is relatively flat quarter over quarter.
Cash debt principal payments came in at $2483 per ship per day in Q2 $1205 higher than prior quarter.
The increase is attributable to principal repayments on our Norwegian bond, which is paid semiannually in a modest increase in the principal payments due in our term loan.
This concludes my comments I will now turn the call back to Gary.
Thank you Frank.
Please turn to slide 15.
Here the dark Blue line shows the B.S. our year to date with the forward curve depicted by a dotted line for the balance of the year 2019 in early years are shown as well.
Stripping out the short term impact from covert 19, essentially the period between late March and June you'll note the market's trending similarly to how it performed last year.
Poppy OSI is currently in the 9000, plus range, roughly $5000 or 130% higher than the low reached in April.
This recovery reflects a normalization in trade demand and the general using important trade restrictions.
In addition, the market's been is further supported in recent months by a robust grain trade China imported a record 11.2 million tons of soybeans in June and for the full year 2020, Chinese expected to import 94 million times increase of 7% over 29 team.
Although year to date most of this product has been coming from Brazil US exports are expected to rise significantly during the second half of the year.
On the back of Phase one deal with the U.S.
As the spot market has recovered so have future expectations Q4 phase are now trading it over $10000 per day, representing an improvement of about 20% since our earnings call in May.
Please turn to slide 16.
As we've discussed before the Baltic Supramax index is comprised of two major geographical components, the Atlanta kind of Pacific, although quite volatile on average the Atlantic market has traded a significant premium to the Pacific historically.
The reason for this is primarily due to the fact that the Atlantic Basin is more of a loading area. While the Pacific is considered more of a discharging region where ships complete their voyages.
In addition to this theres an additional tonnage in Asia has this is where virtually all new building ships get delivered and where vessels typically dry dock.
You will note that the Atlantic wrote a premium spiked in Q1 as Pacific rates collapsed on the back of China and the rest of Asia is covert 19 locked down and as China's started to come back online and the rest of the world started to enacted so important and trade restrictions the ratio flip the other way in Q2.
In Q3, thus far the ratio has flipped yet again with the Atlanta currently trading at a premium over 50%, reflecting a normalization in fundamentals and overall trade demand.
This volatility between the basins is just one of them. Many variables, we look to capitalize on by actively trading our fleet and proactively positioning our vessels to capture the geographic swings in order to generate excess returns.
Please turn to slide 17.
Net supply growth increased in Q2 has a total of 159 Drybulk newbuilding vessels were delivered during the quarter the highest level in three years.
This was partially offset by 20 ships going to demolition.
It's important to note and scrapping is down significantly quarter on quarter has the outbreak of coven 19 led to all of the major Shipbreaking nations suspending operations.
We do expect this number to rebound when restrictions getting lifted.
In terms of forward supply growth fundamentals continue to improve with the Drybulk order book falling sharply and currently standing at just 7% historically low level when looking at the Ultramax vessels as a percentage of the broader Handymax fleet that order book is even lower had just around 5% and depleting rapidly.
For 2020 tribal net fleet growth is now expected to come in at 3%.
As soon as scrapping a roughly 18 million down when times are more than double the amount in 2019.
Total of 36 Drybulk vessels were ordered during Q2 to put this in perspective, the quarterly average over the past 10 years was almost four times that or 140 ships.
We are encouraged by the relatively low number and believe it will stay low for various reasons we've addressed before.
Please turn now to slide 18.
Global growth expectations remain influx and I've been revised downwards since our last earnings call.
The IMF is now projecting global GDP to contract by 4.9% in 2020, and then recover by 5.4% in 21.
Drybulk demand growth projections have been revised downward as well.
As discussed on our last earnings call. We believe the contraction is heavily weighted towards the first half of the year, implying the balance of the year to be in recovery mode. I think we're already seeing this play out in spot rates and in the forward curve.
Notwithstanding uncertainty and the potential for further government actions to slow the virus has spread we remain cautiously optimistic and a continued normalization of trade demand and we see our market being a beneficiary from stimulus measures being put in place around the globe.
With that I'd now like to turn the call over to the operator and answer any questions that you may have.
Operator.
As a reminder, Glasgow question, you will need to press star one on your telephone to withdraw your question press Alky. Please standby when we come barbecue in a roster.
Our first question comes from the line of Omar Nokta from Clarksons Lotto. Your line is now.
Hi, Thank you operator, hey, guys.
Morning.
Thank you Gary just wanted to check in with deal, but on the market I know you talked a little bit about this in your opening remarks, but just a.
There's been obviously a lot of action recently in the Cape market with Iron or can you give a perspective on how that has come down and impacted the super Ultra market you mentioned the grain so I've been much more promising.
Or at least more consistent and but in general I thought that iron ore trade picking up recently impacted the supra ultra market in terms of say vessel availability and rates.
Yes, I mean, it's a great question I think first of all although we don't own any capes were big fans when the order of earnings is appropriate meaning the most expensive ships on the most and that's where we are right now with capes, leading the way you know, there's not a direct competition with capes and ultras and certainly not super.
But there's definitely a knock on effect as you move down from Capes to Cam size to Panamax. So we we like the poll rather than a push down the pull up and so we don't move a lot of iron ore just a couple of percent of our cargo book as iron ore, but it's definitely a positive if we look at our market I mean, clearly the grain, particularly led by soybean.
As as China.
The pin population is.
Being were coming back significantly and expectation for Q4 out of the U.S. golf is pretty strong we're already seeing it but.
Brazil has taken by far the lion share soybeans fast far and with the US a you know harvest coming on we expect.
Pretty pretty big push there and we've seen it now.
Talked about the Atlantic and Pacific markets, and it's really being led how do the Atlantic Bye bye, particularly the U.S. golf.
Trades out to Asia. So we're seeing we're seeing it in general.
You know clearly, there's a restocking going on as well from the shutdown, which which is helpful. But even even today, we're seeing you know.
October phase trading above 11, so really a there is definitely optimism and there's some momentum in the market is the has the index is trading backup. This morning. This morning and next just came in up almost $100 back up to 94. So we feel we feel good about the direction and the fundamentals behind it that are leading.
Right and we we see it really in many areas you know markets can be moved by one area, but what we're seeing now.
His strength from the Atlantic, but also PG is strong and we're starting to see some more activity in Asia as well.
Okay. Thank you and that's really good color and.
Sorry, if they're just bring it back to the iron ore I know you know you. Let you go basically 2% of the cargoes are iron ore and I guess, we can extrapolate it that's probably the same.
For the entire fleet.
In that segment do you think that there has been with this influx of iron ore trade that some some supers are getting sucked into that so that when we do go into the you know the U.S. harvest season, but we'll have a smaller fleet of Super is available to trade that market, the understand where I'm getting out if we're looking at.
To smaller fleets available to trade that market, we may end up having a tighter situation yet currently.
The simple answer is that the lions share of iron ore, which moves of course from Britain, Brazil, Australia, you're not using supramax or even ultramaxes to carry those cargo as well, we're moving iron ore. It's from really you know tertiary type ports you know.
Whether it's you know quite places like.
Oh, a west Coast Central America.
Europe, so real it really not I don't see it as being a meaningful impact between the two by it but you know at least that's not how we see it from Eagle standpoint.
That's fair I just wanted to ask just to get a good times.
Another question or final question, Frank talked about the.
Opex I mean come down quarter over quarter, not seems to be fairly consistent with a lot of other shipping companies that have been reported earnings.
Basically though.
Yes.
Causing a cash costs to come down you over to you.
Yesterday.
Genco reported they mentioned that obviously to expect reversal as things start to fall on the crew changes, but one thing that they had said that I thought was a bit interesting was that the obviously have to complete shutdown and ability to change cruise earlier on in depend dynamic. There was this window that opened up roughly.
And then they mentioned that basically that that when because basically shut and now it's become more complicated just wanted to talk is that how you're seeing things as well as crude change still extremely difficult in probably harder than where it was say few weeks, though.
Yeah, it's definitely very fluid situation and so Hong Kong was open and at the moment, it's closed in Singapore, while not fully closed has definitely clamp down because of what what I think they believe viewed as some violations of protocol I'm, having said that there's there's many other.
Places that were finding opportunities, but it's difficult and.
I think it takes a company you know you have to be nimble and be willing to move of last minute, you know and things like that and we're quarantining.
The reason advance and obviously testing and things like that so there's there's additional commitment and on time and flexibility on and cost as well, but we're getting it done, but but it's not it's not just a one way street getting more more and more open as I mentioned those first two ports, which we'll see where the first to open.
Pent up are now effectively closed so.
It's an ongoing.
Battle, if you well by about where we're getting it done.
Okay. Yeah like you said, it's very fluid and he's definitely continue to change.
Okay I appreciate that thank you and I'll leave it there.
In summary.
Thank you. Our next question comes on the line of Randy given from Jefferies. Your line is now open.
Pardon me Randy Your line is now open please check your mute button.
Randy given from Jefferies. Your line is now open.
Our next question comes on the line of Liam Burke from B. Riley. Your line is now okay. Thank you good morning, Gary morning, Frank.
Good morning.
Gary you out distance the a adjusted B S I significantly and I mean, it's pretty consistent with your past results as well, but is there something going on within the the market where there is a more of a bias towards newer vessels versus.
The older vessel operators and could that possibly accelerate scrapping.
Yes, I mean, you know the simple answer is obvious that the newer vessels are more efficient and and definitely more desirable to charters for for for all the reasons in terms of consumption deadweight et cetera, having said that you know every vessel has its has a par value.
And at the moment fuel prices are relatively weak, which which benefits older vessels on a relative basis I do believe that as fuel prices start to moderate and go back to more normal normal levels and increase given the.
IMO 2020, and need for low sulfur fuel that'll be a catalyst for scrapping. So we expected that to happen in early 2020, clearly given what happened in a fuel markets that that I think was temporize to bet, but long term I think there is that there's a bias towards towards the newer ships, but you know.
All vessels have have a you know like us have par value and our tradable, but you know the newer ships are more desirable, but especially in the long haul trade, which are trades that we tend to focus on crush trading between the Atlantic himself.
Is there any advantage that you have being able to carry both minor major books.
Yeah, no your rate differential.
Yeah, I mean, no question all all of our ships can carry both.
Kerry coal and grain to the major Bulks as I mentioned not not much iron ore and those are our super is as well as our altrus.
And you know we've always always believe that having that balance between the two is a real advantage right stability because we're not relying on July two two markets effectively.
In terms of iron ore on coal so there's definitely a benefit there and less volatility, but that that goes for all of our ships the supers as well as the altrus, but as I said, you ultramax vessels, which which have a better efficiency and larger are more suited for the long haul trades, where they're spending most of that time, I'd say that particularly.
Goes for our scrubber fitted fleet.
Lots been made about the narrow spread but as I talked about in my prepared remarks, we've generated over $20 million, thus far and even or even on a run rate. If we look at you know next year's trading at around 90 at our fuel spread you know for us that that's close to $20 million annual in terms of cash flow. So so.
Pretty meaningful even in a narrow environment and we actually expect that that spread will widen as as oil prices.
Revert in increase and you know that's one of the reasons that we've chosen to monetize a significant amount of those hedges, which were taken at significantly higher levels to take that profit and cash for the balance sheet great. Thank you Gary.
Thank you.
Thank you as a reminder to ask a question you wanted to press star one on your telephone to withdraw your question press the pound King.
Our next question comes from a line of Jaman Liar from value investors edge. Your line is now thanks.
Good morning, gentlemen, thanks for taking my call encouraged relations on the steady results.
Thank you good morning.
Yeah. So the first question I have as you made a you had a little bit of a tighter liquidity position last quarter. It into the challenging market I think that's pretty undeniable that this is a brutal drybulk market, probably the worst we'd seen since early 2016, but she made nice effort to raise some incremental liquidity with the recent refinancing I do you think that.
Latest incremental liquidity does that gets you through barring like and Apocalypse does that get you through the rest of 2020 it into 2021 without the need for more equity or do you think theres going to be a couple more incremental liquidity additions.
Hey, look I mean, I think there's clearly uncertainty in the market, but we feel very comfortable where we are I mean going into this having our unencumbered vessels and the revolver. As you know is exactly for that and unforeseen situation, which I think we can all agree.
As global pandemic, clearly clearly falls under that category, So almost 100 million and with rates trending up now as I mentioned, we we've given an indication that were two thirds covered in the low nines, but but the forward market trading over 11 for October and high tens for Q4, and we're actively engage.
Just on.
On using that market and hedging and so if you look at a market in the mid tens in Q4, notwithstanding the lag I talked about but the market in the mid tens plus our historic premium that we've been able to generate plus our scrubber revenue you see we're well well above that would be well above our cash breakeven, which this quarter was 10 one.
And change so we feel quite good about it notwithstanding the uncertainty in the market. So so at the yeah, we don't see a need for further liquidity right now and where we're looking towards towards hopefully our cash build as we get into the fourth quarter.
Absolutely, let's hope we see that I wanted to look at slide 21, and look at the differences between your debt facility is if you look at the facility on the far right the ultra Co. LLC.
Secured by a little bit better assets I'm sure, but you have outstanding terms. There I was LIBOR plus 250, you. It looks like you swapped to 100% of the floating part at 58 basis points off the term of that loan.
Very friendly facility, you're looking at 3%, but if you look at the middle facility. The ship Co. LLC. A you have 184 million outstanding. It's also senior secured its at 8.25% fixed which might have looked good a couple of years ago, but looks like a massive outlier in this environment. So I guess question. One there is is it is maturing in 2022.
Is there a reasonable.
Odds to switch to a more similar facility as the ultra CTO and secondly, I guess kind of is related to that can you talk to some of the differences I guess I see that nonrecourse, but anything else that keeps that is such an elevated cost you guys.
Yes sure I'm in a first thought you know you pointed out one of the aspects here. It's it's a nonrecourse facility I think the biggest differential as compared with the bank that is a very well amortization and you'll see that that has our older vessels in it which under tradition.
Funnel bank.
That would have a much more accelerated amortization profile. So I'd say going into this year I think the expectation to do something sooner, we'll probably was was higher on the agenda. It how it was a non call two and a half. So the first time, we could have done something would have been may.
Of this year, but you know I think it's fair to say that it's something that we are aware of and we'll look at but the last few months has really been about focus on.
The current environment.
You know and getting through this this period of uncertainty, but I think as I said, it's something that we're definitely aware of comparative to our bank financing and when we're going to we will be looking at it.
Absolutely makes sense to me I keep up the good work gentlemen, I appreciate the in the stable results.
Thank you appreciate it.
Thank you at this time I'm showing no further questions I would like to turn the call back over the Gary Bogo for closing remarks.
Thank you operator, we don't have anything further at this time, so I'd like to thank everyone for joining us today and wish everyone. A good day. Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you know participating you may now disconnect.
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