Q1 2022 Eagle Bulk Shipping Inc Earnings Call
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Today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.
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Greetings and welcome to the Eagle bulk shipping first quarter 2022 results conference call. At this time, all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time to ask a question. At this time. Please press Star then one as a reminder, this conference is being recorded I would now like to turn the conference over to Gary Vogel, Chief Executive Officer, and Frank de Costanzo, Chief Financial Officer of Eagle bulk shipping.
Mr. Vogel you may begin.
Thank you and good morning.
I would like to welcome everyone to Eagle Bulks first quarter 2022 earnings call.
To supplement our remarks today I would encourage participants to access a slide presentation that is available on our website at <unk> Dot com.
Please note that part of our discussion today will include forward looking statements.
Statements are not guarantees of future performance and are 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 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.
Our discussion today also includes certain non-GAAP financial measures, including adjusted net income EBITDA adjusted EBITDA and TCE. Please refer to the appendix in the presentation and our earnings release filed with the Securities and Exchange Commission for more information concerning non-GAAP financial measures and a.
A reconciliation to the most comparable GAAP financial measures, please turn to slide six.
Over the past few months the tragic situation in Ukraine has had a direct impact on our industry and our company with cargo trading patterns being disrupted and altered something I will address later in the call.
Furthermore, a significant number of our seafarer colleagues are from Ukraine, and they are all affected by what is happening to their country and loved ones. The safety and wellbeing of our crew is of Paramount importance and we are focused on supporting them. During this difficult time by providing assistance with temporary housing transportation and helping.
With other needs.
Notwithstanding a volatile rate environment during the first quarter with the Baltic Supermax index or BSI, ranging from a low of about 17000 to a high of over 33000 Eagle generated net income of $53 million or $4 <unk> per share.
Adjusted net income, which strips out noncash mark to market losses on derivative hedges came in at $64 5 million or $4 97 per share. We believe that adjusted net income per share is more useful to analysts and investors and comparing the results of operations.
In line with our capital allocation objectives I am pleased to report that Eagles Board of directors has declared a first quarter cash dividend of $2 per share. This is the third consecutive quarterly dividend of at least $2 since announcing our dividend program last October in total we have declared over $6 per share and dividends in the last <unk>.
Seven months at the same time, our financial profile has improved further through cash generation and firming asset prices with net leverage now just around 25%.
Please turn to slide seven.
We outperformed our benchmark index in Q1 is something we've consistently been able to do except in quarters. When the market advances very rapidly and we achieved a net TCE of $27407 for the quarter. This represents a meaningful delta of almost $3800 against the net BSI, which.
23611 for the quarter.
Looking ahead into Q2, the market has rebounded nicely and as of today. Our index stands at around 30000 per day with futures pointing to continued strength through the balance of the year.
It is noteworthy that now more than four months into 2022, the BSI, which is based on a 58000 deadweight ton ship has significantly outpaced the Cape Index, Notwithstanding the fact that a super Max vessel costs, approximately one third less.
It's this fact combined with our business model that has enabled eagle to deliver superior financial results as compared to some other companies within our space, we're operating larger ships.
<unk> of this continued strength, we've now fixed about 83% of our available days for the second quarter at a net TCE of $29300 per day.
We're also continuing to see significant interest in tonnage for the balance of the year and even longer at elevated rates.
As an example, just last week, we fixed the Madison Eagle one of our ultra Max's on a time charter at a strong rate of $32500 per day for a duration of a minimum of 12 months.
The ship is expected to be delivered to the charter is in may and as such the contract takes that significant revenue stream of approximately $9 million of EBITDA well into the second quarter of 2023.
These types of fixtures combined with the BSI forward curve had around $30000 per day for the balance of the year points to continued momentum for Eagle in 2022.
Given the fixed cost nature of our business, we maintained significant operating leverage with essentially all incremental net revenue generated flowing to the bottom line.
Please turn to slide eight.
In terms of operating performance, we produced almost $85 million of adjusted EBITDA in Q1 after accounting for unrealized P&L impact on our hedges and certain noncash items included in our G&A, our trailing 12 month run rate as well as our current quarter annualized EBITDA figure are both over 330 million.
Implying a modest EBITDA multiple of just around three six please.
Please turn to slide nine.
On the back of almost 1000 and sale and purchase transactions in 2021 Drybulk asset values have continued to appreciate into 2022, and we estimate that the value of Eagle's 53 ship home fleet has increased by about $550 million since January of last year equating to 40.
<unk> per share.
We believe the substantial rise in second hand values can be attributed to a number of factors. We've previously highlighted including improving confidence in forward markets elevated new building prices deferred delivery times for delivery of ships ordered and the ever increasing tail risk for new ships as it pertains to future emissions regulations given.
A positive supply demand fundamentals and forward expectations. We believe there is further upside to values, given where secondhand ships are priced relative to new buildings with that I'd now like to turn the call over to Frank who will review our financial performance.
Thank you Gary.
Please turn to slide 11 for a summary of our first quarter financial results.
TCE revenues totaled $121 6 million in Q1.
The decrease in market rates from the record fourth quarter, along with fewer available days because of dry docks has resulted in a decline versus prior quarter.
It is also worth noting that we increased our chartered in fleet by approximately 50% during the quarter with a number of these ships taken for multiple legs with an initial investment to be recouped in subsequent quarters.
As Gary noted our commercial outperformance has resulted in higher TCE as compared to the market in Q1 with our outperformance, partially offsetting the factors, which impacted TCE revenues.
Net income for Q1 was $53 1 million.
Earnings per share for the first quarter was $4.09 on a basic basis.
Adjusted net income, which excludes noncash unrealized losses on derivatives came in at $64 5 million for the first quarter or $4 97 per share on a basic basis.
As Gary mentioned earlier, the adjusted EBITDA result for the first quarter was $85 million.
Let's now turn to slide 12 for an overview of our balance sheet and liquidity.
Total cash at the end of Q1 was $83 7 million.
The company's Q1 cash balance was driven by our operating results offset by the repayment of $12 $5 million of debt.
Vessel improvements into a Q4 dividend payment of $26 8 million.
I will cover this in greater detail when we turn to the cash walk slide.
Total liquidity came it at $183 7 million at the end of Q1.
Total liquidity is comprised of total cash of $83 7 million and $100 million of a fully undrawn revolving credit facility.
It is important to note that we owned four unencumbered vessels, which provide us with additional flexibility to increase our liquidity.
Total debt at the end of Q1 was $389 2 million a decrease of $12 5 million as a result of the quarterly repayment on the ultra co debt facility.
As a reminder, we entered into interest rate swaps around the time of our global refi in early October to fix the interest rate exposure on the term loan.
As a result of these swaps, which averaged 87 basis points. The company's interest rate exposure is fully fixed insulating us from the rising interest rate environment.
Please now turn to slide 13 for an overview of our cash flow from operations for the first quarter.
Net cash provided by operating activities was $42 3 million in Q1.
Aside from lower market rates, the quarter's cash flow from operations was impacted by the increase in bunker inventories.
Which was driven by both higher fuel prices and increased quantities due to the increase in chartered in tonnage I mentioned earlier.
The chart highlights the timing driven variability that working capital introduces to cash from operations as depicted by the difference between the dark blue bars, which are the reported cash from ops numbers and the light blue bars, which strip out changes in operating assets and liabilities primarily working capital.
As the chart demonstrates the volatility caused by working capital largely evens out over time.
The difference between the two bars this quarter can largely be explained by circa $10 million of cash collections in early April .
Please turn to slide 14 for a Q1 cash walk.
The chart lays out the changes in the company's cash balance in Q1.
The revenue and operating expenditure borrowers are a simple look at the operations with the net of these two borrowers coming in at 85 million the same as our adjusted EBITDA result.
Moving to the right. The working capital is driven by the previously discussed timing of collections and an increase in inventories and higher bunker pricing in quantities.
The Q4 dividend and the debt services bars.
Our further to the right.
Let's now review slide 15 for our cash breakeven per ship per day.
Cash breakeven per ship per day came in at $13291 for the first quarter.
Quarter on quarter decrease is primarily due to decreases in vessel operating costs G&A and interest expense.
Vessel expenses or Opex came in at $5821 per ship per day in Q1 $207 lower than prior quarter.
The decrease was primarily due to lower repairs stores and spares expense.
Drydocking came in at $2259 per ship per day in Q1 similar to prior quarter as we completed dry dockings for four vessels during the quarter with an additional one in progress.
We have also made advanced payments in the quarter ahead of upcoming dry docks.
Cash G&A came in at $1796 per ship per day in Q1 down $339 from Q4 on lower one time legal costs.
It is worth noting that our G&A per ship calculation is based solely on our owned vessels, whereas we operate a larger fleet, which includes chartering in tonnage. If we were to include the chartered in days in our calculation G&A per ship per day would decrease by about $300 to $40 95 for the quarter.
Cash interest expense came in at $805 per ship per day in Q1, $229 lower than prior quarter as we realized significant interest expense savings from our global refi.
Cash debt principal payments came in at 2000 and $610 per ship per day in Q1.
Was marginally higher due to a decrease in owned days.
Looking ahead, we expect the following per ship per day in Q2.
Opex to decline to about $5400.
Drydock to decline to about $800 and significantly lower dry dock activity.
G&A is expected to come in at circa $17 50 in Q2 again it is worth noting that this figure would be approximately $14 65. If we were to include chartered in chips.
Cash interest expense is expected to decrease to $765.
Cash debt amortization is expected to marginally decrease to $2581 on higher one days.
This concludes my comments I will now turn the call back to Gary.
Thank you Frank Please turn to slide 17.
As mentioned earlier on the call the BSI traded downward through January reaching a low of 17273 on February 2nd.
This was not unexpected as January tends to be the weakest months of the year due to lower demand and activity around lunar new year holidays, as well as elevated new building deliveries.
This year the market was also negatively impacted by the Winter Olympics in Beijing, and a short term halt on Indonesian coal exports.
Trade activity picked up significantly in February and the quarter ended with the BSI at almost 31000, averaging 25156 for the quarter not.
Not surprisingly the invasion of Ukraine has caused disruptions and increased volatility due to significant shifts in trade flows as we've spoken about before the black Sea region as a major export market for grains with the Ukraine, and Russia exporting a combined 15% of total global seaborne trade in 2021.
As an example, we're now moving coal from Indonesia to Europe , and grain from Brazil to North Africa. These irregular trades will undoubtedly add to ton mile demand across Drybulk. However, a likely reduction in overall grain movements and impacts to global GDP from both the Russia, Ukraine War, and increasing inflation will likely.
Act to tamper overall cargo volumes on balance when looking ahead forward curves remains supportive at levels around spot for the balance of 2022.
Please turn to slide 18.
Fuel prices hit multiyear highs in Q1 due to increased demand and supply disruptions.
<unk> and V O SFO averaged around $565 $750 per ton, respectively for the quarter with 89% of our fleet fitted with scrubbers to price differential between <unk> and <unk> is an important value driver for our business to fuel price spread between <unk> and <unk>.
<unk> has been very volatile hitting a high of more than $260 per ton and averaged 188 for the quarter, which contributed approximately $11 million in EBITDA.
Looking ahead, the spread has moderated somewhat and currently sits at about $1 60, which would equate to around $38 million of incremental EBITDA on an annualized basis.
Please turn to slide 19.
Net fleet supply growth slowed in Q1, a total of 107 dry bulk new building vessels were delivered during the period down 17% year on year, partially offsetting this nine vessels were scrapped during the same period.
As we've mentioned before notwithstanding record scrap prices the low level of vessel scrapping is not surprising given the strength in the underlying spot market and it continues to add to the group of older ships that will inevitably need to be recycled in the future.
In terms of forward supply growth. The overall Drybulk order book stands at a historically low level of just six 6% and is even lower for the Super Max Ultra Max segment at six 4%.
For 2022 dry bulk net fleet growth is expected to be just two 2%, which would be 40% lower than 2021, given the rapidly depleting order books and somewhat higher projected scrapping as compared to 2021.
A total of 43 Drybulk ships were ordered during Q1 down around 50% compared to the prior quarter and well below the average over the last five years of roughly 100 ships per quarter.
We estimate that 90% of these vessels are only scheduled for delivery in 2024 or beyond.
Although we expect some level of ordering to continue we still believe it will remain low for all of the reasons mentioned earlier on the call.
Please turn to slide 20.
Okay.
We have spoken about before and you can do note from this slide.
Drybulk demand is inextricably linked to global GDP for 2022, the IMF is estimating global GDP growth at three 6%, which was lower by 80 basis points as compared with your January estimate, reflecting impacts from the Russia, and Ukraine War inflationary pressure global supply chain issues and impacts of China's <unk>.
Aero Covid policy measures notwithstanding these factors, it's worth noting that drybulk demand has grown on a ton mile basis, and 21 of the last 22 years, the only exception being 2009.
Please turn to slide 21.
As we alluded to before and can be seen on the table to the left drybulk demand growth is expected to be fairly muted this year, but will be offset by an increase in ton miles of product of goods moved times. The distance traveled this bodes well for drybulk given the projected low fleet growth, we referenced earlier importantly for Eagle.
<unk> demand growth within the minor bulks, which makes up about two thirds of the cargo we carry which are comprised of many infrastructure related commodities, such as steel cement scrap and nickel ore are expected to significantly outperform the major bulks in 2022 for the second year in a row as briefly mentioned at the opening of this call strong relative <unk>.
Cargo demand growth within minor Bulks has translated to rate performance and year to date. The BSI has averaged over 26000, while the Cape Index has averaged roughly 15000.
Looking ahead the forward curves for the balance of the year are trading at around 30000 for Super Max's and roughly 34000 for Capes further supporting the relative performance of the mid size vessels and as a result, their superior earnings compared to invested capital.
We have always and continue to believe that given its flexibility and diversity of cargoes carried the mid sized drybulk vessels segment offers the best risk adjusted returns.
Notwithstanding near term volatility we remain optimistic about the prospects for continued dry bulk demand growth. This positive demand picture combined with a record low order book supports our constructive view on market development looking ahead.
In closing, we remain energized about eagle's leadership position within the mid size dry bulk segment and we're looking forward to continuing to execute for the benefit of our shareholders with that I would now like to turn the call over to the operator and answer any questions you may have operator.
Thank you as a reminder to ask a question you will need to press star one on your telephone to it.
Draw your question press the pound key.
Our first question comes from Chris Robertson with Jefferies. Your line is open.
Good morning, gentlemen, and thank you for taking my questions. Good morning, Chris.
Gary can you talk about those chalk fitting installations, you're undertaking this year will those be installed across the entire fleet over time or just a portion of the fleet and what does this mean.
Practically for carrying capacity for those vessels and earnings potential.
Yeah, absolutely so.
We're installing them as ships going to their statutory dry dock.
And the answer is we're putting them across the fleet, it's a pretty compelling investment about about $100000.
To install them on typically on your average ship.
And when a ship goes through the Neo canal.
The net.
The net earnings after additional expenses right now is about a quarter of a million dollars. So you don't know when youre going to be able to use it and it also it's related to the ability to book a slot and congestion and things like that but obviously you only have to go through once in these shocks once they are on a ship their goods for the life of the vessel so for <unk>.
And ultra Max as its.
I'd go as far as to say, it's pretty much a no brainer.
I guess a follow up on that then are your direct competitors also installing these fittings or are you guys ahead of the curve on this.
I really can't speak to two competitors when we charter in ships, we see it on probably about half the vessels.
Got.
It's a capital expenditure with no clear payback in terms of when Youre going to get it back so owners, who re let their ships on time charter arent going to necessarily get full value for it because how much more would you pay for a ship went out for that you take on for four to six months and likely not going to be able to use it. So.
I think its one size fits all but.
I'll speak from Eagle standpoint are we see it as a as a clear winner and we're going to keep doing it.
Okay, yes, thanks for the color on that.
I have a second question is related to the trajectory of Opex over the course of the year, especially as it relates to an accruing transfers and disruptions either caused by Covid or the current war in Ukraine. So can you just talk about how you think opex will shake out kind of over time.
Yeah, absolutely look I think there is inflationary pressures across the board.
Everywhere and.
Crew changes part of it because of.
Increased cost of travel and you mentioned COVID-19 restrictions extra hotel things like that but we've been facing that now for over two years. So we're guiding to 5400, which is down I think the this quarter. We had a significant number of ships in drydock and so theres extra expense around ships in <unk>.
<unk> for some of the stores and spares that.
And work you do that doesn't get capitalized so.
If 5400 clearly is above what we would have said was long term long term trend definitely before COVID-19 and in the war in Ukraine, but that's that number is down from where we were in this quarter, which was down from fourth quarter as well.
Okay. Thank you very much thank.
Thank you.
Our next question comes from Magnus <unk> with H C. Wainwright Your line is open.
Good morning, Derek Good morning, Frank.
Congrats on a good quarter.
Just.
Two questions the first related to the chartering environment.
The.
Market looks very strong currently assigned.
Very good contract for 12 months.
With things going on in Ukraine, and potentially lower volumes.
In the second half of the year.
Are you looking maybe to lock in more rates, there or should we expect you to be primarily on the spot market.
Yes.
As always we take a very dynamic approach.
Like to say, we come in every day and we make the decisions based on what's in front of us.
If you look at in our press release, we talk about our FFA coverage in terms of hedges and Thats for the balance for the second half of the year. It's around 11 11 ships through <unk> that we have in ourselves against so that gives us.
Coverage to some extent and then as you mentioned the Madison egos at 12 month charter.
Last quarter I talked about a five month minimum five month charter that we put in place, but that was for delivery only in April . So that's just starting so we absolutely have have coverage, having said that the.
The spot market is pretty dynamic I mean, we just fixed one of our.
58000 deadweight ships just to give you an idea.
Delivery in the far east for a trip with steels to the continent at at over $40000, a day inclusive of the scrubber benefit and so.
<unk> long term charters are attractive, but we're able when we position ships and that's what is historically a backhaul of course, you are fully aware that given given the strength in the container market that Pacific has been really strong, but that's in a backhaul and in the fall in the front haul markets today, where we're in the mid Forty's from golf to.
Asia or even from Brazil to Asia, So we like the spot market as well, it's a blend and it's dynamic so I don't think youll see us necessarily increasing our coverage, but we do have forward cover and we'll continue to do so.
Alright.
Yes.
Jane shift from your clients as far as going longer or I mean, do you see any 24 month contracts. So there are discounts are just not attractive enough.
No we don't really see that that part of our trade the kind of long cargo contract trade, we haven't really seen.
A pickup in that at all in fact, the long term trend is much more spot oriented for our business and so I think thats pretty much been been pretty stable over the last few years.
Alright. Thank you just another question on on the fleet renewal going forward I mean, you've done a good job getting rid of some of the older vessels, but how do you balance that going forward with these older vessels generating significant cash flow versus maybe trading them up for a more modern vessels.
Yeah, well, we only have two ships that are over 13 years old now and those two shifts. We've mentioned are sales candidates. In fact, one is widely known on the market.
It's due for special survey or for Drydock I should say.
In the middle of this year, and we say, we're likely to monetize those ships before the cash flow is really good on older ships 18 year old ships, but it's not really where we see igo.
Positioning itself. So those two ships likely to be sold and then you know we don't have as I said, we don't have any other ships older than 13 years. So we've we've done a fair amount of heavy lifting over the years, yes, we did sell 20 of our smaller older ships, but we acquired 29 modern modern vessels 26 of them very modern ultra Max's so.
We don't feel like we need to renew the fleet right now prices, while we think there is upside to prices.
They have more than doubled in the last 12 months since we acquired all of those ships were done prior to that move.
Move upwards. So at the moment, we're quite comfortable with where we are in terms of our our fleet age in our fleet size and.
Having said that.
Forward markets.
Are more supportive long term of the asset prices, where they are today, we're definitely.
Open to look at to look at that but right now we're quite comfortable where we are.
Alright, and just one last question if I may you gave some.
The actual chartered in days.
Increased about 200 days for first quarter would you say in the second quarter that you will have more days than the first quarter or come down more to the fourth quarter level.
Well, if you look at our our earnings deck today, and I know, there's a lot of information in there we don't give an exact number but you can see.
We're partway through the quarter and it's pretty stable in terms of the Gray bar that's on slide seven with the TCE behind of the chartering days I mean in that regard.
This quarter was 960 days that we had in the first quarter chartered in.
Simple math, that's about 11 ships, but actually we had 20 ships that were part of our charter in fleet, so pretty dynamic in terms of ships coming in and out it's not just shifts that we've chartered and we hold on to and that's why we don't give specific guidance as to what the number is because as we sit here today over the next.
Six.
Six seven weeks of the quarter it could change pretty significantly.
Alright, very good that's it for me thank you.
Thank you Magnus.
Thank you. Our next question comes from Liam Burke with B Riley Your line is open.
Thank you good morning, Gary Good morning, Good morning, good morning.
Gary you mentioned at the beginning of your prepared comments that with crew changes and that was a.
Management challenge, but your Opex was down sequentially, so even with the additional crew related expenses you had lower.
Vessel Opex, what were you able to do to bring that down.
I.
I appreciate the question, it's really variable and I mentioned on an earlier question right Drydocks drive a lot of this expense we use the opportunity in drydock to take care of certain maintenance proactively and aside from maintenance doing upgrades. So we have shifts that are going into dry dock now not on there.
Normal statutory cycle, but in order to install ballast water treatment systems because of the regulation U S emo and so while we're there out of service we could.
Wait and wait on holds but we could also we also can spend a few hundred thousand dollars and blast and re code holds because it might be another two and a half years before shipped is going into its statutory dry dock on a five year cycle and so by spending that money.
When we come in we're able to carry more sensitive cargoes and more importantly, long term clean and not have off hire for failing cold inspections and things like that and so but that can't be capitalized between dry docks. You can you can't capitalize that expense so that.
Drops to Opex and so that's just one example, so theres variability around it I think the I think the 5400 right now as I as I sit here today feels like a good number looking forward.
But again, there's a lot of variability.
As ships go into dry dock for various things, having said that I would point you to our Capex slide in the appendix.
Because we had a pretty heavy drydock schedule in the fourth quarter and the first quarter and it's coming off pretty significantly for the balance of the year.
Fair enough.
You mentioned some concern about.
Apply out of Ukraine, and Russia grain.
Similar within into loosen allergy to coal do you see any other alternate sources to partially offset your concerns on the supply side.
Sure.
There is the expectation is that grain movements overall will be will be down this year.
Our number is.
Three 5% to 4% in terms of volume for the year.
But on the other side of that we expect a significant increase in ton mile. I mentioned, one example of moving grain from Brazil to North Africa, which typically that would be a short haul trade from black sea and so.
I think the big question, now, which no one knows the absolute answer right and that will be will ton miles will be increase in ton miles.
Supersede the.
The drop in overall volume and that's that's of course, a pretty significant question and right now the futures point to the view that these rates are going to our supportive going forward and so far we've seen it I mentioned that the fixture if we did today on the backhaul and the long term charter so.
It's very much unchartered waters, so to speak and.
As it plays out but at the moment, we're seeing very significant changes in trade, which is which is adding to ton mile.
Great. Thank you again.
Thank you.
Thank you as a reminder, if you would like to ask a question press. The Star then the one key on your Touchtone telephone again Thats star one to ask a question.
And there are no other questions in the queue I'd like to turn the call back to Gary Vogel for any closing remarks.
Thanks, very much operator, we don't have anything further but I'd like to thank everyone for joining us today and wish everyone a good weekend.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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