Q2 2022 Eagle Bulk Shipping Inc Earnings Call

August 5, 2022

The car.

[music].

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Good day, and thank you for standing by welcome to the Eagle bulk shipping second quarter earnings call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during this session you'll need to press star one one on your telephone.

Be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Gary Vogel CEO of Eagle bulk shipping. Please go ahead.

Yeah.

And she'll T to raise your hand during Q&A you can dial star one one.

[music].

Right.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Good day, and thank you for standing by welcome to the Eagle bulk shipping second quarter earnings call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you'll need to press star one one on your telephone please.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your speaker today, Gary Vogel CEO of Eagle bulk shipping.

Yeah.

Okay.

Thank you and good morning, and our apologies for the technical difficulties.

I'd like to welcome everyone to Eagle bulk second 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. These 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 Securities and Exchange Commission for a more detailed discussion.

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 Exchange Commission for more information concerning non-GAAP financial measures.

And a reconciliation to the most comparable GAAP financial measures. Please turn to slide six.

Before we get into discussing the quarter I'd like to take this opportunity to mention that our thoughts and prayers remain with all those affected by the war in Ukraine, including our Ukrainian seafarers, who maintain their steadfast dedication and commitment to eagle, while being so far from their homeland and their loved ones as we indicated on our lab.

Last call, we have taken steps to provide extra support and assistance to them and to their families. During this difficult time.

From a market perspective, the wars disrupt a typical trade patterns and alter demand as cargoes are being sourced from and send to alternative regions something we'll address later in the call.

For Q2, we were able to capitalize on the market volatility and due to the efforts of our team we're able to achieve our best ever quarterly results with net income coming in at $94 $5 million or $7 27 per share basic and.

Adjusting for noncash mark to market gains on derivative hedges net income came in at $81 6 million or $6 28 per share.

As part of our ongoing fleet renewal strategy, we sold the motor vessel Cardinal at 2004 built Super Max and the oldest vessel in Eagle's fleet just ahead of a statutory dry dock.

Transaction is expected to close later this month pro forma for this sale our fleet totals 52 ships, averaging about $9 six years of age with 90% being fitted with scrubbers, which continues to offer igo our competitive advantage. Please turn to slide seven.

Our record results driven by our strong topline performance generated a net TCE of $30207 per day. This represents an increase of 10% quarter on quarter and an outperformance against our benchmark index of approximately $2500 or 9% as.

As we look forward to the third quarter, we fixed approximately 72% of our owned available days for the third quarter had a net TCE of $29024, indicating a significant outperformance against the BSI.

Although we remain constructive on the market, we believe volatility will remain elevated in the near term as such we've taken a more conservative approach on coverage for the balance of the year and going into 2023.

As you can note from yesterday's press release as of June 30, we had sold <unk> for the fourth quarter totaling almost 40% of our owned available days at an average level of $22322. It's worth noting at the FFA values I'm talking about are based on a non scrubber fitted Superman.

We believe this approach is prudent given the current market volatility as well as very macro economic forecasts.

We also continued to charter out ships on a selective basis on longer period as well as an example, just last week, we fixed a scrubber fitted ultra Max out for a minimum of 12 months starting in October at $25000 gross TCE per day.

This strategy utilizing both <unk> and ships has proven to be an effective part of our dynamic approach to fleet management.

The fixed revenues derived from our <unk> and physical charters combined with earnings from fuel spreads helped to provide surety of revenue streams and bodes well for strong TCE performance through the balance of the year. Please turn to slide eight.

Okay.

Given the inherent high operating leverage in our business robust revenue in Q2 led to record operating performance with adjusted EBITDA coming in at $102 $6 million after adjusting for the unrealized P&L impact of our hedges and certain other noncash items included in G&A.

Our trailing 12 month EBITDA run rate is now $370 million, implying a very modest EV EBITDA multiple have just two and a half.

On the back of the significant cash generation, our financial profile continues to improve with net leverage estimating at around 18%.

Please turn to slide nine.

Asset price performance has been fantastic over the past 18 months with 10 year old Super Max vessels more than doubling in value given the significant elevation of values and a recent correction in spot rates as well as the macro economic landscape S&P activity has slowed down somewhat with prices plateauing.

Notwithstanding we remain constructive on the market with asset prices in the medium term given the positive supply demand dynamic, which will address later in the call.

I would 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 second quarter financial results.

TCE revenues totaled $138 2 million in Q2.

Significant increase in market rates, along with the increase in available days drove our top line growth versus prior quarter.

Net income for Q2 was $94 5 million.

Earnings per share for the second quarter was $7 27 tenths on a basic basis on a dilutive basis, which includes shares related to the convertible bond EPS came in at $5 77 for the quarter.

Adjusted net income, which excludes noncash unrealized gains and derivatives came in at $81 6 million for the second quarter or $6 28.

Our basic basis.

On a dilutive basis adjusted EPS came in at <unk>.

$4 98 for the quarter.

Our adjusted EBITDA record result for Q2 was $102 6 million, 21% higher than prior quarter.

Please turn to slide 12 for an overview of our balance sheet liquidity.

Yes.

Okay.

Total cash at the end of Q2 was $141 5 million, an increase of $57 9 million as compared to Q1.

The significant increase in the company's Q2 cash balance was driven by our strong operating results.

Offset in part by repayments of $12 $5 million of debt vessel improvement and a Q1 dividend.

Total liquidity came in at $241 5 million at the end of Q2.

Total liquidity is comprised of total cash of $141 5 million.

$100 million of a fully drawn or undrawn revolving credit facility.

It is important to note that we own three unencumbered vessels, which provide us with additional flexibility to increase our liquidity.

In addition, the Cardinal is now classified as the vessel held for sale.

We expect that vessel to be delivered to a new owner.

In August generated approximately $15 5 million in cash.

Total debt at the end of Q2 was $376 8 million a decrease of $12 5 million as a result of the quarterly repayment of the ultra co debt facility.

We entered into interest rate swaps around the time of our global refi in early October 2021.

To fixed interest rate exposures on the term loan.

As a result of these swaps, which averaged 87 basis points.

Companies interest rate exposure is fully fixed insulating us from the adverse impact of rising interest rates.

Please now turn to slide 13 for an overview of our cash flows from operations.

Net cash provided by operating activities was $98 million in Q2.

The chart highlights the timing driven variability that working capital introduces to cash from ops as depicted by the differences between the dark blue bars, which are reported cash from ops and the light blue bars, which strip out changes in operating assets and liabilities, primarily working capital as.

As the chart demonstrates the volatility caused by working capital largely evens out over time.

The differences between the two bars in Q2 can be explained primarily by the increases in the value of receivables and inventories on both higher market values market rate values and bunker prices.

Our receivable collection is outstanding as reflected in the company's robust cash generation.

And an overall strong cash conversion cycle.

Please turn to slide 14 for our Q2 cash walk.

The chart at the top of the slide lays out the increase in the Companys cash balance during Q2 the.

The revenue and operating expenditures bars are a simple look at the operations with the net of these two bars coming in at 103 million the same as our adjusted EBITDA results.

The dividend and debt service bars, which can be found further to the right explain most of the remaining Q2 activity.

The chart at the bottom of the slide Similarly covers the cumulative cash movements for the first two quarters of 2022.

Yes.

Let's now turn to slide 15 for our cash breakeven per ship per day.

Cash breakeven per ship per day came in at $11741 for the second quarter.

And quarter decrease of $550 is due to lower vessel operating cost Drydocking G&A and interest expense.

Vessel expenses or Opex came in at $5584 per ship per day in Q2.

$237 lower than prior quarter.

The decrease was primarily due to lower repairs and stores expenses.

This notwithstanding we continue to face COVID-19 related costs as well as general inflationary pressures.

Drydocking came in at $1104 per ship per day in Q2, $1155 lower than prior quarter as we completed dry docks for three vessels during the quarter.

We have also made advanced payments in the quarter ahead of Q3 dry docks.

Cash G&A came in at $1718 per ship per day in Q2 down $78 from Q1. 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 our chartered in tonnage.

We were to include the chartered in days in our calculation G&A per ship per day would improve by $329 to $1389 for the quarter.

Cash interest expense came in at $754 per ship per day in Q2.

$51 lower than prior quarter as we realized an increase in interest income due to rising interest rates and our increasing cash balance.

Cash debt principal payments came in at $2581 per ship per day in Q2.

Looking ahead, we expect the following per ship per day in Q3.

Opex should come in at around $5750.

Dry dock to decline to about $300 on significantly lower dry dock activity.

G&A is expected to come in at circa $17 50 again, it is worth noting the figure would be about $300 lower if we were to include chartered in ships.

Cash interest expense is expected to remain steady at $750.

Cash debt amortization is expected to remain at $2581 per ship per day.

This concludes my comments I will now turn the call back to Gary.

Thank you Frank Please turn to slide 17.

Year to date Super Maxis continue to outpace all other drybulk segments with BSI currently averaging over 26000, which notably has on part of last year's stellar performance also as mentioned earlier on the call freight volatility has increased in recent months due to the effects of a continued war in Ukraine and the macro.

Economic environment.

Notwithstanding lower dry bulk volumes led by a lack of cargos from Ukraine substitution of Black Sea grain exports and an increase in European coal imports had led to a meaningful increase in ton miles, which has been positive for fleet utilization and in turn supportive of rates.

<unk> has had a mixed effect with northern European ports struggling to absorb the large increase in coal imports European coal imports came in 72% higher for the second quarter as compared to the same period last year concurrently we've witnessed a decrease in vessel congestion in China with the easing of Covid related restrictions.

Combined with muted short term import demand, particularly with respect to iron ore and coal.

Separately fed tightening and the expectation for further hikes led to a sharp selloff in commodities in early June which in turn impacted sentiment.

With these disparate factors at work and being in the middle of the summer period. The BSI has traded down to under 20000 per day, while well off recent highs. This is quite strong by historical standards and about $9000 above our breakeven cash breakeven cost and doesn't include revenues from scrubbers and our operating.

Please.

With China's slowly reopening and stimulus measures begin to rollout. We believe we could see a meaningful recovery in manufacturing activity and in turn Drybulk demand a significant positive for rates as we head into the fourth quarter a quarter historically supported as well by the North American grain harvest. Please turn to slide 18.

Fuel prices continue to move higher in Q2, with <unk> and <unk>, SFO, averaging 683 and $911 per ton respectively. The spread between <unk> and <unk> prices remain very volatile hitting a high of more than $370 per ton on average in the core.

Order and then averaging 228 up to 21% compared to the first quarter.

On an illustrative basis, given our fleet scrubber position, we would realize the benefit of close to $75 million on an annualized basis based on fuel spreads of $316 per ton.

Please turn to slide 19.

Net fleet supply growth slowed in Q2, a total of 96 Drybulk Newbuild vessels were delivered during the period down 25% year on year.

The Tivoli is continues to increase the number of older ships that will inevitably need to be scrap recycled in the future.

In terms of forward supply growth. The overall Drybulk order book stands at a historically low level of just seven 2% of the on the water fleet.

For 2022, Drybulk net fleet growth is expected to be two 7%, which we be down around 25% as compared with last year.

Looking further ahead 2023 net fleet growth is projected to drop further to just 0.7% driven by muted deliveries and an increase in scrapping volumes.

A total of 53 Drybulk ships were ordered during Q2 down about 70% compared to the prior quarter and less than half of the average over the last five years of roughly 110 ships per quarter.

Worth, noting that the vast majority of ships being ordered today will only be delivered in 2024 and beyond.

Although we expect some level of ordering to continue we still believe it will remain low for reasons, we haven't articulated a number of times before please turn to slide 20.

In terms of macro demand the IMF has lowered their GDP growth estimate for this year to three 2% down 40 basis points as compared to the forecast as of April .

After reaching a multiyear high last year Drybulk trade demand growth is expected to be flat in 2022, however, taking into consideration the significant ton mile effect I mentioned before caused by the war in Ukraine. It increases to positive one 2% for.

For 2023 current market estimates are pegging drybulk trade demand growth to increase to 2% versus 2022 on a core basis, excluding any ton mile effect.

Please turn to slide 21.

Okay.

Breaking down Drybulk demand into its primary components. It is evident that the growth fundamentals from minor bulk has been and continues to be superior as compared to major bulks given our exclusive focus on the mid sized segment. Our cargo mix typically consists of between 60 and 70% of minor bulks.

For 2022 minor bulk trade demand is expected to be <unk>.

Reach one 1% on a core basis as compared to the major Bulks is forecasted to decrease by 0.8%. This is the primary reason why supermaxilla have been the best performing asset class. This year outpacing capes by $8000 per day, even though they are about one third the size and cost about 40%.

Wes.

Although near term market Volatilities elevated we remain optimistic about the medium term prospects for dry bulk given the positive forces benefiting demand combined with a record low order book and a number of emissions regulations that will come into force over the next couple of years.

We believe these dynamics will further improve the supply side in terms of fleet utilization and scrapping.

Given our outlook the strong results to date and consistent with our stated capital allocation strategy Eagles Board of directors declared a second quarter cash dividend of $2 20 per share equating to just over 30% of net income. This is the fourth consecutive quarterly dividends since we adopted a dividend policy last October .

And brings total shareholder distributions to $8 25 per share in closing we remain energized about eagle's leadership position within the mid sized Drybulk segment, and we're looking forward to continuing our strong level of execution to benefit our shareholders with that I'd like to turn the call over to the operator and answer.

Any questions you may have operator.

As a reminder, if you'd like to ask a question at this time. Please press star one one on your telephone.

That is star one one to ask a question.

Our first question comes from Omar <unk> with Jefferies. Your line is now open.

Hi, Thank you hi, there good morning, guys.

Good morning, welcome back.

Thanks, Gary.

Want to ask you about the market you laid out some of the broader headwinds that we've seen with economic uncertainty reduce congestion and whatnot kind of gone back to early June .

I guess, maybe recently seen some more pronounced weakness just maybe the past week or two.

Has anything changed or is there any maybe shift in.

Whether its charter appetite or cargo availability has something changed in the past couple of weeks it makes it more pronounced.

Or is it more of a maybe just a gradual snowball effect of.

What you talked about.

That data that can maybe June .

Yes, I don't think theres any any of wholesale event that I would point to here I mean first of all we are right in the middle of summer, which historically is a weak period, particularly for mid size and this.

The summer market is in the Atlantic, particularly as often buoyed by cargoes out of the Black Sea and we're seeing virtually no green of course from Ukraine, and so that's having an impact on that market overall and then as I mentioned, we've seen an unwinding of congestion in China. So I think it's.

It's volatility right we.

We're at similar levels in the early part of this year. So we just this is.

Part of what we expect is a little more.

Significant deval right now than in the midsize segment, but like I said, we were here earlier in the year end.

Fundamentals, we think are quite promising for the latter part of the year and especially.

Brazil has.

Starting to export corn now in the North American grain harvest coming on which will.

Also.

Longer ton mile.

Rent this year than in typically because of the dislocation of of cargos from Ukraine. So we think it's let's call. It. It's in August effect, along with some other other overlays and I'll leave it at that.

Yes.

Got it thanks for that color and I guess, you highlighted some of the.

The FFA contracts, you've entered into and in that time charter I think you said it was last week that you signed the one year that kicks off in October at 25000.

Clearly, obviously very strong rate.

And.

It sounds like that was even a premium to maybe what the broad prevailing Tc averages were a week ago.

I guess I know, it's difficult to answer how do you how repeatable do you think that is stated in today's market I gauge that maybe.

The rate may be off from that 25, but you would you be able to still secure one year.

Today just.

And comparing it to last week. So it's very very short term, but just wondering if theres any maybe wholesale change in market dynamics over the past couple of LIFO.

Yes, the market the market's off over the last week and I think if you look at the change in the forward market and not the index, but the forward market you would probably see a similar impact.

Not exactly dollar for dollar, but but on a period right as well right.

These trade similarly, not exactly of course, there's dislocations, but but the market is off over the last week and a half having said that that charter that one year charter.

A number of things at play there that's a scrubber fitted ship right and scrubbers right now at spot rates are for <unk>.

Sure Max Ernie around $4000.

A day across the fleet and that's that's obviously meaningful and again its an ultra Max versus the Supermac switches. The FFA rates have we are looking on so when we go out and when we reroute ships right. It sounded like you just wake up in the morning, and David It's based on relationships and developing it so like I said, it would be down slightly today, but.

We pick our moments when we think there is better value in the physical market than the FFA market and if there wasn't an opportunity, but we wanted more cover we go out and sell and FFA and then we can reverse that right. If we have someone comes in once a ship next week, we might buyback the FFA and reroute the shift and that's a dynamic part of our strategy that I think is.

<unk> can differentiate it and enables us to add value in <unk>.

To achieve these tcs that that frankly for a pure ultra Max Super Max Ultra Max player with half in each half of our fleet in each segment I think is a pretty demonstrative.

Yes definitely.

Thanks, Gary.

Just one final.

A follow up question here just on the scrubbers clearly it's been a homerun.

Yes, theres been some talk I'm not sure how substantial are significant it is but there is some talk that maybe some owners are looking for retrofit.

Scrubbers.

On the ships that they didn't do back in 2018 2019.

As have been in a unique spot really with what maybe maybe at most 10% of the Super Ultra fleet, having scrubbers.

Do you think or have you heard of any plans.

From ship owners that we'll see another wave of scrubber investment here.

As we look ahead.

Yes. So the answer is I think you will see some retrofitting definitely definitely see scrubbers on most new buildings coming out having said that to your point right a very small percentage of the midsize segment and the payback is slightly longer.

Being first and being there at the start was really an imperative for US we have three non scrubber fitted supermaxilla sister ships.

<unk>.

Are there other vessels that are all scrubber fitted we've looked at it and decided at this point, we're not doing it.

<unk> time, the off hire time of course off hire today is significantly more expensive than it was when we retrofitted our fleet in 2019, So I think youll see some uptick.

It will be focused on the larger sizes for from a economics aspect of it.

But I don't think it will be meaningful I think that the.

Mid sized segment will will continue I think as far as I can see to be significantly.

In Hs, sorry, VLSI foe, earning fleet.

For the future.

Understood. Thanks, Thanks, Kerry for that I'll turn it over okay.

Thank you.

Our next question comes from the line of <unk> with Alliance Global Partners. Your line is now open.

Good morning, Gary Good morning cost.

Frank.

Quick follow up on if you do see scrubber retrofits on some of the suite.

The downtime is going to be more significant in 2023 or whenever that happens too.

Just a quick question on your hedge book is there anything in particular, you triggered you to double almost double your org.

Book in the fourth quarter.

And then secondly, do you have anything in.

Out into the three time frame and then thirdly, you talked about how Thats just basically an add on on the BSI index can you help us adjust for your fleet to get to sort of a time charter equivalent for what you've hedged ended the fourth quarter for Eagle.

Sure so.

Let me start with helping you look at the FFA against the fleet I mean, as I mentioned to one of the amas questions right. Our fleet is about half <unk> half Super Max.

Every ship has a value relative to the index ship, which is a specification of a Japanese 58. So if you have a Japanese 58, non scrubber fitted vessel. The FFA is a pretty good proxy for what that ship is worth in the open market on any given day. So ultra maxes in general General are worth about.

10% to 12% more than the index ship. There are some that are even better and some that are worse, but I would use 10% to 12% I mean, you can look at our slide around fuel spreads and what that means in terms of forever right right now probably $4000 a day the forward curve is down from that.

So how much you are able to glean from from charter is is somewhere probably south of 4000, but you can.

Obviously as an owner are looking to maximize as much as possible and so that's how you kind of get to it and then from an Eagle standpoint, our ability to outperform the index also based on our our methodology and trading platform. So I'd say right now just.

Roughly you're probably looking at about 26 $2700 a day premium for a scrubber on a mid sized ship to add onto a period of one year.

Just on the forward curve.

Quick math.

In terms of our forward.

We only report our <unk> as of June 30, we don't include them in our in our coverage. When we say were 72% covered at any given time, because RFA positions dynamic as I mentioned, we may sell and FFA and buyback. So we only reported once a quarter and we leave it at that because.

But as I mentioned in our remarks, we are we do have.

Building some coverage into next year next year still trades extremely backward dated.

Two to the index today I mean, it's around it's around 13500 today for next year, which.

Aside from the market being off significantly today, we just find that.

Severely backward dated and we're not we're not we're not looking to hedge our fleet at those kinds of numbers.

And Janet right, there may be an opportunity against the ship with charter in or something like that so we have been focused more on physical for next year and also focused on let's say, increasing our hedge position this year, where theres not as much of a backwardation.

And as you can see as of June 30, as I mentioned, almost 40% of our fleet covered just on <unk>.

Hopefully that's helpful.

Very helpful. And then you had a pretty significant cash build in the third.

Second quarter that should continue in the.

Third and fourth quarters.

Looking at your cash build the decline in net debt potentially be net debt zero by the end of next year.

How do you look at capital allocation in the context of the convert coming up in 2024, and then also the dividend.

It's likely to well, it's $2 20, now it's likely to decline and I was just wondering sort of how youre looking at that formula.

In the context of maybe.

Allocating some cash to support the dividend to keep it closer to $2 over the course of each quarter or is that something you're thinking about right now or is that something that the board.

<unk> is going to decide on a quarter to quarter basis.

So let me start by saying I'm not really focused on what the dividend will be next quarter I'm focused on maximizing our revenue during the quarter. So that it's an easy decision when we get there but.

But in all seriousness I think if you look back at past actions right, our board decided to pay in excess of 30%.

Last quarter.

<unk> brought us to $2.

What they've done in the past is not a guarantee but I think it shows that the willingness of our board two to allocate capital when they deem appropriate whether that's from noncash adjustments on an after phase or what have you and as you mentioned, we've had a significant cash build.

You also mentioned the convert and that's something that we've talked about.

At some point.

Of course that will likely be converted whether we use cash or shares or a combination of both as in the company's options. So building cash around that we think makes sense and as we get closer to maturity, which is now less than two years out.

Cost for an early redemption goes down because of the black Scholes modeling behind the pricing. So so we think building some cash around that makes sense and and.

Nothing wrong with having cash on the balance sheet from an optionality standpoint as well.

Great. Thanks for your time.

Okay.

As a reminder, if you'd like to ask a question Thats Star one one.

Im showing.

No further questions at this time I'd like to turn the call back to management for closing remarks.

Thank you operator, we have nothing further but I'd like to thank everyone for joining us and wish everyone. A good day and a good weekend. Thank you.

Yes.

This concludes today's conference call.

For participating you may now disconnect.

The conference will begin shortly.

As Johan during Q&A, you can dial star one one.

[music].

Okay.

Yes.

Sure.

Yes.

Okay.

[music].

Okay.

[music].

Okay.

[music].

Yes.

Okay.

Yes.

Okay.

[music].

Yeah.

[music].

Good day, and thank you for standing by and welcome to the Eagle bulk shipping second quarter earnings call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

I ask a question during the session you will need to press star one one on your telephone please.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your speaker today, Gary Vogel CEO of Eagle bulk shipping.

Yeah.

Okay.

Thank you and good morning, and our apologies for the technical difficulties.

I'd like to welcome everyone to Eagle bulk <unk> second 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 Eagle ships Dot com.

Please note that part of our discussion today will include forward looking statements. These 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.

The risks and uncertainties that may have a direct bearing on our operating results our performance and our financial condition.

And a reconciliation to the most comparable GAAP financial measures. Please turn to slide six.

Before we get into discussing the quarter I'd like to take this opportunity to mention that our thoughts and prayers remain with all those affected by the war on Ukraine, including our Ukrainian seafarers, who maintain their steadfast dedication and commitment to eagle, while being so far from their homeland and their loved ones as we indicated on our <unk>.

Last call, we have taken steps to provide extra support and assistance to them and to their families. During this difficult time.

From a market perspective, the wars disrupted typical trade patterns and alter demand as cargoes are being sourced from and send to alternative regions something we'll address later in the call.

Adjusting for noncash mark to market gains on derivative hedges net income came in at $81 6 million or $6 28 per share.

As part of our ongoing fleet renewal strategy, we sold the motor vessel Cardinal 2004, built Super Max and the oldest vessel in Eagle's fleet just ahead of our statutory dry dock.

As we look forward to the third quarter, we fixed approximately 72% of our owned available days for the third quarter had a net TCE of $29024, indicating a significant outperformance against the BSI.

As you can note from yesterday's press release as of June 30, we had sold <unk> for the fourth quarter totaling almost 40% of our owned available days at an average level of $22322. It's worth noting that the FFA values I'm talking about are based on a non scrubber fitted supermarkets.

We believe this approach is prudent given the current market volatility as well as various macro economic forecasts.

We also continue to charter our ships on a selective basis on longer period as well as an example, just last week, we fixed the scrubber fitted ultra Max out for a minimum of 12 months starting in October at $25000 gross TCE per day.

This strategy utilizing both <unk> and ships has proven to be an effective part of our dynamic approach to fleet management.

Our trailing 12 month EBITDA run rate is now $370 million, implying a very modest EV EBITDA multiple of just two and a half.

On the back of this significant cash generation, our financial profile continues to improve with net leverage estimating at around 18%.

Please turn to slide nine.

Asset price performance has been fantastic over the past 18 months with 10 year old Super Max vessels more than doubling in value.

Given the significant elevation of values and a recent correction in spot rates as well as the macro economic landscape S&P activity has slowed down somewhat with prices plateauing.

Notwithstanding we remain constructive on the market with asset prices in the medium term given the positive supply demand dynamics, which will address later in the call.

I would 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 second quarter financial results.

TCE revenues totaled $138 2 million in Q2.

The significant increase in market rates, along with the increase in available days drove our top line growth versus prior quarter.

Net income for Q2 was $94 5 million.

Earnings per share for the second quarter was $7 27 on a basic basis on a dilutive basis, which includes shares related to the convertible bond EPS came in at $5 77 for the quarter.

Adjusted net income, which excludes noncash unrealized gains and derivatives came in at $81 6 million for the second quarter or $6 28.

On a basic basis.

On a dilutive basis adjusted EPS came in at <unk>.

$4 98 for the quarter.

Our adjusted EBITDA record results for Q2 was $102 6 million, 21% higher than prior quarter.

Let's now.

Please turn to slide 12 for an overview of our balance sheet liquidity.

Yes.

Total cash at the end of Q2 was $141 5 million, an increase of $57 9 million as compared to Q1.

The significant increase in the Companys Q2 cash balance was driven by our strong operating results.

Offset in part by repayments of $12 5 million of that vessel improvement and a Q1 dividend.

Total liquidity came in at $241 5 million at the end of Q2.

Total liquidity is comprised of total cash of $141 5 million and.

And $100 million of a fully undrawn revolving credit facility.

It is important to note that we own three unencumbered vessels, which provide us with additional flexibility to increase our liquidity.

In addition, the Cardinal is now classified as the vessel held for sale.

We expect that vessel to be delivered to a new owner.

In August generating approximately $15 5 million in cash.

Total debt at the end of Q2 was $376 8 million a decrease of $12 5 million as a result of the quarterly repayment of the <unk> debt facility.

We entered into interest rate swaps around the time of our global refi in early October 2021.

To fixed interest rate exposures 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 adverse impact of rising interest rates.

Please now turn to slide 13 for an overview of our cash flows from operations.

Net cash provided by operating activities was $98 million in Q2.

As the chart demonstrates the volatility caused by working capital largely evens out over time.

The differences between the two bars in Q2 can be explained primarily by the increases in the value of receivables and inventories on both higher market values market rate values and bunker prices.

Our receivable collection is outstanding as reflected in the company's robust cash generation.

And an overall strong cash conversion cycle.

Please turn to slide 14 for our Q2 cash walk.

The chart at the top of the slide lays out the increase in the Companys cash balance during Q2 the.

The revenue and operating expenditures bars are a simple look at the operations with the net of these two bars coming in at 103 million the same as our adjusted EBITDA results.

The dividend and debt service bars, which can be found further to the right explain most of the remaining Q2 activity.

The chart at the bottom of the slide Similarly covers the cumulative cash movements for the first two quarters of 2022.

Yes.

Let's now turn to slide 15 for our cash breakeven per ship per day.

Cash breakeven per ship per day came in at $11741 for the second quarter.

The quarter on quarter decrease of <unk> $550 is due to lower vessel operating costs, Drydocking G&A and interest expense.

Vessel expenses or Opex came in at $5584 per ship per day in Q2.

$237 lower than prior quarter.

The decrease was primarily due to lower repairs and stores expenses.

This notwithstanding we continue to face COVID-19 related costs as well as general inflationary pressures.

Drydocking came in at $1104 per ship per day in Q2, $1155 lower than prior quarter as we completed dry docks for three vessels during the quarter.

We have also made advanced payments in the quarter ahead of Q3 dry docks.

If we were to include the chartered in days in our calculation G&A per ship per day would improve by $329 to $1389 for the quarter.

Cash interest expense came in at $754 per ship per day in Q2 50.

<unk> $51 lower than prior quarter as we realized an increase in interest income due to rising interest rates and our increasing cash balance.

Cash debt principal payments came in at $2581 per ship per day in Q2.

Looking ahead, we expect the following per ship per day in Q3.

Opex should come in at around $5750.

Dry dock to decline to about $300 on significantly lower dry dock activity.

G&A is expected to come in at circa $17 50, again is worth noting the figure would be about $300 lower if we were to include chartered ships.

Cash interest expense is expected to remain steady at $750.

Cash debt amortization is expected to remain at $2581 per ship per day.

This concludes my comments I will now turn the call back to Gary.

Thank you Frank Please turn to slide 17.

Year to date Supermac has continued to outpace all other dry bulk segments with BSI currently averaging over 26000, which notably has on part of last year's stellar performance also as mentioned earlier on the call freight volatility has increased in recent months due to the effects of a continued war in Ukraine and the <unk>.

Macro economic environment.

Combined with muted short term import demand, particularly with respect to iron ore and coal.

Separately fed tightening and the expectation for further hikes led to a sharp selloff in commodities in early June which in turn impacted sentiment.

With these disparate factors at work and being in the middle of the summer period. The BSI has traded down to under 20000 per day, while while off recent highs. This is quite strong by historical standards and about $9000 above our breakeven cash breakeven cost and doesn't include revenues from scrubbers and our operating active.

<unk> with China's slowly reopening in a stimulus measures begin to rollout. We believe we could see a meaningful recovery in manufacturing activity and in turn Drybulk demand a significant positive for rates as we head into the fourth quarter a quarter historically supported as well by the North American grain harvest, Please turn to slide.

2018.

Fuel prices continue to move higher in Q2, with <unk> and <unk>, averaging 683, and $911 per ton respectively. The spread between <unk> and <unk> prices remain very volatile hitting a high of more than $370 per ton on average in the quarter and.

Averaging 228 up to 21% compared to the first quarter.

On an illustrative basis, given our fleet scrubber position, we would realize the benefit of close to $75 million on an annualized basis based on fuel spreads of $316 per ton.

Please turn to slide 19.

Net fleet supply growth slowed in Q2, a total of 96 Drybulk Newbuild vessels were delivered during the period down 25% year on year pass.

Partially offsetting this eight vessels were scrapped during the same period as we've mentioned previously despite record scrap prices the low level of vessel scrapping is not surprising given the strength in the underlying spot market positively is continues to increase the number of older ships that will inevitably need to be scrapped recycled and.

Future.

In terms of forward supply growth. The overall Drybulk order book stands at a historically low level of just seven 2% of the on the water fleet for 2022, Drybulk net fleet growth is expected to be two 7%, which we be down around 25% as compared with last year.

Looking further ahead 2023 net fleet growth is projected to drop further to just 0.7% driven by muted deliveries and an increase in scrapping volumes.

Total of 53 Drybulk ships were ordered during Q2 down about 70% compared to the prior quarter and less than half of the average over the last five years of roughly 110 ships per quarter.

Worth, noting that the vast majority of ships being ordered today will only be delivered in 2024 and beyond.

Though we expect some level of ordering to continue we still believe it will remain low for reasons, we haven't articulated a number of times before.

Please turn to slide 20.

In terms of macro demand the IMF has lowered their GDP growth estimate for this year to three 2% down 40 basis points as compared to the forecast as of April .

For 2023 current market estimates are pegging drybulk trade demand growth to increase to 2% versus 2022 on a core basis, excluding any ton mile effect.

Please turn to slide 21.

Okay.

Breaking down Drybulk demand into its primary components, it's evident that the growth fundamentals for minor bulk has been and continues to be superior as compared to major bulks given our exclusive focus on the mid sized segment. Our cargo mix typically consists of between 60 and 70% of minor bulks.

For 2022 minor bulk trade demand is expected to reach one 1% on a core basis as compared to the major bulks is forecasted to decrease by <unk>, 8%. This is the primary reason why Super Max's have been the best performing asset class this year.

Pacing capes by $8000 per day, even though there are about one third the size and cost about 40% or less.

We believe these dynamics will further improve the supply side in terms of fleet utilization and scrapping.

And brings total shareholder distributions to $8 25 per share in closing we remain energized about eagle's leadership position within the mid sized dry bulk segment and we're looking forward to continuing our strong level of execution to benefit our shareholders with that I would like to turn the call over to the operator and answer.

Any questions you may have operator.

As a reminder, if you'd like to ask a question at this time. Please press star one one on your telephone.

Again that is star one one to ask a question.

Our first question comes from Omar <unk> with Jefferies. Your line is now open.

Hi, Thank you hi, there good morning, guys.

Welcome back.

Thanks, Thanks, Gary I wanted to ask you about the <unk>.

<unk> you laid out some of the broader headwinds that we've seen with economic uncertainty reduce congestion and whatnot kind of going back to early June .

I guess, maybe recently seen.

More pronounced weakness just maybe the past week or two.

As anything change or is there any maybe shift in.

Whether its charter appetite or cargo availability has something changed in the past couple of weeks it makes it more pronounced.

Or is it more of a maybe just a gradual snowball effect of.

What you talked about.

That dated back to May be June .

Yeah, I don't think theres any any of wholesale event that I would point to here I mean first of all we are right in the middle of summer, which historically is a weak period, particularly for mid size and this.

The summer market is in the Atlantic, particularly as often buoyed by cargoes out of the Black Sea and we're seeing virtually no grain of course from Ukraine, and so that's having an impact on that market overall and then as I mentioned, we've seen an unwinding of congestion in China. So I think it's.

It's volatility right.

We are at similar levels in the early part of this year. So we just this is.

Part of what we expect is a little more.

Significant deval right now than in the midsize segment, but like I said, we were here earlier in the year and the.

Fundamentals, we think are quite promising for the latter part of the year and especially.

Brazil has starting to export corn now in the North American grain harvest coming on which will.

Also.

Longer ton mile.

<unk> this year than in typically because of the dislocation of of cargos from Ukraine. So we think it's let's call. It August effect, along with some other other overlays and I'll leave it at that.

Got it thanks for that color and I guess, you highlighted some of the.

The FFA contracts, you've entered into and in that time charter I think you said it was last week that you signed the one year that kicks off in October at 25000.

Yeah.

So clearly obviously a very strong rate.

And.

It sounds like that was even at a premium to maybe what the broad prevailing Tc averages were a week ago.

I guess I know it's difficult to answer.

<unk> do you think that is stated in today's market I gauge that maybe the right maybe off from 25, but you would you be able to still secure one year.

Today.

I'm comparing it to last week. So it's very very short term, but just wondering if theres any maybe wholesale change in market dynamics over the past couple of weeks.

Yes, the market the market's off over the last week and I think if you look at the change in the forward market and not the index, but the forward market you would probably see a similar impact.

Not exactly dollar for dollar, but on but on a period right as well right.

These trade similarly, not exactly of course, there's dislocations, but but the market is off over the last week and a half having said that that charter that one year charter.

A number of things at play there that's a scrubber fitted ship and scrubbers right now at spot rates are for for an ultra Max earning around $4000.

A day across the fleet and that's that's obviously meaningful and again its an ultra Max versus a super Max which is the FFA rates that we are looking on so when we go out and when we reroute ships right. It's not like you just wake up in the morning, and David It's based on relationships and developing it so like I said it would be down slightly today, but we.

We pick our moment so when we think there is better value in the physical market than the FFA market and if there wasn't an opportunity, but we wanted more cover we go out and sell and FFA and then we can reverse that right. If we have someone comes in once a ship next week, we might buy back the FFA in REO at the ship and that's a dynamic part of our strategy that I think is <unk>.

Unique and differentiated and enables us to add value and.

And achieve these tcs that that frankly for a pure ultra Max Supermac Ultra Max player with half in each half of our fleet in each segment I think is a pretty demonstrative.

Yes definitely.

Thanks, Gary.

And just one final.

Follow up question here just on the scrubbers clearly, it's been a homerun and.

Theres been some talk I'm not sure how substantial are significant it is but there is some talk that maybe some owners are looking to retrofit.

Scrubbers.

On the shifts that they didn't do back in 2018 2019.

<unk> been in a unique spot really with what maybe maybe at most 10% of the Super Ultra fleet, having scrubbers.

Do you think or have you heard of any plans.

From ship owners that we'll see another wave of scrubber investment here.

As we look ahead.

Yes. So the answer is I think youll see some retrofitting and you're definitely definitely see scrubbers on most new buildings coming out having said that to your point, a very small percentage of the midsize segment and the payback is slightly longer.

Being first and being there at the start was really an imperative for US we have three non scrubber fitted supermaxilla sister ships.

Two other other vessels that are all scrubber fitted we've looked at it and decided at this point, we're not doing it the lead time the off hire time of course off hire today is significantly more expensive than it was when we retrofitted our fleet in 2019, So I think youll see some uptick but I think it will be focused on the <unk>.

<unk> sizes for from the economics aspect of it but I don't think it will be meaningful I think that the mid sized segment will will continue I think as far as I can see to be significantly.

And Hs, sorry, VLSI foe, earning fleet for the future.

Understood. Thanks, Thanks, Kerry for that I'll turn it over okay. Thank you.

Our next question comes from the line of <unk> with Alliance Global Partners. Your line is now open.

Good morning, Gary Good morning good.

Good morning, Frank.

Quick follow up on if you do see scrubber retrofits on some of the fleet I mean that implies the downtime is going to be more significant in 2023 or whenever that happens too.

Just a quick question on your hedge book is there anything in particular Youre triggered you to double almost double your work your hedge book in the fourth quarter.

And then secondly, do you have anything in.

Into the three timeframe and then thirdly, you talked about how that's just basically on a on the BSI index can you help us adjust for your fleet to get to sort of a time charter equivalent for what <unk> hedged ended the fourth quarter net eagle.

Sure so.

Let me start with helping you will get the FFA against the fleet I mean as I mentioned.

One of <unk> questions right. Our fleet is about half <unk> half Super Max.

10% to 12% more than the index ship. There are some that are even better and some that are worse, but I would use 10, 12% I mean, you can look at our slide around fuel spreads and what that means in terms of scrubber in a REIT right now probably $4000 a day.

<unk> curve is down from that so how much you are able to glean from from a charter is is somewhere probably south of 4000, but you can.

Roughly as you are probably looking at about 26 $2700 a day premium for a scrubber on a mid sized ship to add onto a period of one year.

Based on the forward curve quick.

Quick math.

In terms of our forward.

We only report our <unk> as of June 30, we don't include them in our in our coverage. When we say were 72% covered at any given time, because our FFA positions dynamic as I mentioned, we may sell and FFA and buy back. So we only reported once a quarter and we leave it at that because.

But as I mentioned in our remarks, we are we do have are building some coverage into next year next year still trades extremely backward dated.

Two to the index today I mean, it's around it's around 13500 today for next year, which we've.

Side from the market being off significantly today, we just find that.

Severely backward dated and we're not we're not we're not looking to hedge our fleet at those kinds of numbers.

In general right, there may be an opportunity against the ship with charter in or something like that so we have been focused on more on physical for next year and also focused on on let's say, increasing our hedge position this year, where theres not as much of a backwardation.

And as you can see as of June 30, as I mentioned, almost 40% of our fleet covered just on <unk>.

Hopefully thats helpful.

Very helpful. And then you had a pretty significant cash build in the third.

The quarter and that should continue.

The third and fourth quarters.

Looking at your cash build the decline in net debt.

This would be net debt zero by the end of next year.

How do you look at capital allocation in the context of the convert coming up in 2024, and then also the dividend.

Likely to well, it's $2 20, now it's likely to decline.

Just wondering sort of how youre looking at that formula.

In the context of maybe.

Allocating some cash to support the dividend to keep it closer to $2 over the course of <unk>.

Each quarter or is that something youre thinking about right now or is that something that.

The board is going to decide on a quarter to quarter basis.

So let me start by saying I'm not really focused on what the dividend will be next quarter I'm focused on maximizing our revenue during the quarter. So that it's an easy decision when we get there.

But in all seriousness I think if you look back at past actions, our board decided to pay in excess of 30%.

Last quarter.

Brought us to $2.

What they've done in the past is not a guarantee but I think it shows that the willingness of our board to allocate capital when they deem appeal its appropriate whether that's from noncash adjustments on an FFA is or what have you and as you mentioned, we've had a significant cash build.

He also mentioned the convert and that's something that we've talked about.

At some point.

We of course that will likely be converted whether we use cash or shares or a combination of both as in the company's options. So building cash around that we think makes sense and as we get closer to maturity, which is now less than two years out.

Cost for an early redemption goes down because of the black Shoals modeling behind the pricing. So so we think building some cash around that makes sense and and.

Nothing wrong with having cash on the balance sheet from an optionality standpoint as well.

Great. Thanks for your time.

As a reminder, if you'd like to ask a question Thats Star one one.

I am showing no further questions at this time I'd like to turn the call back to management for closing remarks.

Thank you operator, we have nothing further but I'd like to thank everyone for joining us and wish everyone. A good day and a good weekend. Thank you.

Yes.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q2 2022 Eagle Bulk Shipping Inc Earnings Call

Request a DemoDemo

EGLE

Eagle Bulk Shipping

Earnings