Eagle Bulk Shipping Inc. Q1 2023 Earnings Call
Ladies and gentlemen, our Eagle bulk shipping reports first quarter 2023 will begin in two minutes. Thank you for your patience and please remain on the line.
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Good day and thank you for standing by welcome to the Eagle bulk shipping reports first quarter 2023 results. 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 the session you will need to press star one.
One on your telephone you will hear a message out dicing. Your hand this race to withdraw the question simply press Star one again.
And be advised that today's conference is being recorded I would now like to hand, the conference over to Guy with puzzle.
Floor is yours.
Thank you and good morning, I would like to welcome everyone to Eagle bulk <unk> first quarter 2023 earnings call.
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 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 TCE.
<unk> revenues adjusted net income EBITDA and adjusted EBITDA. 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 reconciliation to the most comparable GAAP financial measures.
Before I turn to our earnings presentation, I would like to take this opportunity to address an incident that occurred on board one of our vessels earlier this week.
Tuesday morning, three of our seafarers or kidnapped from the gravity bulker, while she was anchored out of window Gabon.
Obviously as an ongoing situation and I'm limited in what I can say I would like to convey that eagle is committed to ensuring the safe and proper churn of the kidnapped men and the safety of their colleagues on board. This ship is a matter of utmost urgency.
Our highest priority is the safety and wellbeing of our seafarers and their families.
We greatly appreciate the support of the authorities and our maritime industry colleagues as we work to bring these men safely home.
Given the sensitive nature of the situation, we will be unable to provide further comment.
Please turn to slide six.
Against the backdrop of a seasonally weak market in Q1 and in line with previous information provided on TCE for the quarter, we generated a net income of $3 2 million or.
A <unk> 25 per share basic.
Based on this result, and consistent with our stated capital allocation strategy you guys Board of directors declared a cash dividend of <unk> 10 per share equating to 40% of net income.
On the vessel sale and purchase front, we've continued to act Opportunistically. Following our recent acquisition of four modern high specification Ultra maxes during a market pullback we have taken advantage of our recent increase in both S&P liquidity in ship values and sold three noncore non scrubber fitted supermarkets vessels.
For total consideration of $49 8 million.
These ships were the only non scrubber fitted supermac sees in our fleet and were purchased Opportunistically just two years ago for total consideration of $28 $2 million.
Based on our calculations, we generated a levered IRR of 70% on this S&P trade inclusive of cash generated during the period.
Please turn to slide seven.
For Q1, we achieved a net TCE of $12917, representing an outperformance versus the benchmark BSI index of roughly 31% or $3041 per ship per day.
Given the seasonal lull, we experienced during the quarter and our general view of markets for the balance of the year. We believe Q1 will represent a low in 2023 for both the BSI and our TCE.
As we look to the second quarter spot rates have improved considerably we will discuss market fundamentals later on in the call, but as of today, we have fixed approximately 65% of our owned available days for Q2 at a net TCE of $16030.
I would now like to turn the call over to Kosta so depleted.
Took over the role of CFO on April one.
For those of you who may not be aware <unk> has been with Eagle since 2010, and most recently served as our Chief strategy Officer Kosta.
Thank you Gary and good morning, everyone before I begin with my prepared remarks, I would like to take this opportunity to thank my predecessor, Frank de Costanzo for his guidance and support over the past few months as well as my colleagues within the finance group.
Make my transition to the CFO seat seamless one.
With that let's proceed with a discussion of our financial results. Please turn to slide nine.
For this quarter, we have revamped and simplified the presentation of our finance slides to provide readers with additional insight and perspective on our financial results for the period as well as increased visibility on a quarter ahead.
On slide nine we're showcasing our P&L we format it slightly from the GAAP presentation.
Reflective of a seasonally weak Q1.
Our net top line performance, our TCE revenue came in at $59 $2 million for the period and based on 4581 actual owned available days, we achieved a TCE of 12917.
Representing a significant outperformance against our benchmark index as Gary indicated earlier.
Vessel operating expenses decreased roughly 12% quarter on quarter totaled $31 3 million or 6497 per vessel per day in line with our previous guidance.
Opex for the period included one time takeover costs related to the two broker Eagle, which was delivered to the company in February . Additionally, opex continued to be impacted by elevated crew cost related to wages travel and our seafarer nationality makeup, which is primarily eastern European.
As we have discussed on previous calls the Russia, Ukraine War has created challenges for us in terms of crude sourcing management and support for general Wellbeing and has ultimately contributed to the cost inflation that we have been experiencing.
As a result of these challenges we have added a new crew manager in order to diversify our source makeup and are currently in the process reallocating the crew management on 20 of our ships.
Transaction is expected to negatively impact our crew related cost for the next few quarters until the management changeover has been completed.
General and administrative expenses decreased 5% quarter on quarter to a total of $10 $9 million. This decrease is attributable to lower employee related costs.
Cash G&A expenses equated to $9 $1 million or <unk> 90 per vessel per day.
It's worth noting that our G&A figure per ship per day does not include our chartered in fleet. If we were to include those days are G&A figure would be approximately $580 per ship per day.
During Q1, we sold and delivered the Yeager, our oldest vessel in our fleet and realize a gain on sale of $3 3 million.
I think it's important to note that we sold the vessels just ahead of a statutory dry dock, allowing us to save on the associated and required capex spend.
Net interest expense inclusive of cash interest expense cash interest income and non cash deferred financing fees came in at $2 million for the quarter in line with our prior guidance.
Unrealized P&L.
Standing FFA and bunker swap positions as of quarter end was negative $240000.
Adjusted net income, which is net income adjusted for the unrealized gains and losses in <unk> and bunker swaps came in at $3 $4 million or 26 per share basic and diluted.
Please note that the convertible bond was deemed to be anti dilutive this quarter from an EPS perspective, and as such the shares underlying the security were not included in the diluted share count.
Adjusted EBITDA amounted to $18 7 million.
Please turn to slide 10.
We ended the quarter with a total cash position of $155 9 million down $33 9 million as compared to December 31.
We generated positive cash flow of $7 $4 million from operations used $18 5 million for net vessel sale and purchase transactions and made $21 1 million in debt repayments and dividend distributions.
Please turn to slide 11.
As of March 31, we owned 53 vessels and had a total liquidity equal to $255 9 million.
Total debt outstanding was $329 4 million comprised of $225 million on the term loan and 104 million face on the convert.
Based on vessel values assessment of our fleet, we estimate our net debt to fleet ratio at 15, 4%.
In Q2, we expect to take delivery of the Halifax, Eagle and Vancouver Eagle and make associated payment for the remaining balance due at $54 2 million.
On the sales side, we closed on the Newport equal this week and expect to complete the sales of the monarch Eagle and sank it equal by the end of the second quarter.
Back to receive total net sale proceeds of $48 $6 million for the three ships and realize a total gain on sale of $17 million.
Pro forma for these transactions our fleet will total 52 ships with an estimated total cash and liquidity of $150 million and 235, 9% respectively.
Please turn to slide 12.
As we look ahead into Q2, we're providing you with an informational outlook.
Based on our current vessel S&P delivery timelines, we are forecasting a total of 4805, one days for the second quarter and 4512 owned available days after taking into consideration estimates for both scheduled and unscheduled off hire.
As Gary indicated earlier as of today, we have fixed approximately 65% of our owned available days at a TCE of 16000 zero 30. Please.
Please note that this figure is inclusive of our pro rata estimate for realized gains and losses for the period on a mark to market basis.
On the expense side, we are estimating the following.
Operating expenses are expected to come in in line with Q1 with an estimated range of 6300 $6600 per vessel per day.
This range takes into consideration two vessel takeovers planned.
Spend on repairs and discretionary upgrades as well as our estimate for costs associated with the crew management changeover initiatives I discussed earlier.
Noncash depreciation and amortization expenses to come in between 3100 3400 per vessel per day.
G&A cash expenses to come in between <unk> hundred 1900.
Noncash stock based comp sensation to come in between 3300, $50 and $450 per vessel per day.
Net interest expense to come in between 500 $700 per vessel per day.
This concludes my remarks, I will now turn the call back to Gary who will discuss the industry fundamentals.
Thank you Kosta.
Please turn to slide 14.
Dry bulk market saw typical seasonality in Q1.
<unk> started the first quarter on a continuation of the negative trend we experienced during the fourth quarter and traded down to below $7000 by mid February .
This weakness is attributable to a number of short term factors, which we discussed in our last earnings call, including decreased trade flows unwinding of congestion.
Seasonal low and economic activity around the lunar new year holidays.
Since bottoming on February 13, the BSI posted a significant rebound as China came back online after the holidays.
And post Covid reopening rates.
<unk> more than doubled by mid March and has since traded within a fairly tight range between 12 and 14000.
The forward curve for the balance of the year remains in contango with Q3, and Q4 trading at a premium to spot, reflecting the market's continued belief for demand support and a further recovery in rates buoyed by strong supply side fundamentals.
Please turn to slide 15.
Fuel prices were mixed during the first quarter with HFF bow rising by 3% on the backup tighter supplies, whereas <unk> SFO prices weakened by 5% due to a general rebalancing that has been ongoing since late Q3 2022 as a result, your spreads between <unk> and VR CFO al.
<unk> roughly $193 per ton for the quarter were down approximately $48.
Pro forma for our recent vessel sale and purchase activity 50 of our 52 shifts or 96% of our fleet is now fitted with scrubbers, which solidifies <unk> position as the largest owner of scrubber fitted ships within the mid sized drybulk vessel segment globally.
Notwithstanding contraction in fuel spreads on an illustrative basis based on the 2023 year to date and forward curve, we estimate that our scrubbers will generate approximately $32 million incremental net income on an annualized basis.
Please turn to slide 16.
If values continue to increase on the back of a noticeable improvement in S&P liquidity as we indicated on our last earnings call buying interest is coming not only from traditional dry bulk owners, but also from container and tanker owners, who are looking to reinvest profits and diversify away from their core segments.
To illustrate move in values. The two 2020 built scrubber fitted ultra Max which we executed purchase agreements on just two months ago and have yet to taken delivery of our now worth about $3 million or 10% more based on recently reported comparative transactions.
And as we mentioned earlier on the call. We took advantage of the recent run up in values and improvement in market liquidity to sell our three non scrubber supermac, Susan and embark opportunistic transaction.
Notwithstanding the subdued freight market. We are currently experiencing I think the current strengthening S&P market is extremely noteworthy and exhibits participants positive view and conviction on the fundamentals.
We remain constructive and believe we'll continue to see an improvement in the market and asset prices over the medium term given the increasingly positive supply side dynamics. Please.
Please turn to slide 17.
Following on my last comment net fleet supply growth slowed in Q1, a total of 114 Drybulk Newbuild vessels were delivered during the period as compared to 122 in the prior quarter Newbuild.
New building deliveries in Q1 were partially offset by 17 vessels, which were removed from the market and were scrapped, notably frugal five mid sized geared vessels were scrapped during the quarter, while still low it was a significant increase compared to just nine midsize vessels that were scrapped during all of 2022.
As we've mentioned previously despite high scrap prices the low level of vessel demolition is not too surprising given the strength in the underlying spot market over the past two years and the apparent shared sentiment by owners generally that rates will be strong going forward.
In terms of forward supply growth. The overall Drybulk order book remains at a historically low level of under 7% of beyond the water fleet.
For 2023 dry bulk net fleet growth is projected at two 4%, which would be down about 40 basis points as compared with 2022.
The main driver of this low growth rate is a continuation of muted deliveries as well as an increase in assumed scrapping volumes.
A total of 34 Drybulk ships were ordered during Q1 down 60% as compared to the prior quarter and just a third of the average over the last five years of roughly 115 ships per quarter.
It's worth noting that the vast majority of ships being ordered today will only be delivered in 2025 and beyond.
Please turn to slide 18.
We have discussed on prior calls have this chart shows the favorable supply dynamics over the next few years based on delivery of the current order book and expected scrapping levels. The mid size fleet is expected to surpass the record age of 12 years in mid 2024 and continue increasing from there.
Positive from this trend is that there is an ever increasing number of older ships.
That will inevitably need to be recycled during the coming years given.
Given the relative cost advantage of secondhand ships versus new buildings today as well as uncertainty surrounding de carbonization and future fuel propulsion technology, we believe ordering and the result of an order book will remain low for some time.
We expect these dynamics combining a near record low order book with a near record fleet age to further improve the supply side in terms of fleet development in the coming years.
Please turn to slide 19.
The IMF is currently projecting global GDP growth to reach two 8% for 2023 down 10 basis points as compared to the previous forecast.
The macro outlook appears to be modestly improving as the economic shocks of the pandemic supply chain disruptions and Russia's invasion of Ukrainian recede and Chinese activity rebound following the reopening of its economy and with central banks being at or close to the end of their tightening stage notwithstanding continued uncertainty.
I believe we could see an improvement in general confidence in the market going forward.
In terms of dry bulk total trade demand growth is expected to improve by 470 basis points in 2023 to reach a level of positive one 8% on a core basis and improving further to positive two 5% once factoring in the ton mile effect. Please turn to slide 20.
Looking into the details of Drybulk demand on this slide we note that for 2023 forecast for most commodities has improved since our last earnings call.
Iron ore demand growth has been revised upward by 120 basis points to one 8% primarily on an upward revision in Chinese demand of 19 million tons called.
Coal demand has also been revised upward by 100 basis points to two 8% growth for 2023 and increased demand from India for both thermal and coking coal as well as an increase in Chinese seaborne demand for thermal coal.
Demand for minor Bulks is generally holding steady with an overall upward revision of 30 basis points to 0.8% growth on an absolute basis for 2023.
In terms of grain trade demand growth has been revised to three 1% in 2023.
Significant year over year improvement, it's a downward revision of 270 basis points compared to the growth forecast.
February this revision is primarily due to a decline in Argentine crop yields caused by drought export levels. This year from all of the grain exports are expected fee growth of about six 5% around the same levels forecast in February .
We should note also that current grain forecast include a meaningful increase in Ukrainian exports for 2023, which assumes the U N grain agreement will continue.
As has been in the recent news the official extension of the agreement. According to UN Brunswick till July , but Russia is only acknowledging an extension through may 18th and has recently signaled that it will not agree to another extension if a list of demands to facilitate Russian grain and fertilizer exports is not met negotiations are.
Ongoing and the outcome of these will be impactful.
Eventual export volumes.
While overall demand has been challenged in recent quarters due to various reasons, it's worth reiterating that drybulk demand has grown on a ton mile basis in 20 of the last 22 years and we believe there is considerable upside to the current growth forecast, where macroeconomic and geopolitical headwinds abate.
Please turn to slide 21 for a recap.
Given our exclusive focus on the mid sized segment with an ability to carry all drybulk commodities and a commercial platform with a track record of meaningful outperformance, we continue to be in an optimal position to maximize utilization and capitalize on a rapidly evolving environment looking forward, we remain positive about.
The medium term prospects for the Drybulk industry, particularly given strong supply side fundamentals with a fully modern fleet of 52, predominantly scrubber fitted vessels and over $250 million of liquidity at quarter end <unk> is in a unique leadership position to continue to take advantage of opportunities and we're looking forward to continuing to deliver.
Superior results for our stakeholders that large with that I would like to turn the call over to the operator and answer any questions that you may have.
Operator.
And as a reminder to ask a question.
Please press star one on your telephone and wait for your name to be announced.
The other question simply press Star one again, please standby while we.
Get our Q&A queue.
One moment for our first question that comes from Omar <unk> with Jefferies. Please proceed.
Thank you Hey, guys good morning.
Thanks Marni update.
Yeah, Gary you spent a good amount of time talking about the about the market and just wanted to see if you could expand just a bit more on that one of the two.
Sort of get your sense on the pulse of the market you highlighted that the first quarter represents.
Hopefully the bottom for the year.
How do you think about how rates are going to progress from here.
Obviously, we've seen the bounce rates are still not that exciting, but it does seem that were.
Fundamentally in a tighter spot than we were but I just wanted to see if you could expand a bit more on how you think the rate structure of the market will.
We will proceed as we kind of move forward here over the next couple of quarters.
Sure I mean I think.
Youre right its not particularly exciting.
We are but we're seeing we see demand growth this year right, which is as important against last year, which was one of the two negative years in the last 22 that I talked about on a ton mile basis, and so we're seeing we're seeing growth in things, particularly light Green Brazil.
Brazil exports.
Moving up to China, China is importing more soybeans, we've seen Indonesian coal exports to China are up significantly in the first quarter. So it is definitely positive momentum here, but it's taking time I mean, the China reopening.
I think we all expected it was going to take time.
For the economy to come back and their stimulus, but that takes time to work through the system. So we're seeing we're seeing.
Good demand overall, our ships, which we do a lot of cross trading between the Atlantic and the Pacific We're seeing meaningful amounts of cargo flows in both directions, which is helpful, especially from an operating standpoint in terms of outperforming the market, bringing ships into areas that we see moving moving upward in advance and things like that.
<unk>.
We'd all love it.
So move more quickly than it has but I think it's notable right that the market bottomed out in mid February at below 7000, and were up significantly and as I mentioned in my prepared remarks.
Market remains in contango so so.
We're positive and any time you talk about rate development I just think it's we always go back to the supply side I would say it all the time, it's all always in my career.
Five years, it's always about supply and the order book is just incredible really low against that rapidly ageing fleet. So so it may take a little bit longer than we all would like but directionally really positive and the supply side is really supportive of future rate development.
Good color and then maybe just to touch a bit more on the you mentioned the S&P market and how it's been active and you took advantage. Obviously you got the nice gain on those three opportunistic supermac since you bought a couple of years back.
How is the S&P market here currently is it still fairly active and how should we think about eagle.
Going forward I know you guys have been obviously bid the fine tuning the fleet should we expect the same.
Going forward.
Yes, so the S&P market is really robust, especially when we talk about the fact that rates are better, but they're not they're not rocketing up and I think it's because people see the same dynamic right that the relative value of a second hand vessel on the water, earning positive cash flow from day one against against.
If you go and order a ship today Youre looking at two plus two to three years out depending on on when where youre going to build that ship and so that's why we are seeing and we also mentioned we're seeing a lot of investments outside of traditional dry bulk owners as people look to redeploy and diversify our capital so no not a data.
In my mind.
Second hand market is bid right now and we're seeing values move up from from where we were and I think I think we continue continue to see that.
In terms of ego I think I'll use the word we used in our prepared remarks very opportunistic we saw when the market came off at the latter part of last year.
And although there is uncertainty in the market, we decided to act.
Trying not to perfectly time, the market, but cost average at that point and notwithstanding a week.
Q1, we saw a lot of people come into the market and move up. So I think we'll continue to look at that we don't feel a lot of pressure to go out and continue to buy a certain number of ships, but as we see opportunities based on where we see the market we have the ability.
Got it great. Thanks, Gary I'll turn it over thank you. Thanks.
Thanks, So in Q1 moment for our next question. Please.
And the question comes from the line of Ben Nolan with Stifel. Please proceed.
Thank you.
Good morning, Gary.
Been a long time I'm happy for you so.
The.
I have a couple of questions. The first is from a macro level. There is there has been.
Eagle in particular.
Was hit by.
The lack of trade liquidity and being able to get letters of credit are actually customers being able to get letters of credit doesn't feel like that's happening right now, but im curious if that has been at all.
Something that you've run into or something that you'd be concerned about given all the big financial institutions that are.
Yes.
Pretty volatile at the moment.
Yes, so no doubt I remember 2008, well.
We haven't seen absolutely anything at all.
In terms of inability for people to transact.
Obviously, a lot of headlines and concern around around macro, but but I can say on the desk and I'm sitting here next to our Chief commercial officer is looking at me as well and not in we haven't seen any impact whatsoever in terms of trade.
Trade credit.
Okay, that's good to hear.
And then as it relates to capital allocation I know you guys have that.
The dividend policy in place but.
Asset prices have been going up the share price has been going down any thinking about maybe opportunistically either with the convert into shares just saying, okay well.
The.
The more expedient or higher value use of capital is.
Is something in <unk>.
Back of either of those two maybe as opposed to.
Dividends.
Yes look I mean, I think our.
Our board.
Followed through with our dividend policy.
Right right right down the middle so to speak with the Tencent I think our view our view is that the capital allocation policy that was put in place at 30% or the 10% minimum was done so that we had capital the ability to use it as as best for the benefit of our shareholders.
And in the fourth quarter last year, we did buyback some convert and given the weakness in the shares. It is definitely something that is a possibility as well as we have a $50 million share buyback authorization to so as I like to say, it's a matter.
Nothing to report at this time, but these are definitely options in terms of.
Returning capital to shareholders through various means and fully appreciate the value of a buyback. The one thing on the convert side as I mentioned this I know at least one time previously is that the negative carry at the moment against cash rate given given the positive interest that we're able to achieve.
Cash in the bank, whereas when you buy back the convert the value includes.
Future coupons, so that all goes into our calculus, but absolutely we're fully.
Not just aware, but but we're evaluating all possible uses of capital for the benefit of the shareholders.
Okay.
And then last on my end.
Early on you mentioned.
Sort of retooling.
Sure.
The labor side of things and sourcing.
Sailors from other parts of the world other than eastern Europe .
And you did say that there is going to be a couple of quarters of cost associated with that I'm curious from a longer term perspective, though.
Is it neutral too.
The cost of labor or.
Does that maybe enable you to actually save a little money on.
Crewing.
Yes, we think this will be beneficial from a cost perspective, and it's not just around the.
Actual actual salaries paid but.
Crew repatriation costs have been extremely high given given the war in Ukraine.
Around eastern Europe , and so that's part of it length of duration onboard ships is also different which impacts the cost per per contract. If you will because people will tend to stay on longer. So overall directionally. We think this will be beneficial to our opex cost going forward.
Once we get through it.
Worth, noting that as Kosta gave in his remarks in terms of guidance.
In our solar we expect.
Next quarters, our second quarter Opex.
Effectively in line with first quarter inclusive of those numbers.
That's why the trends transition over.
Alright cool.
I appreciate it thank you guys.
Great. Thanks, Pat.
Thank you Sorry reminder, ladies and gentlemen to ask a question simply press star one one to get into Q1.
One moment for our next question.
And it comes from the line of Liam Burke with B Riley financial Please proceed.
Yes. Thank you good morning, Gary Good morning Kosta.
Good morning.
Gary on the macro you talked about call being a driver of demand.
Is this a function of just overall consumption or are you looking at a combination of consumption and longer ton miles here.
Yes at the moment, we've seen in the first and into the second quarter, it's really been a function of more volume.
<unk> import.
Has increased significantly, particularly Indonesian coal.
<unk>.
At the last.
Few quarters ago kind of in the early days of the invasion of Ukraine, We're moving coal Indonesian coal.
<unk> Europe .
That's abated.
Superman Ultra Max side, I think there is still no there's still a significant amount of coal moving in Europe .
Similar to last year's volumes, but it tends to move on the larger sizes. So the increase in coal movements for us have been primarily Indonesian coal exports year to date.
Great and as you look I mean, obviously, we're dealing with volatility in commodities, but.
Moving into the second half of the year is there anything that concerns you more or less in terms of overall end market demand.
No I think the concerns going back to two.
Ben's comment is more about macro.
And.
Global GDP growth and shocks to that but in general.
As we think interest rate.
Increases abate and those those headline risks hopefully abate as well that will just continue to see it. So theres nothing in particular, that's concerning to me out there we across the board, we see growth across the commodity spectrum ton mile as well, bringing it up to.
Around two 5% this year, which we think is well not.
While not robust is healthy, especially against the supply side, then that supply side expected.
Coming to the market, which is which is going to reduce going forward in the second half of the year and into the first part of 2024 as well.
Great. Thank you Gary.
Thank you, thank you and with that ladies and gentlemen, Thank you for your participation in the Q&A I will turn it back to Gary Vogel for his closing comments.
Okay. Thanks, very much operator, we don't have anything further at this time, so I'd like to thank everyone for their time and joining us today and wish everyone. A good weekend.
Thank you ladies and gentlemen, this concludes the conference call and you may now disconnect.
Okay.
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