Eagle Bulk Shipping Inc. (EGLE) on Q1 2022 Results - Earnings Call Transcript
Operator: Greetings, and welcome to 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. As a reminder, this conference is being recorded. I would now like to turn the call over to Gary Vogel, Chief Executive Officer; and Frank De Costanzo, Chief Financial Officer of Eagle Bulk Shipping. Mr. Vogel, you may begin.
Gary Vogel: Thank you, and good morning. I would like to welcome everyone to Eagle Bulk's first quarter 2022 earnings call. To supplement our remarks today, I would encourage participants to access the slide presentation that is available on our website at eagleships.com. Please note that part of our discussion today will include forward-looking statements. These statements 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 reconciliations to the most comparable GAAP financial measures. Please turn to Slide 6. 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 their loved ones. Furthermore, a significant number of our seafarer colleagues are from Ukraine, and they are all affected by what is happening to their country and their loved ones. The safety and well-being 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 Supramax Index, or BSI, ranging from a low of about 17,000 to a high of over 33,000, Eagle generated net income of $53 million or $4.09 per share. Adjusted net income, which strips out non-cash 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 in comparing the results of operations. In line with our capital allocation objectives, I'm pleased to report that Eagle's 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've declared over $6 per share in dividends in the last 7 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 7. We outperformed our benchmark index in Q1, something we've consistently been able to do, except in quarters when the market advances very rapidly, and we achieved a net TCE of $27,407 for the quarter. This represents a meaningful delta of almost $3,800 against the net BSI, which averaged 23,611 for the quarter. Looking ahead into Q2, the market has rebounded nicely. And as of today, our index stands at around 30,000 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 58,000 deadweight ton ship has significantly outpaced the Cape Index, notwithstanding the fact that a Supramax 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 or operating larger ships. Illustrative of this continued strength, we've now fixed about 83% of our available days for the second quarter at a net TCE of $29,300 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 Ultramaxes on a time charter at a strong rate of $32,500 per day for a duration of a minimum of 12 months. The ship is expected to be delivered to the charters 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 at around $30,000 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 8. 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 non-cash 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 EV EBITDA multiple of just around 3.6%. Please turn to Slide 9. On the back of almost 1,000 sale and purchase transactions in 2021, dry bulk acid values have continued to appreciate into 2022, and we estimate that the value of Eagle 53 ship owned fleet has increased by about $550 million since January of last year, equating to $40 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 newbuilding 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 the positive supply-demand fundamentals and forward expectations, we believe there's further upside to values given where second hand 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.
Frank De Costanzo: 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 a 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 non-cash 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 and 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 in 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 own 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 Ultraco 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 bars are a simple look at the operations. With the net of these two bars coming in at $85 million, the same as our adjusted EBITDA results. Moving to the right, the working capital bar is driven by the previously discussed timing of collections and an increase in inventories and higher bunker pricing and quantities. The Q4 dividend in the debt services bars are 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 $13,291 for the first quarter. The 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 $5,821 per ship per day in Q1, $207 lower than prior quarter. The decrease was primarily due to lower repairs, stores and spares expense. Dry docking came in at $2,259 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 $1,796 per ship per day in Q1, down $339 from Q4 on lower onetime legal costs. It is worth noting that our G&A per ship calculation is based solely on our own vessels, whereas we operate a larger fleet, which includes chartered and 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 14.95 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 $2,610 per ship per day in Q1, which 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 $5,400. Dry dock to decline to about $800 on 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 1,465 if we were to include chartered-in ships. Cash interest expense is expected to decrease to $765. Cash debt amortization is expected to marginally decrease to $2,581 on higher owned days. This concludes my comments. I will now turn the call back to Gary.
Gary Vogel: Thank you, Frank. Please turn to Slide 17. As mentioned earlier on the call, the BSI traded downward through January, reaching a low of 17,273 on February 2. This was not unexpected as January tends to be the weakest month of the year due to lower demand and activity around Lunar New Year holidays, as well as elevated newbuilding 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 31,000, averaging 25,156 for the quarter. 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 is 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 are regular trades will undoubtedly add to ton mile demand across dry bulk. However, a likely reduction in overall grain movement and impacts to global GDP from both the Russia-Ukraine war and increasing inflation will likely act to temper overall cargo volumes. On balance, when looking ahead, forward curves remain 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. HSFO and VLSFO averaged around $565 and $750 per ton, respectively, for the quarter. With 89% of our fleet fitted with scrubbers, the price differential between HSFO and VLSFO is an important value driver for our business. The fuel price spread between HSFO and VLSFO 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 160, 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 newbuilding vessels were delivered during the period, down 17% year-on-year, partially offsetting this, nine vessels were scrapped during the same period. As we have 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 dry bulk order book stands at a historically low level of just 6.6% and is even lower for the Supramax/Ultramax segment at 6.4%. For 2022, dry bulk net fleet growth is expected to be just 2.2%, which would be 40% lower than 2021, given the rapidly depleting order book and somewhat higher projected scrapping as compared to 2021. A total of 43 dry bulk ships were ordered during Q1, down around 50% compared to the prior quarter and well below the average over the last 5 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. As we have spoken about before, and you can denote from this slide, dry bulk demand is inextricably linked to global GDP. For 2022, the IMF is estimating global GDP growth at 3.6%, which was lower by 80 basis points as compared with our January estimate, reflecting impacts from the Russian-Ukraine war, inflationary pressure, global supply chain issues and impacts of China's zero COVID policy measures. Notwithstanding these factors, it's worth noting that dry bulk demand has grown on a ton mile basis in '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, dry bulk demand growth is expected to be fairly muted this year, but will be offset by an increase in ton miles, the product of goods moved times the distance travelled. This bodes well for dry bulk given the projected low fleet growth we referenced earlier. Importantly, for Eagle, 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 cargo demand growth within minor bulks has translated to rate performance. And year-to-date, the BSI has averaged over 26,000, while the Cape Index has averaged roughly 15,000. Looking ahead, the forward curves for the balance of the year are trading at around 30,000 for Supramaxes and roughly 34,000 for Capes, further supporting the relative performance of the midsized vessels, and as a result, their superior earnings compared to invested capital. We have always and continue to believe that given the flexibility and diversity of cargoes carried, the midsized dry bulk vessel 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 developments looking ahead. In closing, we remain energized about Eagle's leadership position within the midsized 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?
Operator: Thank you. Our first question comes from Chris Robertson with Jefferies. Your line is open.
Chris Robertson: Good morning, gentlemen. Thank you for taking my questions.
Gary Vogel: Morning, Chris.
Chris Robertson: Gary, can you talk about those chock 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 kind of practically for carrying capacity for those vessels and earnings potential?
Gary Vogel: 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 $100,000 to install them on - typically on your average ship. And when a ship goes through the Neo canal, the net earnings after additional expenses right now is about $0.25 million. So you don't know when you're 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 and these chocks, once they're on a ship, they're good for the life of the vessel. So for modern Ultramaxes, it's - I'd go as far as to say it's pretty much a no-brainer.
Chris Robertson: 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?
Gary Vogel: I really can't speak to competitors when we charter in ships. We see it on probably about half the vessels. But it's a capital expenditure with no clear payback in terms of when you're going to get it back. So owners who re-let their ships on time charter aren't going to necessarily get full value for it because how much more would you pay for a ship in for - that you take on for four to six months and likely not going to be able to use it. So I don't think it's one size fits all, but I'll speak from Eagle standpoint, we see it as a clear win, and we're going to keep doing it.
Chris Robertson: Okay. Yeah. Thanks for the color on that. I have a second question just 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?
Gary Vogel: Yeah, absolutely. I think there's inflationary pressures across the board everywhere. And you know, even crew changes, part of it because of increased cost of travel and you mentioned COVID restrictions, extra hotels, things like that. But we've been facing that now for over 2 years. So we're guiding to 5,400, which is down. I think the - this quarter, we had a significant number of ships in dry dock and so there's extra expense around ships in dry dock for some of the stores and spares that you - and work you do that doesn't get capitalized. So 5,400 clearly is above what we would have said was a long-term trend definitely before COVID and the war in Ukraine, but that number is down from where we were in this quarter, which is down from fourth quarter as well.
Chris Robertson: Okay. Thank you very much.
Gary Vogel: Thank you.
Operator: Our next question comes from Magnus Fyhr with H.C. Wainwright. Your line is open.
Magnus Fyhr: Good morning, Gary. Good morning, Frank.
Gary Vogel: Morning…
Magnus Fyhr: Congrats on a good quarter. Just two questions. The first related to the chartering environment. The market looks very strong currently. You've signed a 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?
Gary Vogel: Yeah. I mean as always, right, we take a very dynamic approach. I'd 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 that's for the balance for the second half of the year, it's around 11 ships through FFAs that we have sales against. So that gives us coverage to some extent. And then as you mentioned, the Madison Eagle is a 12-month charter. Last quarter, I talked about a 5-month - minimum 5-month charter that we put in place, but that was for delivery only in April. So that's just starting. So we absolutely have coverage. Having said that, the spot market is pretty dynamic. I mean we just fixed one of our 58,000 deadweight ships just to give you an idea, delivery in the Far East for a trip with steels to the continent at over $40,000 a day, inclusive of the scrubber benefit. And so the long-term charters are attractive, but we're able - when we position ships, and that's what's historically a backhaul. Of course, you're fully aware that given the strength in the container market, the Pacific has been really strong. But that's in a backhaul. And in the front haul markets today, we're in the mid-40s from Gulf to Asia or even - or 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 you'll see us necessarily increasing our coverage, but we do have forward cover, and we'll continue to do so.
Magnus Fyhr: All right. And any change from your clients as far as going longer? Or I mean, do you see any 24-month contracts or their discounts are just not attractive now?
Gary Vogel: No. We don't really see that part of our trade, the kind of long cargo contract trade is 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 that's pretty much been pretty stable over the last few years.
Magnus Fyhr: All right. Thank you. Just another question 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 vessel?
Gary Vogel: Yeah. Well, we only have two ships that are over 13 years old now. And those two ships, we've mentioned are sales candidates. In fact, one is widely known on the market. It's due for a special survey or for dry dock, I should say, in the middle of this year. And we said 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 Eagle positioning itself. So those two ships are likely to be sold. And then we don't have - like I said, we don't have any other ships older than 13 years. So we've done a fair amount of heavy lifting over the years. Yeah, we did sell 20 of our small older ships, but we acquired 29 modern vessels, 26 of them, very modern Ultramaxes. So we don't feel like we need to renew the fleet right now. Prices while we think there's upside to prices, they've more than doubled in the last 12 months, right, since we acquired all of those ships were done prior to that move upwards. So at the moment, we're quite comfortable with where we are in terms of our fleet age and 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 hoping to look at that. But right now, we're quite comfortable where we are.
Magnus Fyhr: All right. Good, good. And just one last question, if I may. You gave some - the actual charter-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?
Gary Vogel: Well, if you look at 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 that we're part way through the quarter, and it's pretty stable in terms of the gray bar that's on Slide 7 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. And 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 ships 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, seven weeks of the quarter, it could change pretty significantly.
Magnus Fyhr: All right. Very good. That's it for me. Thank you.
Gary Vogel: Thank you, Magnus.
Operator: Thank you. Our next question comes from Liam Burke with B. Riley. Your line is open.
Liam Burke: Yes. Thank you. Good morning, Gary.
Gary Vogel: Good morning.
Liam Burke: 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?
Gary Vogel: Liam, I appreciate the question. It's really variable. And I mentioned on an earlier question, right, dry docks drive a lot of this expense. We use the opportunity in dry dock to take care of certain maintenance proactively. And aside from maintenance, doing upgrades. So we have ships that are going into dry dock now, not on their normal statutory cycle. But in order to install ballast water treatment systems because of the regulation, U.S. and IMO. And so while we're there out of service, we could wait and wait on hold, but we could also - we also can spend a few hundred thousand dollars and blast and recode holds because it might be another 2.5 years before a ship is going into its statutory dry dock on a 5-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't capitalize that expense. So that drops to OpEx. And so that's just one example. So there's variability around it. I think the 5,400 right now, 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 dry dock schedule in the fourth quarter and the first quarter, and it's coming off pretty significantly for the balance of the year.
Liam Burke: Fair enough. You mentioned some concern about supply out of Ukraine and Russia, grain. Similar with an lucinalogy to coal, do you see any other alternate sources to partially offset your concerns on the supply side upgrade?
Gary Vogel: Yeah. There's - the expectation is that grain movements overall will be down this year. Our number is 3.5% 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 it's - I think the big question now, which knows the absolute answer right, and that will be well ton-miles will the increase in ton miles supercede the drop in overall volume. And that's, of course, a pretty significant question. And right now, the futures point to the view that these rates are supportive going forward. And so far, we've seen it. I mentioned the fixture we did today on the backhaul and the long-term charter. So it's very much uncharted waters, so to speak, and as it plays out. But at the moment, we're seeing very significant changes in trade, which is adding to ton mile.
Liam Burke: Great. Thank you, Gary.
Gary Vogel: Thank you.
Operator: Thank you. And there are no other questions in the queue. I'd like to turn the call back to Gary Vogel for any closing remarks.
Gary Vogel: 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.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
