Eagle Bulk Shipping Inc. (EGLE) on Q1 2021 Results - Earnings Call Transcript
Operator: Greetings, and welcome to the Eagle Bulk Shipping First Quarter 2021 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 call 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'd like to welcome everyone to Eagle Bulk's first quarter 2021 earnings call. To supplement our remarks today, I would encourage participants to access a slide presentation that is available on our website at eagleships.com.
Frank De Costanzo: Thank you, Gary. Please turn to Slide 10 for a summary of our first quarter financial results. The continued improvement in the chartering market and our short duration profile drove our top line growth in Q1 with revenue net of both voyage and charter hire expenses totaling $61.5 million, an increase of 23% from the prior quarter. Net income came in at $9.8 million for the first quarter, our most profitable quarter in more than 10 years. Earnings per share or EPS for the first quarter was $0.84 on both a basic and diluted basis. Adjusted EBITDA improved in Q1, coming in at $31.5 million as compared to $22 million in the prior quarter, and $18.8 million for the first quarter of 2020. Let's now turn to Slide 11 for an overview of our balance sheet and liquidity. Total cash inclusive of $4.5 million of restricted cash was $80.7 million at the end of Q1, representing a decrease of $8.1 million as compared to the year-end. The decrease in cash was primarily a result of the $7.8 million principal payment on the Ultraco Debt facility, and the repayment of $15 million for the Super Senior revolving credit facility.
Gary Vogel: Thank you, Frank. Please turn to Slide 16. As I indicated earlier in the call, spot rates are at the highest levels in over 10 years. During Q1, the Atlantic Supramax market averaged $20,398 outperforming the Pacific over 35%, roughly in line with long-term historical averages. The strength in the Atlantic market was broad based, but in particular, robust grain shipments to China, pet coke from the U.S., and manganese ore from West Africa help drive increased demand. More recently, it's interesting to note that the Pacific markets been outperforming the Atlantic since late March and is now about 25% higher. Although Pacific outperformance occurs from time to time, it tends to be during weaker markets. The fact that we're seeing this phenomenon in a robust rate environment is due to a confluence of events. Firstly, I think it underscores how strong trade volumes within the sub region is, with Chinese steam coal imports being a significant contributor. With coal prices reaching multi year highs and domestic demand elevated, Chinese loosened import quotas in order to bring in seaborne imports. And with the Chinese effective ban on Australian imports still ongoing, exporters such as Indonesia and Malaysia have been benefiting, which is positive for Supramax and Ultramax tonnage, which tend not to participate in the Australian trades.
Operator: Our first question will come from line of Omar Nokta from Clarksons Platou. You may begin.
Omar Nokta: Thank you. Hey, guys, good morning, Frank and Gary.
Gary Vogel: Good morning.
Omar Nokta: Good morning. Yes, nice results, obviously for the quarter and definitely looks like some really strong ones coming up here. And just wanted to ask maybe about the fleet here at -- at Eagle, here in the past several months, you've been fairly active fine tuning the fleet. You sold some of the older ships a while ago, and you've been replacing them with the seven newer vessels. And as you highlighted, those have turned out to be very well timed, especially considering what the S&P markets done since, I think, you spent just under $100 million on those vessels, and they're probably worth closer to $140 million. And so you're pretty active in the fourth quarter and into February. But over the past 3 months or so, at least from our side on the -- from the outside it looks like you've kind of quieted down the acquisitions. Where are you at the moment in terms of the fleet? Do you still expect to be busy on the acquisition fronts here in the coming months?
Gary Vogel: Yes. Well, thanks for that. I mean, it's funny, we don't feel like we've been quiet. But you're right, we haven't acquired any more ships since February in the last few months. As I said in our -- in the prepared remarks, we think that asset values are trailing based on the current market. And really the most important thing for that is the forward curve, which continues to push up. Next year is now trading close to 15 and 2023 is moving up to mid 12. So, as people get more confidence in the forward market, we think asset values have potentially considerable upside. So we are looking as we always do, we're looking at further acquisitions. We feel comfortable where we are with our 52 ships. We only have three ships remaining that over 15 years old. Ultimately, those are sales candidates as the other older ships have been. But really in our mind it's about obtaining fair value based on where we think, the cash flow generation is for those ships in the forward curve. So we're not there yet. But ultimately those ships likely will be monetized and very likely will continue to require ships on a targeted basis.
Omar Nokta: Thanks. That makes sense. And that you brought up the FFAs, and I think it's interesting, given rates overall on the spot market are much stronger, the FFAs are much more liquid, and we're seeing a bit more time charter activity, so liquidity there. And as I look at the results, it looks like your trading business, you had an average charter in cost of, say, just under $13,000 a day, but you earned 15, little over 15 fleet wide. So call it a 2,000 a day spread and that looks like a comparison, something in the a few $100 per day in several quarters in the past. Maybe first thing -- first question just off that is, is that a good way to think about the performance of the trading business? Just looking at the TCN average rate versus kind of the overall average have gotten for the fleet?
Gary Vogel: Yes, I would actually caution that because it's a very dynamic model, and it includes derivatives that we use to hedge away market risk and keep optional periods. And based on market development, obviously, in an upward rising market, you tend to declare options and keep ships longer. Conversely you don't in a falling market. I think if I were to be trying to figure out the premium, I would look at the historic and apply some percentage of that, that I was comfortable with going forward. But on a specific number of ships and margin. I think there's too many variables that come into play.
Omar Nokta: Yes, that makes sense. Thanks. And I guess, do you think because of all the liquidity that we are seeing in the market, do you think that this trading piece is going to start to become a much bigger element for Eagle going forward? Do you think you'll ramp that business up?
Gary Vogel: For us, it's always about risk reward, every position. We're always looking to arb between a physical ship a cargo potentially using a derivative. But it's really about risk reward where we see the value of that trade. So given the volatility, there's more opportunities to trade. But again, it also depends on, as I said, what the risk profile is of that. So likely I think we'll get back to levels we saw in terms of charter and pre-COVID. We're still not there yet. And that was really hampered last year, when it was all about just keeping cargo and keeping your own ships moving. I think you will see some growth, but it's not growth for growth's sake, just for the benefit of -- I know, you know, but for the benefit of others listening, we don't value from our charter and business based on volume at all. Ultimately, it's about a net P&L that gets applied to our own fleet. So we're only doing it not for volume sake, but if we can trade that around and increase the overall value of our own tonnage. And we do think that people own Eagle because we're an owner of Supramax and Ultramax vessels, and then we try and build on that earnings over and above index returns, but we're not going to build a separate operating arm that becomes, call it, outsized to our owning position.
Omar Nokta: Got it. That's pretty clear. Thanks for that, and I'll turn it over.
Gary Vogel: Great. Thank you.
Operator: Our next question comes from line of Randy Giveans from Jefferies. You may begin.
Randy Giveans: How you gentleman are doing?
Gary Vogel: Good morning, Randy.
Frank De Costanzo: Hi, Randy.
Randy Giveans: Good morning. So, I guess, following up on that, with the forward curve being pretty robust. Obviously, you've given pretty strong quarter-to-date rate guidance at a 10, 11 plus year high. For that 71% for 2Q, were there any short-term or medium-term time charts locked in? And then obviously with the forward curve still elevated, will you look to do any of those 6 to maybe 12 months time charters?
Gary Vogel: Yes, so we don't typically disclose our chartering book and charter out. It's all part of our mix. As I've said before, we prefer to operate our own vessels on voyage basis and what have you. Having said that, if we're paid fair value for rewriting a ship on time charter for a short period versus selling an FFA to lock in a revenue stream, then we'll do that. I mean, as an example, I'll give you one. We fixed one of our ships recently, Singapore Eagle for minimum 6 to about 8 months to try and limit the redelivery window to a minimum 6 instead of about at 24,000. But if it redelivers in the Pacific, it's $27,000. So just to give you an example, we do relet our ships as part of our portfolio approach, but it's not our go to move. So it's a combination of voyage business, time charter, mostly short FFAs and the mix of all of those. But we're definitely with an elevated forward curve, we are managing the book going forward and walking in certain cash flows. But at this point, beyond that, I'll leave it to the quarterly guidance within the quarter that we've provided.
Randy Giveans: Got it. Okay. And then obviously on the balance sheet front, continuing to improve, you've added some new debt. You've closed on that, I think, is $35 million credit facility. So is that building liquidity solely for more kind of acquisitions? Or at this point are you looking to further delever the balance sheet or paying down debt? And if the latter, do you have any kind of net debt to loan kind of leverage ratio target?
Gary Vogel: Yes, well, I mean, the answer is we come in every day asking ourselves, what's the best allocation for capital? And as you mentioned, given the guidance, there's significant positive cash flows at the moment. So, I mean, one thing is definitely delevering. We were positive going into 2020 and then we had COVID. Unfortunately, having a stance with undrawn revolvers and unencumbered assets, couple Ultramaxes that we put bank debt on, enabled us to go through the pandemic without taking extraordinary measures or anything that was expensive, detrimental. We put leverage on at LIBOR plus 250 onto those Ultramaxes. We want to get back to that kind of defensive stance, and I say defensive in the sense that having that dry powder against what I think is what we deemed to be an appropriate measure of leverage. But as we go forward, we're looking at opportunities. As I said, we think there's upside in asset values and we look to opportunistically continue to renew and now grow the fleet. But delevering is definitely something we want to do. You will note on the last three Ultramaxes, the depth that we brought on as a revolver and so I think long-term you would see -- not long-term, but I think aside from our traditional revolver we had, I think you'd see us look to pay that down. And once we did that on those three ships, you would end up with unencumbered assets, which is something that in my experience in dry bulk, it's always good to have unencumbered access. They're essentially a performing proxy for cash in many respects. And I think that's a good thing to have in a business that sometimes surprises to the downside.
Randy Giveans: Yes. Makes sense. Well, that's it for me. Thank you.
Gary Vogel: Great. Thank you.
Operator: Our next question comes from the line of Liam Burke from B. Riley. You may begin.
Liam Burke: Thank you. Good morning, Gary. Good morning, Frank.
Gary Vogel: Good morning, Liam.
Frank De Costanzo: Hi.
Liam Burke: Gary, you mentioned in your prepared comments that there had been some offset or positive offsets with taking some container cargo on the dry bulk. Is that a meaningful shift and is that sustainable?
Gary Vogel: Yes. Well, I'll start with the bladder part. It's a good question. And I think I would defer to the comments from the container like saying they believe that this will continue, I believe, into the fourth quarter was a statement and other players, that's not our arena. Having said that, it's definitely meaningful. I mean, when you see ships fixing from the far East into the Atlantic at $25,000 in our size, that -- those are numbers that historically trade at some -- sometimes call it 40% of the market, even less. So, you're seeing a total shift in that because the positive is it's not to the detriment of the Atlantic, it's simply that the Pacific market is elevated and I gave some examples of those. So I think it's sustainable as long as we see this dislocation in the container market, and -- but how long that goes, like I said, not really our area, but I'm an interested reader of everything that comes out of the container world in that regard, because it is having a profound effect on both our rates, but also our trading patterns.
Liam Burke: Great. And on the operating expenses, I think Frank mentioned that there was some COVID related increases. Do you see -- once those correct, I know it's difficult to continue to drive down operating costs. But do you think you continue to manage down on those operating expenses?
Gary Vogel: Well, the answer is yes. I mean, unfortunately, the COVID expenses are -- they continue. And in fact, I would say, some of it is -- not most of it, but some of the incremental expense on that is self imposed when the ships now are roughly $1,000 an hour to run a ship. Having off hire because of crew has an issue in terms of a crew change and holding a ship back for a day, day and a half is really meaningful, much more meaningful than the incremental cost of a couple days of being early and making sure the crew is tested and ready to go. So, we're taking steps to ensure that the ships keep moving, especially now because they're generating significantly more, which means of higher cost significantly more as well. So going forward, yes, we're taking initiatives to cut OpEx and that's an imperative. I've said before, OpEx is an output, it's not a target. We can get to a target number very quickly. But the most important thing is to run ships that are safe, compliant and also reliable. So -- but we absolutely are looking to improve on the OpEx numbers. But I'll leave it at that.
Liam Burke: Thank you, Gary.
Gary Vogel: Thank you.
Operator: Our next question will come from the line of Greg Lewis from BTIG. You may begin.
Gregory Lewis: Hey. Thank you and good morning, good afternoon, everybody. Gary, I was kind of curious and I think you've touched a little bit on it in your prepared remarks around the coal trade. I mean, clearly, we're reading a lot of headwinds around India, in terms of some of the slowdown that they're having, issues around COVID. Is that -- what is -- has that creating any kind of disruptions, dislocations in the coal trade in that region in Southeast Asia?
Gary Vogel: Yes, I mean, well the answer is getting a little feedback here, can you hear me?
Gregory Lewis: Yes.
Gary Vogel: So Q1, not at all. In fact, India coal was back to pre-COVID levels. Having said that, with -- obviously the humanitarian crisis that's going on there now, we absolutely expect that there'll be a reduction in coal consumption and coal trades. But we haven't seen it in a measurable way yet. But we expect Q2 will be impacted to some extent. The one thing about the coal trade in the Pacific is it's a short haul trade, right? So it doesn't have the same impact over the volumes in terms of numbers for us. It's about 14% of what we carry coal in general, majority of that being to China. But it's shorter haul, so it doesn't have the same impact on a ton mile. One interesting thing I mentioned in the prepared marks that we don't participate in the Australian coal trade, but we have seen an example where we're actually finalizing terms on a trade at the moment from met coal from the U.S Gulf to China on an Ultramax vessel, that is definitely not a trade, we typically would see that we're benefiting from and clearly that's a long haul trade. So there are dislocations in the market at the moment and not -- for the first time in a while in dry bulk they're not all negative. We're seeing some positive offsets to those negatives.
Gregory Lewis: Yes, absolutely. And then just real quick, I mean, we're tracking as is everybody the fuel differentials. Just as economies, I guess the side have started to open off, has that created any problems around sourcing back pre IMO days was, is there going to be -- is there going to be high sulfur fuel available, is there going to be low sulfur fuel available at this stage now that economies are starting to reopen. Have you noticed any potential sourcing issues on the fuel side?
Gary Vogel: Absolutely the answer is no. We have not. And I think the fuel spread has continued to widen and we believe as air travel and particularly long haul international travel comes back, then aside from crude pricing overall that spread should -- will likely widen which is why we reversed our 2021 hedges earlier at the end of last year. So we're comfortable where we are today it's around 110, next year around 130. But we think there's upside to that as things open up. But from an operational standpoint, fuel availability, no issue whatsoever.
Gregory Lewis: Okay. Thank you all for the time. Have a great day.
Gary Vogel: Thank you. You too.
Operator: And I'm not showing any further questions in the queue. I like to turn the call back over to the speakers for any closing remarks.
Gary Vogel: All right. Thank you, operator. We don't have anything further today. So I'd just like to thank everyone for joining us and wish everybody a good day.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
