Eagle Bulk Shipping Inc. (EGLE) on Q3 2022 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the Eagle Bulk’s Third Quarter 2022 Earnings Conference 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. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Gary Vogel. Please go ahead.
Gary Vogel: Thank you, and good morning. I would like to welcome everyone to Eagle Bulk’s third 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 a reconciliation to the most comparable GAAP financial measures. Please now turn to Slide 6. Notwithstanding macro headwinds and heightened uncertainty surrounding geopolitical elements, Eagle was able to post another strong quarterly result, achieving Q3 net income of $77.2 million or $5.94 per share basis. Adjusting for non-cash mark-to-market gains on derivative hedges and other non-cash items net income came in at $74.3 million or $5.72 per share. Based on this result and consistent with our stated capital allocation strategy, Eagle’s Board of Directors declared a cash dividend of $1.80 per share, equating to 30% of earnings. This is our 5th consecutive quarterly dividend bringing total shareholder distributions to $10.05 per share, since we adopted our capital allocation strategy just 13-months ago. Additionally, we opportunistically repurchased approximately 9% or $10 million face amount of our convertible bond debt in the open market. This transaction has not only resulted in a decrease in our debt outstanding, but also in a reduction of our diluted share count by 296,990 shares. I think it is worth noting that we repurchased the bonds when our shares were trading around $41 so we view the transaction as quite accretive in terms of NAV. As part of our ongoing fleet growth and renewal strategy, we acquired a high specification 2015 built scrubber fitted Ultramax for $27.5 million. The vessel was constructed at Imabari in Japan and will be renamed to the motor vessel Tokyo Eagle. Delivery is expected within November. Separately, in August, we closed on the sale of the Motor Vessel Cardinal, a 2004 built Supramax, the ship was sold for $15.8 million pro forma for these transactions, our fleet totals 53 ships averaging about 9.8 years of age with 91% being fitted with scrubbers. Please turn to Slide 7. Our third quarter financial flow results were driven by exceptional top-line performance especially when compared to the underlying market. We achieved a net TCE of $28,099, which represents a decrease of 7% quarter-on-quarter, but a significant increase in outperformance against our benchmark index to almost $9000 or 46% per-ship per-day. Our strong market performance can be attributed to a number of factors including our commercial platform and its dynamic approach to trading ships, our FFA and commercial position heading into the quarter, and our ability to capture significant value from fuel spreads as a result of our fleet scrubber position. As we look forward to the fourth quarter, spot rates are weaker than the Q3 average. But as of today, we fixed approximately 70% of our owned available days for the fourth quarter at a net TCE of $25,040 pointing towards another quarter of significant outperformance against the BSI. Please turn to Slide 8. Our top-line performance helped drive another strong operating result with adjusted EBITDA coming in at 85.1 million after adjusting for the unrealized P&L impact of our hedges and certain other non-cash items. Our trailing 12-month EBITDA run rate remains essentially flat as compared to the last quarter coming in at $364 million very modest EV EBITDA multiple of just 2.3 times. I would now like to turn the call over to Frank, who will review our financial performance in more detail.
Frank De Costanzo: Thank you, Gary. Please turn to Slide 10 for a summary of our third quarter financial results. TCE revenues totaled 128.9 million in Q3 versus 138.2 million in Q2. The decrease was mainly due to lower market rates offset in part by a slight increase in available days. Net income for Q3 was 77.2 million. Earnings per share for the third quarter was $5.94 on a basic basis. On a diluted basis, which primarily includes the shares related to the convertible bond, EPS came in at $4.77 for the quarter. Adjusted net income, which excludes non-cash unrealized gains on derivatives and a loss on debt extinguishment came in at 74.3 million for the third quarter or $5.72 per share on a basic basis. On a diluted basis, we achieved adjusted EPS of $4.58 for the quarter. Adjusted EBITDA for the third quarter was 85.1 million. As Gary noted, during the quarter, we repurchased $10 million in face value of our convertible bonds, which reduced our diluted share count by approximately 300,000 shares. Let’s now turn to Slide 11 for an overview of our balance sheet and liquidity. Total cash at the end of Q3 was 97.6 million, an increase of 56.1 million as compared to Q2 2022. The significant growth in the company’s cash balance was primarily driven by strong operating results as well as the receipt of 14.9 million in net proceeds from the sale of one vessel. These inflows were partially offset by the Ultraco Debt Facility’s quarterly amortization payment of 12.4 million, a 4.1 million deposit paid for the purchase of the Tokyo Eagle, a 14.2 million payment to purchase a portion of our convertible bonds and 28.8 million of dividend payments. Total liquidity came in at 294.6 million at the end of Q3. Total liquidity is comprised of total cash of 197.6 million 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. We intend to use cash-on-hand to pay for the Tokyo Eagle, which will provide us with a fourth unencumbered vessel once the Tokyo was delivered to us in the fourth quarter. Total debt at the end of Q3 was 354.3 million, an improvement of 22.4 million from Q2, driven by the quarterly repayment of the Ultraco Debt Facility and the repurchase of the convertible bonds. We entered into interest rate swaps around the time of our global refinancing in early October of 2021 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 adverse impact of rising interest rates. Please now turn to Slide 12 for an overview of our cash flows from operations for the third quarter of 2022. Net cash provided by operating activities was 102.3 million an increase of 4.3 million from Q2. Strong receivables collection drove the quarter-on-quarter increase. Our working capital management is outstanding as reflected by the company’s strong overall cash conversion cycle. The chart highlights the timing driven variability that working capital introduces to cash flow operations as depicted by the differences 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. Please now turn to Slide 13 for a Q3 cash walk. The chart at the top of 13, lays out the increase in the company’s cash balance during Q3. The revenue and operating expenditures bars provide a simple look at the company’s operations with the net of these two bars totaling85 million which equals our adjusted EBITDA result. Just to the right, you will note the strong working capital result. The convertible bond buyback dividend in the debt service bars, which explain most of the remaining Q3 cash activity. The chart at the bottom of the slide similarly covers the cumulative year-to-date cash movements. Let’s now review Slide 14 for our cash breakeven per-ship per-day. Cash breakeven per-ship per-day came in at $11,931 for Q3. The quarter-on-quarter increase of $190 is due to higher vessel operating costs, offset in part by lower drydocking, G&A, interest expense and debt principal repayment. Vessel expenses or OpEx came in at $6,566 per-ship per-day in Q3, 982 higher than prior quarter. The increase was primarily due to unscheduled required repairs and upgrades to the ships that do not qualify for capitalization. Increased crew travel costs along with higher stores and freight expenses. In short, we continue to face COVID related as well as general inflationary cost pressures. Drydocking came in at $503 per-ship per-day in Q3, $601 lower than the prior quarter as we completed drydocking for only one vessel during the quarter as compared to three in Q2. Cash G&A came in at $1701 per-ship per-day in Q3, down $17 from Q2. 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. If we were to include our chartered in days in our calculation, G&A would improve by almost $300 to $1409 per-ship per-day. Cash interest expense came in at $584 per-ship per-day in Q3, $170 lower than the prior quarter as we realized an increase in interest income on our growing cash balances. Cash debt principal payments came in at $4 lower at $2,577 per-ship per-day in Q3. Looking ahead, we expect the following per-ship per-day in Q4. OpEx is likely to remain elevated at similar levels at circa $6600 per day. Drydocking is expected to decline to $310 on lower drydocking activity. G&A is expected to be unchanged at $1,700. Again, it is worth noting that this figure would be about $300 lower if we were to include our chartered in ships. Cash interest expense is expected to decline to circa $500. Cash debt principal payments is expected to remain flat at $2,577 per-ship per-day. This concludes my comments. I will now turn the call back to Gary.
Gary Vogel: Thank you, Frank. Please turn to Slide 16. Year-to-date, Supramax continue to outpace all of the drybulk segments with the BSI currently averaging just under 24000, the highest January to September market since 2008. As mentioned earlier on the call, freight rates have moderated in recent months, due to a number of factors, including lower global growth as well as uncertainty surrounding the macro landscape, which has impacted aggregate demand and sentiment. In addition, notwithstanding a general cooling of commodity prices, the U.S. dollar strength has kept landed prices of commodities high, impacting purchasing power and trade volumes. Furthermore, notwithstanding the successful implementation of the Ukraine Grain corridor since July, overall grain volumes continue to be impacted by the war and low water levels on the Mississippi River are hindering the ability to get product from the Midwest downriver for export. Another factor which is difficult to quantify has been the reduction of what we call spillover cargoes that we carried as a result of the extremely high container market. While we continue to move some bad cargoes and other commodities that have historically been moving on container ships, volumes are significantly lower than they were a year-ago. Chinese congestion which unwound through the first half of the year remains at relatively low levels, primarily driven by muted short-term trade volumes. This factor also has contributed to lower Pacific freight rates due to more available tonnage. Anecdotally, the Atlantic and Pacific rate premium which is essentially flat in Q3 is now averaging around 35% in Q4 more in-line with the historic relationship. Positively, congestion remains elevated in Northern Europe, as the continent attempts to substitute its energy source away from Russian natural gas. Year-to-date, European seaborne coal imports totaled roughly 138 million tons, up 36% year-on-year. Finally and importantly, dislocations resulting from some of the aforementioned factors have positively impacted ton miles as cargoes such as grain and coal need to move across greater distances from alternative countries of origin. Please now turn to Slide 17. Fuel prices which reached a 10 year high in Q2 came off meaningfully during the third quarter, similar to what we have seen across the commodity spectrum. HSFO and VLSFO averaged $500 and $795 per ton respectively. Although prices were down, the spread between HSFO and VLSFO prices widened in Q3, peaking at more than $400 per ton and averaging $295 for the quarter, up 29% compared to the prior period. Pro forma for the Tokyo Eagle, 48 out of our 53 ships will be scrubber fitted. On an illustrative basis, given Eagle’s fleet, we estimate that our scrubbers will generate approximately $58 million in incremental net income on an annualized basis using the 2022 year-to-date fuel spread figures and the forward curve for the balance of the year. Please turn to Slide 18. Asset prices have come off their peak levels reached in June. Given the significant move up in values over the past two years, cooling off was not unexpected given that we have seen both spot and forward rates correct to the downside. S&P liquidity was thin during the summer months with minimal transactions taking place. As mentioned earlier, in September, we took advantage of the market to liquidity and picked up a modern high specification scrubber fitted Japanese Ultramax for $27.5 million. Based on our calculations, this transaction represents roughly a 20% discount comparable deals done just a few months ago. S&P liquidity has improved over the past month with pricing fairly stable. Looking ahead, notwithstanding short-term volatility, our view has not changed. We remain constructive on the market and asset prices in the medium-term given the positive supply side dynamic. Please turn to Slide 19. Net fleet supply growth slowed in Q2. A total of 99 dry bulk newbuild vessels were delivered during the period, down 8% year on year. Partially offsetting this 13 vessels were scrapped during the same period. Notably for Eagle, just four midsized geared vessels were scrapped during the first three quarters of the year that is four ships out of a fleet of almost four thousand midsize ships. As we have mentioned previously, despite high scrap prices. The low level of vessel recycling is not too surprising given the strength in the underlying spot market over the past two years. A positive from this, is that there is an ever increasing number of older ships that will inevitably need to be recycled during the coming years. In terms of forward supply growth, the overall drybulk order book remains at a historically low level of just around seven percent of the on the water fleet. For 2022, drybulk net fleet growth is expected to be 2.7%, which would be down about twenty five percent compared with 2021. Looking ahead, 2023, net fleet growth is projected to drop further to just 0.6% driven by continued muted deliveries as well as a significant increase in scrapping volumes. A total of 45 dry bulk ships were ordered during Q3 down about 27% compared to the prior quarter and less than half of the average over the last five years of roughly 15 ships per quarter. It is worth noting that the vast majority of ships being ordered today will only be delivered in 2024 and 2025. Although, we expect some level of ordering to continue, we still believe it will remain low for the reasons we have articulated many times before. Please turn to Slide 20. This is a new slide we are including in this quarter’s presentation. It depicts the average age of the Supramax Ultramax fleet going back thirty years overlaid against the order book as a percentage of the on the water fleet. It is interesting to see how quickly the fleet is aging in recent years and will most certainly outpace the historical high reached in 1994. This is not only the result of the decreasing number of new buildings entering the market, but also due to the fact that smaller number of older ships are getting scrapped. As mentioned previously, the order book today remains at a historically low level. Given the relative cost advantage of secondhand ships versus newbuildings, as well as the uncertainty surrounding decarbonization and future fuel propulsion technology, we believe ordering will remain low for quite some time. We believe these dynamics combined with a record low order book with a near record fleet age will further improve the supply side in terms of fleet utilization and scrapping. Please turn to Slide 21. After reaching a multi-year high last year, the drybulk trade demand growth is expected to come in at negative 1.6% for the full year 2022. However, after taking into account the significant ton mile effect, caused by the war in Ukraine, the deficit growth rate improves by 110 basis points. The impact to demand this year is a direct result of global slowdown as a result of high inflation and tighter monetary policy across the developed world, as well as the continuation of China’s restrictive zero COVID policy. For 2023, the IMF is currently projecting global GDP growth to reach 2.7% a decrease of 50 basis points as compared to the current year estimate. In terms of drybulk, trade demand growth is expected to improve by 240 basis points in 2023 to reach a level of positive 0.8% on a core basis and higher when factoring in a positive ton mile effect. Please turn to Slide 22. In evaluating drybulk demand in more detail, growth rates for 2022 are now expected to come in lower for both major and minor bulks. This is primarily driven by downward revisions to volumes in steel, fertilizer, forest products in cement. As we look into 2023, there is great deal of variability in forecasted growth rates amongst the various drybulk commodities. Volumes for infrastructure related commodities such as iron ore, steel and cement are expected to come off basis the current views of weaker Chinese demand and lower global economic activity. Coal on the other hand, which typically represents anywhere from 15% to 20% of our cargoes, is expected to grow by over 2%, and we expect this figure to be even greater when factoring in the increased ton mile effect for this particular commodity, primarily as a result of Europe’s changing energy mix. Additionally, grain, which typically represents anywhere from 10% to 15% of our cargo mix, are projected to grow by 4.3% as Black Sea exports are expected to normalize and grain production led by soybeans increases in both the U.S. and in Brazil. Please turn to Slide 23. Given our exclusive focus on the midsize segment with an ability to carry all drybulk commodities, and a commercial platform with a track record of meaningful out performance I believe we are in an optimal position to maximize utilization and capitalize on a rapidly evolving environment. Looking forward, notwithstanding current uncertainty in the macro landscape, we remain optimistic about the medium-term prospects for the drybulk industry, particularly based on strong supply side fundamentals. With a modern fleet of 53 predominantly scrubber fitted vessels, roughly 300 million of liquidity, Eagle is in a very unique leadership position, and we are looking forward to continuing to deliver superior results for our stakeholders at large. With that, I would like to now turn the call over to the operator, and answer any questions that you may have. Operator.
Operator: [Operator Instructions] And our first question will come from Omar Nokta of Jefferies. Your line is open Omar.
Operator: Our next question will come from Benjamin Nolan from Stifel. Your line is open Ben.
Operator: [Operator Instructions] And our next question comes from Liam Burke of B. Riley Financial. Your line is open.
Operator: Our next question will come from Poe Fratt of Alliance Global Partners. Your line is open.
Operator: And our next question will come from Climent Molins of Value Investor's Edge. Your line is open.
Climent Molins: Congratulations for the outstanding operational performance. Following-up on the questions regarding the convertibles, should we think about the repurchase as kind of a one off opportunity that you took advantage of or do you believe this is something you could repeat going forward?
Climent Molins: Thanks for the color. That is all for me. Thank you for taking my question.
Operator: And I’m showing no further questions. I would now like to hand the call back to Gary Vogel for closing remarks.
Gary Vogel: Great. Thank you, operator. We don’t have anything further, so I would like to thank everyone for taking the time today to be with us and wish everyone a good day and a good weekend.
Operator: This concludes today’s conference. Thank you for participating. You may now disconnect.
