Eagle Bulk Shipping Inc.

Thank you. Thank you. Greetings and welcome to the Eagle Bulk Shipment Third Quarter 2020 Results Conference Call. At this time, all participants are in the listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. To ask a question during the session, you would need to press star 1 on your telephone. Should anyone require any further assistance, please press star 0. 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 DiCostanzo, Chief Financial Officer of Eagle Bulk Shipping. Mr. Vogel, you may begin.

Thank you, and good morning. I'd like to welcome everyone to Eagle Bolt's third quarter 2020 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. 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 risk 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 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 reconciliation to the most comparable GAAP financial measures. Please turn to slide five. As we have discussed before, this year, seafarers endured a great deal due to COVID-19. Government-imposed travel restrictions, which were put in place in order to curtail the spread of the virus, created substantial challenges with respect to being able to effect crew changes and repatriation. requiring many seafarers to work well past their contractual employment periods. While many hurdles still exist, thankfully, travel restrictions have eased in some countries, allowing for crew changes to take place. However, it's estimated that more than 300,000 seafarers are still waiting to go home, and as I've spoken to before, this is simply not acceptable. At EGLE, it has been a strategic priority to relieve our seafarers which were overdue, And in this regard, I'm pleased to report that we have now been able to change over the vast majority of our crew, where today only 26 seafarers out of about 1,000 are beyond their contractual working period. Of course, we remain focused on getting this number down to zero. In order to achieve this result, we had to divert some of our ships and or incur additional off-hire, which came at a cost. During the past quarter, we incurred approximately 40 incremental off-hire days related to such crew changes, equating to almost $400,000 in lost revenue. And in addition, crew changes have been costing about 50% more than normal due to such things as extended hoteling, COVID testing, and more expensive travel costs. This impacted our OPEX by about $187 per day during the quarter, given both the cost mentioned and the elevated number of crew changes affected. These costs notwithstanding, we felt it was our obligation to Eagle seafarers and simply the right thing to do. Please turn to slide six. Our markets continued on a recovery path during the third quarter, with the BSI ending September at 10,943 and averaging 9931 per day for the full period, representing an increase of 81 percent as compared to the prior quarter. We believe the recovery trend is reflective of the normalization in trade demand, as well as the result of general easing important trade restrictions. The market's been further supported by general stimulus measures in China, as well as a robust grain trade, which we'll discuss later on in the call. Eagle generated a net TCE for the third quarter of $9,620 per day, up $400 per day from the level communicated during our earnings call in August, and up 20% quarter on quarter. representing a small beat against the market. As we have discussed in previous calls, it's challenging to catch and beat a rapidly rising market due to the fact that a number of days are fixed in advance and where voyages average about 45 days in duration. In addition, as we've spoken about previously, given the volatility and weakness in the markets earlier on in the year and lack of visibility due to COVID-19, we increased our hedge position for the second half of 2020 in order to provide us with appropriate downside protection. While this negatively affected our performance for the quarter, we believe it was a prudent thing to do and it was more than offset by the positive contribution from our platform methodology as well as operating scrubbers on the majority of our fleet. As we have always advocated, performance is best measured over multiple quarters. In this regard, inclusive of Q3, Our last 12 months average outperformance stands at $2,101 per ship per day, equating to approximately $37 million in incremental cashflow on an annualized basis based on our current fleet size. Additionally, while the outbreak of COVID-19 and the OPEC price water negatively impacted fuel spreads, by our calculations, we've generated more than $23 million on our scrubber investment in just the first nine months. Looking ahead, As of today, we have fixed about 73% of our available days for the fourth quarter at a net TCE of $11,275 per day, which as of today represents a significant outperformance once again. Please turn to slide seven. The top line growth we experienced in the third quarter contributed to an improved operating performance for the period as represented by EBITDA, which totaled $11.5 million. Please turn to slide eight. As part of our ongoing fleet renewal program, we have reached agreements to sell three of our vintage supermaxes, the Osprey, Shrike, and Skua, all built between 2002 and 2003. Gross proceeds total $15.4 million, with all three sales expected to close during the fourth quarter. It is important to note that each of these sales were affected just months ahead of their statutory dry docks and installation of ballast water treatment systems, saving a total of about $4.2 million in related dry dock and capex costs. Inclusive of the above, over the past four years, we have renewed 43% of our fleet, having acquired 20 Ultramaxes and sold 18 Supermax vessels. These S&P transactions have vastly improved our fleet makeup. The average size of our ships has increased, the average age of our fleet has remained fairly static over the period, and As illustrated in the graph on the lower right-hand corner of the slide, our fleet emissions profile has significantly improved as measured by fuel consumption per deadweight ton. We plan to continue to execute on our fleet renewal and growth program on an opportunistic basis. With that, I'd like to turn the call over to Frank, who will review our financial performance.

Frank Moyer Thank you, Gary. Please turn to slide 10 for a summary of our third quarter 2020 financial results. The improvement in the underlying spot market drove top-line growth in Q3, with revenue net of both voyage and charter hire expenses totaling $43.5 million, an increase of 50% from the prior quarter. In Q3, our TCE came in at $9,620, which is $191 above the adjusted net BSI of We incurred a net loss of $11.2 million for the third quarter, equating to a loss per share of $1.09, both basic and diluted. Please be reminded that we have completed a one-for-seven reverse stock split effective September 15, 2020. The earnings per share number is reflective of the reverse stock split. As a reminder, our hedge positions, excluding the interest rate swaps, do not receive hedge accounting treatment, and as such, the mark-to-market changes flow through the income statement as other expenses. As would be expected, adjusted EBITDA improved in Q3, coming in at a positive 11.5 million. It is worth noting that our profitability in the quarter was reduced by 3 million as a result of changes in our derivative hedge book. Let's now turn to slide 11 for an overview of our balance sheet and liquidity. Total cash, inclusive of $1.9 million of restricted cash, was $85.3 million at September 30, 2020, representing a decrease of $13.3 million as compared to the end of the second quarter. The decrease in cash was primarily a result of the repayment of $20 million of the revolver and principal repayments of $7.8 million on the new ultra-co-debt facility. along with CapEx spending of $2.9 million, in part offset by proceeds of $4.6 million from the sale of the vessel GoldenEye and $12.8 million of operating cash generated. Total liquidity increased to $105.3 million at the end of Q3. Liquidity is comprised of total cash of $85.3 million and $20 million of undrawn availability on the UltraCo revolving credit facility. Total gross debt excluding debt issuance costs at the end of Q3 was $522.4 million. I would note that our UltraCo term loan three-month LIBOR floating rate exposure is fully hedged via interest rate swaps at a blended average of 58 basis points. Please turn to slide 12. for an overview of our cash flow from operations for the third quarter of 2020. At the top of the slide, you can see that net cash provided by operating activities was $12.8 million in Q3, representing a material improvement over the prior two quarters. The chart demonstrates the timing-driven variability that working capital introduces to cash from operations as depicted by the differences between the dark blue bars which are reported cash from ops numbers, and the light blue bars, which strip out changes in operating assets and liabilities, primarily working capital. I believe it is more meaningful to evaluate cash from ops from a year-to-date perspective, which smooths out some of the noise. Cash flows used in operating activities were $12.3 million for the year to date. You will note from the graph that working capital changes have evened out over the nine-month period. Please now turn to slide 13 for a Q3 and year-to-date cash walk. The cash at the top of the slide lays out the changes in the company's cash balance during Q3. Revenue and operating expenditures are a simple look at the operations. The net of the two large bars on the left is positive 14 million, which is close to our adjusted EBITDA number. To the right, you will find a bar covering the $4 million of dry docking costs in capex of $2.9 million. The $20 million bar represents the repayment of funds drawn from our UltraCo revolving credit facility. And finally, the bar totaling $12 million represents the debt principal and interest paid in the quarter. The chart on the bottom half of the slide displays the changes in the company's cash for the first nine months of 2020. Let's now review slide 14 for our cash break-even per ship per day. Cash break-even per ship per day came in at $10,644 in the third quarter. The quarter-on-quarter increases in OPEX, dry docking costs, and G&A were in part offset by a decrease in debt principal repayment. Vessel expenses, or OPEX, came in at $4,784 per ship per day in Q3, $337 higher than the prior quarter. The increase in OPEX per day was a result of the incremental costs related to the increase in crew changes in the quarter that Gary noted. Dry docking came in at $936 per ship per day in Q3, $628 higher than the prior quarter. The increase was a result of an increase in the number of dry docks. Cash G&A came in at $1,596 per ship per day in Q3, up $268 from Q2. The increase was attributable to the office-based employees returning to the office in the quarter, along with a decrease in owned days due to the sale of the GoldenEye. It is worth noting that our G&A per ship calculation is based on our owned vessels, whereas we operate a larger fleet, including our chartered-in tonnage. In this regard, if we were to include the chartered-in days in our calculation, G&A per ship per day would be $1,428 for the quarter. Cash interest expenses came in at $1,611 per ship per day in Q3, which was flat quarter over quarter. Cash debt principal payments came in at $1,718 per ship per day in Q3, $765 lower than the prior quarter. The decrease is attributable to amortization repayments on our Norwegian bond debt, which are paid semiannually in Q2 and Q4. This concludes my comments. I will now turn the call back to Gary.

Thank you, Frank. Please turn to slide 16. Here, we depict the BSI year-to-date performance as well as the BSI for 2019 and prior years. As we had indicated on our last earnings call, the market continues to be trending similarly to years past, once stripping out the impact from COVID-19, essentially the period between late March and June. Here to date, the BSI averaged $7,717 with current spot trading above $10,000 or roughly $6,000 higher than the low reached in April. Please turn to slide 17. One standout in an otherwise negative year demand-wise has been the increase in grain volumes. The global seaborne soybean trade is expected to reach 161 million tons for calendar year 2020, an increase of 9% as compared to the year prior. This is primarily due to significant pickup in imports by China as the country's pig population continues to recover post the African swine fever epidemic. Aside from an increase in global volumes, U.S. exporters are specifically benefiting from this increase. This is attributable to both the lack of availability of beans from Brazil, as well as the phase one trade agreement reached between the U.S. and China back in January. The dark blue line depicts total U.S. soybean exports for the current marketing year, which began on September 1st, overlaid on the previous four years. As you will note, U.S. soybean exports are tracking ahead of both the 16, 17, and 17, 18 marketing years and far above the last two, which were negatively impacted by both the Asian swine fever and U.S.-China trade war. Looking ahead, the outstanding U.S. sales for export figure currently stands at around 33 million tons, which indicates a continued robust trend. As mentioned, the global increase is based primarily on increase in Chinese purchases. This is of particular note as exports to China when compared to other destinations account for a higher number of ton miles or effective demand. Finally, while squaloring on quantum, we're seeing robust amounts of corn being sold to China with outstanding U.S. sales for export totaling roughly 9 million tons. Please turn to slide 18. Net supply growth increased in Q3, albeit at a slower pace than what we experienced in the prior quarter, with less deliveries hitting the water and more ships going for demolition. A total of 87 dry bulk new building vessels were delivered during Q3, down about 46% quarter on quarter. And offsetting this, a total of 43 vessels were scrapped during the same period, more than doubling as compared to Q2. The pickup in scrapping was very much expected as demolition yards began opening back up after closures in Q2 due to restrictions enacted on the back of COVID-19. In terms of forward supply growth, the overall dry bulk order book stands at just 7%, a historically low level. And when looking at the Ultramax vessels as a percentage of the broader Hanumax fleet, the order book is even lower at just around 5.5%. For 2020, Dry bulk net fleet growth is now expected to come in at 3.4 percent, which assumes scrapping of roughly 16.4 million deadweight tons, more than double what it was last year. A total of 17 dry bulk ships were ordered during Q3, representing the lowest quarterly level in four years. We remain encouraged by the current supply-side dynamics of low ordering and elevated scrapping and believe they will remain favorable for the foreseeable future. Please turn to slide 19. Global growth expectations remain in flux but have been revised upward since our last earnings call, reflecting a quicker recovery in Q2 and stronger expected growth for Q3. The IMF is now projecting global GDP to contract by 4.4 percent in 2020 and then recover by 5.2 percent in 2021. Dry bulk demand growth projections have been revised upward as well, with 2020 now expected to post a decrease of just 2.3 percent as compared to the previous forecast of negative 4.1%. The primary drivers for this improved forecast is increased projected trade in grain and iron ore, as well as in a number of the minor bulks. Notwithstanding uncertainty and the potential for further government actions to slow the virus spread, we remain cautiously optimistic in a continued normalization of trade demand and see our market being a beneficiary from the stimulus measures which are already being put in place around the globe. With that, I'd like to now turn the call over to the operator and answer any questions you may have. Operator?

Thank you. With the prepared remarks completed, we will now open the lines for questions. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by as we compile the Q&A roster. Our first question comes from Randy Gideons with TechBreeze. You may proceed with your question.

Howdy, gentlemen. How's it going?

Hey, Randy. Morning.

Morning, morning. Yeah, well, you know, first, congrats on all the crew changes. I know that's certainly been an important issue for you all, so nice to see the progress on that. Now, looking at the quarter-to-date rate guidance, you know, you mentioned it was well above benchmarks, well above your peers. So just trying to see if you can break this out by Ultramax versus Supermax. And then also, what kind of rates are you earning maybe this week? Are they above or below that $11,275? Just to try to get a sense for the trajectory for the remaining 27%. Yeah.

Well, first of all, I think it's fair to say that this market has been pretty dynamic. It's It was lower than where it is today as we entered the quarter. It hit a high of 10.9, and today the index is around 10 and drifting down. So we don't go into where fixtures are specifically between supermax and ultramax. We do a blend because we trade our ships together. We do have a slide in our appendix which speaks to the fact that our ultramax vessels traded about, depending on where they're built and when, you know, about 10% to 15% higher on a relative basis to Supermax, so you can see where the spread roughly is. But we don't break it out. You know, what I would say is if you look at the spot level and then our ability to outperform, spot is at 10%. You know, we have our platforms and then we have scrubbers. And even though the spread right now is extremely weak, you know, still that adds around $600, $700 per day across our fleet when you amortize the 41 scrubbers and spread it out over our, you know, broader fleet.

Got it. Okay, that's fair. And now, speaking of your fleet, good segue there, you know, it's nice to see that you were able to sell three of those older Supras, especially in this environment, and especially right before their dry docking, so kudos for that. I guess, what are your plans for those four remaining Supermaxes, you know, built prior to 2005? And then on the other end of the equation, in terms of fleet renewal, any interest in an in-block purchase of modern secondhand Ultramaxes?

Yeah, well, first of all, if I talk about the sales and the remaining older vessels, so we've, I think, made it quite clear that selling our older vessels, the ones greater than 15 years, is something we will continue to do, and we look to replace them. We're open to both individual ship purchases as well as larger and block purchases. I mean, we've done both in the 20 acquisitions, a combination, and I think that really will continue. I mean, it comes down to the risk-reward balance at the time, and obviously larger transactions require more capital. So it's a balance in that, but we will continue – excuse me. we'll continue to look to monetize and sell the older assets and renew them and renew the fleet as well as to grow it.

Got it. Good deal. Well, that's it for me. Looking forward to a much better fourth quarter, I'm sure, for everyone. So, thanks. Thank you, Randy.

Thank you. Our next question comes from Omar Notto with Clarkson's Plateau. You may proceed with your question.

Thank you. Hi, Gary and Frank. Just maybe briefly, Dovetailing a little bit on the last question from Randy, maybe just checking on the debt side, Frankie did a pretty good job in the presentation of kind of giving a perspective on the debt that's been repaid, and especially I think the $20 million out of the 55 revolvers been repaid in the third quarter. I know earlier this year there was a lot of uncertainty with the pandemic taking shape and freight rates being low. you took down the revolver to make sure you had a, in part, to have a certain level of comfort, I would think. You know, with that repayment, that $20 million, is that a signal, you know, one that you're feeling more comfortable with the financial situation and the outlook? And then the next question is, you know, do you see paying a bit more of that revolver here in the fourth quarter?

Yeah. Hi, Omar. It's Frank here. Yes, we, I wouldn't say we We meant it as a signal, but you could take it as a signal that, yes, we are more comfortable naturally by paying down $20 million in the quarter. As Gary noted, the environment has improved materially. In regards to Q4, we're looking for opportunities to pay down additional revolver as our cash flow in the market allows. It is important to us to pay that down when the liquidity profile allows it, yes.

Okay, thanks. And then the three supers that you've committed to sell, you know, you're getting 15 and change this quarter. You know, how much of that do you expect to retain after the debt repayment?

Yeah, actually, those three vessels are within, you know, the SHIPCO silo, which is financed by the Norwegian bond. So the proceeds from those sales actually all go into a restricted account, which can be used for purchasing ships or to buy back bonds, either one.

Okay. Got it. Okay. And do you have a sense of what direction you'll go into with those proceeds, buying ships or buying bonds?

You know, no decision per se, but, I mean, we continue to look to renew and grow the fleet. But, again, it's an evaluation based on, you know, opportunities in the S&P market versus the value at which we could buy bonds back. So no decision has been taken yet. Okay. Got it. All right.

That was it for me. Thanks, Gary. Okay. Thanks, Frank. Thanks so much.

Thank you. And as a reminder, to ask a question, you'll need to press star then one on your telephone. Our next question comes from Liam Burke with B Riley. You may proceed with your question.

Thank you. Good morning, Gary. Good morning, Frank. Morning, Liam. Gary, you talked about in the earlier question about obviously the direction of rates are dynamic, but they were trending a little off what you had fixed quarter to date. Is there anything in the macro environment that's changing in terms of trade patterns? I mean, grain is grain, but is there anything changing in the macro that would cause that drift, or is it just daily dynamicism?

Yeah, well, I think the biggest thing right now to point to one would be the headlines about China, you know, restricting coal from Australia. We've seen this, you know, although we don't carry coal from Australia, it's primarily Cape and Camcer Max trade. That clearly has an impact on the market. And in fact, with the With the grain trade being strong out of the Atlantic, it actually based on a comparative basis. You see ships ballasting in, larger ships, Camp Sur Max, ballasting into the Atlantic to carry that cargo on a relative basis. So that's definitely a trade. I mean, fortunately, we have the soybean trade to absorb that, which is really a differentiation from the last couple of years. I mean, this year, the ban on coal is specifically to Australia. I think it takes on these political, you know, But in the last couple of years, we've seen China restrict coal imports on the basis of quotas being met towards the end of the year. And we didn't have the long haul soybean trade from the Atlantic that I talked about from the U.S. for the reasons already mentioned. So, you know, I think that's the biggest thing at play right now on the positive, the grain, the soybean trade, which primarily comes out of the U.S. Gulf. And then on the negative side, the lack of coal imports. you know, from Australia into China.

Great. Frank, you were pretty clear that how you look at your cash flow provided by operations is on a year-to-date basis rather than quarter-to-quarter. But the third quarter, you saw a dramatic turnaround in your cash flow profile. Barring any kind of significant fall-off in rates, would you expect that trajectory to continue into the fourth quarter?

No, no, that was really a catch-up in Q3, you know, the weaker performance from a cash standpoint in Q1 and Q2. So we would expect it to normalize in Q4. Okay, great.

Thank you.

Thanks, Liam.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Gary Vogel for any further remarks.

Thank you, Operator. We have no further comments. I'd like to thank everyone for joining us today and wish everyone a good day. Thanks.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Thank you. you Bye. Thank you.