Eagle Bulk Shipping Inc.

Greetings and welcome to the 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. To ask a question at this time, please press star, then 1. As a reminder, this conference is being recorded. I would now like to turn the conference over to Gary Vogel, Chief Executive Officer, and Frank DiCostanzo, Chief Financial Officer of Eagle Bulk Shipping, Mr. Vogel, you may begin.

Mr. Thank you, and good morning. I would like to welcome everyone to Eagle Bolt'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 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 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 turn to slide six. 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 loved ones. The safety and wellbeing 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 Supermax 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 EGLE'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 seven 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 percent. Please turn to slide seven. 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 TC 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 Supermax 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 who are 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 TC 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 a 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 maintain significant operating leverage with essentially all incremental net revenue generated flowing to the bottom line. Please turn to slide eight. 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 nine. On the back of almost 1,000 sale and purchase transactions in 2021, dry bulk asset values have continued to appreciate into 2022. and we estimate that the value of Eagle's 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 secondhand values can be attributed to a number of factors we've previously highlighted, including improving confidence in forward markets, elevated new building 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 secondhand 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.

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 the 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 Ultracodet 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 average 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 debt 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 and the debt services bars are further to the right. Let's now review slide 15 for our cash breakeven per shift per day. Cash breakeven per shift 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 advance payments in the quarter ahead of upcoming dry docks. Cash J&A came in at $1,796 per ship per day in Q1, down $339 from Q4 on lower one-time 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-in 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 $1,495 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 $1,750 in Q2. Again, it is worth noting that this figure would be approximately $1,465 if we were to include chartered-in chips. 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.

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 2nd. 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 new building 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 irregular trades will undoubtedly add to ton-mile demand across dry bulk. However, a likely reduction in overall grain movements 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 multi-year 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 it 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 new building 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 Supermax 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 percent compared to the prior quarter, and well below the average over the last five years of roughly 100 ships per quarter. We estimate that 90 percent 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 lowered by 80 basis points as compared with their 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 traveled. 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 supermaxes and roughly 34,000 for CAPEs, further supporting the relative performance of the midsize 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 mid-sized 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 EGLE's leadership position within the mid-sized 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?

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Our first question comes from Chris Robertson with Jefferies. Your line is open.

Good morning, gentlemen. Thank you for taking my questions.

Good morning, Chris.

Gary, can you talk about those chalk-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?

Yeah, absolutely. So, you know, we're installing them as ships go into their statutory dry dock, and the answer is we're putting them across the fleet. It's a pretty compelling investment, about $100,000 dollars. to install them typically on your average ship. And when a ship goes through the Neo Canal, you know, the net earnings after additional expenses right now is about a quarter of a million dollars. So, you know, you don't know when you're going to be able to use it. And also, it's related to the ability to book a slot and congestion and things like that. But obviously, you know, you only have to go through once. And these chocks, you know, once they're on a ship, they're good for the life of the vessel. So, For modern Ultramaxes, I'd go as far as to say it's pretty much a no-brainer.

I guess to follow up on that, then, are your direct competitors also installing these fittings, or are you guys ahead of the curve on this?

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 relet their ships on time charter aren't going to necessarily get full value for it because, you know, how much more would you pay for a ship that you take on for four to six months and likely not going to be able to use it. So, you know, I don't think it's one size fits all, but, you know, I'll speak from Eagle's standpoint, you know, we see it as a clear win and we're going to keep doing it.

Okay, yeah, thanks for the color on that. I have a second question related to the trajectory of OpEx over the course of the year, especially as it relates to 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?

Yeah, absolutely. I think there's inflationary pressures across the board, you know, everywhere. And, you know, even crew change is part of it because of, you know, increased costs of travel. And you mentioned, you know, COVID restrictions, extra hotel, things like that. But, you know, we've been facing that now for over two years. So, you know, we're guiding to 5,400, which is down. I think this quarter, you know, 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 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.

Okay. Thank you very much.

Thank you.

Our next question comes from Magnus Feier with HC Wainwright. Your line is open.

Good morning, Gary. Good morning, Frank. Good morning. Congrats on a good quarter. Just two questions. The first related to the chartering environment. You know, the market looks very strong currently. You've signed a very good contract for 12 months up. You know, 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?

Yeah, I mean, as always, right, we take a very dynamic approach. You know, I 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, you know, sells against. So that gives us, you know, coverage to some extent. And then, as you mentioned, you know, the Madison Eagle is a 12-month charter. Last quarter, I talked about a five-month, minimum five-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, you know, the spot market's 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, you know, the long-term charters are attractive, but we're able, you know, when we position ships, and that's what's historically a backhaul. Of course, you're you know, 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, you know, we're in the mid-40s from Gulf to Asia or even from Brazil to Asia. So, you know, 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.

All right. And any, you know, 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?

No, we don't really see that. That part of our, you know, trade, the kind of long cargo contract trade, we haven't really seen a pickup in that at all. In fact, you know, 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.

Thank you. Just another question on the fleet renewal going forward. 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?

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, you know, one is widely known on the market. It's due for special survey or for dry dock, I should say, in the middle of this year. And we say we're likely to monetize those ships before. You know, the cash flow is really good on older ships, 18-year-old ships, but it's not really where we see Eagle, you know, positioning itself. So those two ships likely to be sold. And then, you know, we don't have, as 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 smaller, older ships, but we acquired 29 modern vessels, 26 of them, you know, very modern Ultramaxes. So, you know, 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, you know, prior to that move upward. So at the moment, we're quite comfortable with where we are in terms of our, you know, our fleet age and our fleet size. And, you know, having said that, you know, forward markets start, you know, are more supportive long-term of the asset prices where they are today. We're definitely, you know, open to look at that. But right now, we're quite comfortable where we are.

All right, good, good. And just one last question, if I may. Sure. You gave some, you know, the actual charted 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, you know, come down more to the fourth quarter level?

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 you know, that we're, you know, partway through the quarter, and it's pretty stable in terms of the gray bar that's on slide seven with the TC behind of the chartering days. You know, I mean, in that regard, you know, this quarter was 960 days that we had, you know, in the first quarter chartered in. And, you know, simple math, that's about 11 ships, but actually we had 20 ships that were part of our, you know, chartering 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, you know, we don't give specific guidance as to what the number is because, you know, as we sit here today over the next, you know, six, you know, six, seven weeks of the quarter, you know, it could change pretty significantly.

All right, very good. That's it for me. Thank you.

Thank you, Magnus.

Thank you. Our next question comes from Liam Burke with B. Riley. Your line is open.

Yes, thank you. Good morning, Gary. Good morning, Frank. Good morning.

Good morning.

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?

You know, 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, you know, 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 holds, but we also can spend a few hundred thousand dollars and blast and recode holds because it might be another two and a half years before a ship is going into its statutory dry dock on a five-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 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.

Fair enough. You mentioned some concern about supply out of Ukraine and Russia of grain. Similar, with a loose analogy to coal, do you see any other alternate sources to partially offset your concerns on the supply side of grain?

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, you know, that would be a short-haul trade from Black Sea. And so, you know, it's, I think the big question now, which no one knows the absolute answer, right, and that will be, well, ton-miles, will the increase in ton-miles, you know, supersede the drop in overall, you know, volume? And that's That's, of course, a pretty significant question. And right now, the futures point to the view that, you know, 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, you know, it's very much, you know, uncharted waters, so to speak, and, you know, as it plays out. But at the moment, we're seeing very significant changes in trade, which is adding to Ton Mile. Great.

Thank you, Gary.

Thank you.

Thank you. As a reminder, if you would like to ask a question, press the star, then the one key on your touchtone telephone. Again, that's star one to ask a question. And there are no other questions in the queue. I'd like to turn the call back to Gary Vogel for any closing remarks.

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.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.