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Eagle Bulk Shipping Inc (EGLE)
Q1Â 2020 Earnings Call
May 8, 2020, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings and welcome to the Eagle Bulk Shipping First Quarter 2020 Results Conference Call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to turn the call over to your host to Gary Vogel, Chief Executive Officer and Frank De Costanzo, Chief Financial Officer of Eagle Bulk Shipping. Mr. Vogel, you may begin.
Gary Vogel -- Chief Executive Officer and Director
Thank you and good morning. I would like to welcome everyone to Eagle Bulk's first quarter 2020 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 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.
Before discussing figures today, I'd like to begin by saying that our thoughts are with all of those who have been impacted by the loss of relatives or friends as well as those suffering health-wise or otherwise from the COVID-19 global pandemic. We're also extremely grateful to the healthcare professionals and all those putting themselves at great risk on the frontlines for the benefit of the global community, and we are indebted to all of our crew members and the broader seafaring community who continue to sail on ships and do their part to keep global supply chains open, many who are now beyond their contractual employment periods and away from family and home.
As a company, we remain focused on the health, safety, and wellness of our employees, both shore-based and shipboard personnel. In this regard, we're providing our ships with PPE, equipment and testing kits and have implemented protocols to minimize potential infections by limiting ship visits for non-essential purposes and by minimizing interactions with external personnel. We will continue to follow guidance from the relevant organizations and authorities and make adjustments as necessary. Notwithstanding current restrictions and challenges, we're also working to be able to begin to affect wide-scale crew changes again soon in order to allow crew members to travel home and bring seafarers onboard in a safe and efficient manner. Ashore, our global staff has been working remotely since March and I'm pleased with how our team across the globe have adjusted to this new reality with collaboration and execution remaining at very high levels despite our disruptive work environment.
Now please turn to Slide 5. The Baltic Supramax Index or BSI remained weak during Q1 on the back of traditional seasonal weakness relating to increased newbuilding deliveries and the Chinese New Year and was further pressured by a switch to higher fuel costs brought about by the IMO 2020 related fuel switchover. Rates as of the end of December were around $8,300 per day, continued down during the first half of the quarter, reaching a low of $5,152 on February 13th.
Despite the initial outbreak of COVID-19 in China and the negative impact it had on economic activity there, driven by the extension of the Lunar holiday break and general shutdown of the country, rates started to recover and the BSI was back up over $8,300 again on March 18th. However, beginning mid late March, the outbreak of COVID-19 and its implications to global economic activity started to spill over to the rest of the world with countries enacting broad restrictions and closures of mines, supply chains, and ports. This, in essence, created both a short-term demand as well as a cargo supply shock to the market, driving rates down rapidly by $2,000 in just 12 days to $6,250 by quarter-end.
Against this highly volatile backdrop, Eagle achieved a net TCE for the first quarter of $10,075 per day, equating to a market outperformance of $3,838 or 62%. We were able to achieve this outperformance by successfully executing on our active management approach to trading and by benefiting from operating scrubbers on the majority of our fleet. We calculate that the outperformance contribution was about evenly driven between these two factors.
Moving into Q2, COVID-19 has led to massive disruption in global trade and cargo flows. Additionally, the precipitous drop in fuel prices brought on as a result of demand disruption from the virus and then further exacerbated by the price war and excess of oil supply has been negative for the industry including Eagle. For drybulk, cheap fuel encourages faster steaming across the board, which increases effective vessel supply and separately, makes older and less efficient ships more competitive on a relative basis at least for the time being.
Secondly, the fuel spread between very low-sulfur fuel oil or VLSFO and heavy fuel oil or HFO, which drives scrubber-related revenue has weakened. The decrease in fuel spread is due in part to historically low headline crude oil prices, but also as a result of the massive demand disruption for mid distillates such as jet fuel and diesel oil. Fortunately, we hedged about 25% of our scrubber fuel spread exposure for both 2020 and 2021, prior to the impacts mentioned above when spreads were wide.
As you would expect, these hedges are now well in the money representing a current mark-to-market value of almost $10 million including about $600,000 realized in the first quarter and providing a significant contribution to the bottom line. It is also worth noting that while fuel spreads are currently at depressed levels of around $70 per ton, Eagle should still be able to generate roughly $15 million in incremental cash flow per annum on this figure, which is in addition to the spread hedges I previously mentioned.
So far, in the second quarter, the BSI has averaged approximately $4,724 per day representing a drop of 28% as compared to the average of Q1. As of today, we have fixed about 67% of our available days for the second quarter at a net TCE of $8,110 per day representing a significant current outperformance of roughly $3,000. Looking further ahead toward the second half of the year, the current FFA curve is trading at a higher BSI level of about $8,000. While we don't typically disclose specifics around our forward FFA hedge positions, given the current environment, we believe it is beneficial to disclose that and as of today, we have an FFA hedge position of just over 20% of our owned fleet in excess of $9,000.
We believe these hedges, combined with a forward cargo book, fuel spread hedges, scrubber contribution, and our active management strategy are all important revenue drivers that would help Eagle navigate this unprecedented market disruption. Although Frank will provide more detail later on in the call, I think it's also important to highlight that we maintain a strong liquidity position with cash and undrawn revolvers as of March 31, totaling almost $95 million. In addition to this, we own two unencumbered modern scrubber-fitted Ultramaxes as well.
Please turn to Slide 6. EBITDA adjusted for certain non-cash items totaled $18.8 million for the first quarter representing a significant increase in operating performance over the prior period, thanks in part to higher commercial utilization achieved. Additionally, I'm very pleased to be able to report that our scrubber installation program was fully completed on April 8th and as such, going forward, we expect our off-hire days to revert back to historic levels related primarily to statutory drydocks. With that, I would like to now turn the call over to Frank, who will review our financial performance.
Frank De Costanzo -- Chief Financial Officer
Thank you, Gary. Please turn to Slide 8 for a summary of our first quarter 2020 financial results. Revenue, net of both voyage and charter hire expenses, totaled $41.8 million for the first quarter, essentially flat from the prior quarter. It is important to note that we were able to keep the top line flat despite a circa 40% fall in the BSI. Our significant outperformance to the index can be attributed to our commercial platform and the benefits realized by our scrubber-fitted fleet. The company reported a net loss of $3.5 million for the first quarter or a loss per share of $0.05, both basic and diluted. Adjusted EBITDA came in at $18.8 million, an increase of $9 million or 92% from the prior quarter. Operating performance benefited from a positive $8 million gain on our hedge book, which protects the company from its fuel spread exposure related to operating scrubbers. Q1 adjusted EBITDA also benefited from an increase in available days as the off-hire days related to scrubber installation program were significantly lower.
Let's now turn to Slide 9 for an overview of our balance sheet and liquidity. Total cash as of March 31st, 2020 was $72.2 million, inclusive of $3 million of restricted cash, representing an increase of roughly $13.1 million from year-end. The increase in cash was driven by a $47.5 million in proceeds from revolving credit facility drawdowns, in part offset by capex spending on scrubbers and ballast water treatment systems and a principal payment on our Ultraco debt facility. Total liquidity was $94.7 million and is comprised of total cash of $72.2 million and $22.5 million of undrawn revolving credit facilities. Total gross debt, excluding debt issuance cost, at March 31st was $516.4 million, an increase of $41.7 million from the prior quarter. The increase in debt is primarily due to the revolver drawdowns of $45 million on our Ultraco debt facility and $2.5 million on our Shipco super senior facility, in part offset by principal repayments totaling $5.8 million.
Please turn to Slide 10 for our first quarter 2020 cash walk. At the top of the slide, you can see that net cash used in operating activities came in at $12.1 million, down from $2.7 million in cash provided by operating activities in Q4 2019. The chart also shows the timing-driven variability that working capital introduces to cash from operations as demonstrated 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 liability, essentially working capital.
As the chart demonstrates, the volatility caused by working capital largely evens out over time. The relatively large difference between those two bars in Q1 can be explained primarily by two items. First, a $7.7 million unrealized gain on our derivative instruments recorded in other current assets, which will be reversed in future quarters as the hedges roll off or we choose to monetize our positions. Additionally, we had bunker payments of approximately $4 million accrued at the end of last year and paid in early first quarter.
The chart at the bottom of the slide lays out the changes in the company's cash balance in Q1 2020. The two large bars on the left, revenue and operating expenditures, are a simple look at the operations. To the right, you will find a bar covering the $5 million of drydocking cost and capex of $18 million for scrubbers and ballast water treatment systems. The $48 million bar represents the net proceeds from the revolving credit facility draws and finally, the bar totaling $11 million represents the debt principal and interest paid in the quarter.
Let's now review Slide 11 for our cash breakeven per ship per day. For Q1 2020, cash breakeven per ship per day came in at $10,784, $805 lower than Q4 and $704 higher than full-year 2019 cash breakeven. The $805 quarter-on-quarter decrease was primarily the result of lower debt service and drydocking costs, in part, offset by an increase in opex. Q1 2020 vessel expenses or opex came in at $5,209 per ship per day. As we have seen in prior years, it is not uncommon for Q1 to come in somewhat higher as a result of annual expenses. In addition, opex was impacted by elevating stores and spares due to initial stocking of newly acquired vessels as well as the purchasing of critical spares for the scrubber-fitted fleet.
In Q1 2020, drydocking came in at $1,138 per ship per day, $172 lower than Q4. The quarter-on-quarter decrease was driven by a decrease in the number of drydocks completed. Cash G&A in Q1 2020 came in at $1,505 per ship per day, down $158 from Q4 and $176 lower than the full year 2019 results. It is worth noting that our G&A per ship calculation is based only on our own vessels. In this regard, if we were to include the chugger in days in the calculation of our Q1 G&A per ship per day, it would be $1,329.
Cash interest expense for Q1 2020 came in at $1,655 per ship per day, which is $75 higher than prior quarter. The increase is primarily due to increased debt from revolver drawdowns and a decrease in interest income, all by an increase in ownership days. Cash debt principal payments in Q1 2020 came in at $1,278 per ship per day, which is $751 lower than the prior quarter. The decrease is attributable to the fact that Q4 2019 included a principal repayment on our Norwegian bond debt. In terms of capex, as noted by Gary earlier, we completed our scrubber installation program in early April, and as such, capex related to this program will end in Q2.
Looking ahead, as a result of COVID-19, the U.S. Coast Guard has instituted a program allowing for the deferral of the installation of ballast water treatment systems for up to one year. Earlier this week, we received approval for 18 such extensions. Given the current environment, we expect we will defer a number of installations and as such, capex related to ballast water treatment systems will be reduced in 2020. We will provide further updates as final determinations are made in the terms of timing and quantum. Additionally, and in response to COVID-19, we have reduced certain G&A costs. This concludes my comments. I will now turn the call back to Gary.
Gary Vogel -- Chief Executive Officer and Director
Thank you, Frank. Please turn to Slide 13. Here, we depict the BSI year-to-date performance plus the forward curve for the balance of the year as compared to 2019 and prior years. As you can see, the BSI has historically declined throughout the first quarter, bottoming out in mid-February. The index typically posts a strong recovery between mid-February through the end of March as China comes back online post the Lunar New Year holiday.
To put this into perspective, the historical average recovery percentage in the BSI from mid-February low through the end of March is around 60% and this year, it was no different, until that is the outbreak of COVID-19 started to spread across the world impacting trade and hitting [Phonetic] both vessel demand and cargo supply. On the demand side, countries like India, the second largest coal importer in the world, saw their requirements reduced as power plants started to operate at lower capacity due to weaker demand for electricity arising from the shutdown across the country. In addition, restrictions enacted on ports and internal transportation have caused bottlenecks and even further disruptions to imports and cargo flows in general.
On the supply side, countries such as South Africa, an important exporter of drybulk, shut down mines and curtailed port operations leading to a sharp drop in cargo flows out of that country. One bright spot has been South American grain exports, where Brazil has exported 35 million tons [Phonetic] through April, up 29% year-on-year. Unfortunately, this has been happening in the midst of a reduction of cargo volumes across virtually all of their commodities.
The BSI bottomed about two weeks ago at just above $4,000; it has been grinding higher as we're seeing countries solely come back online, increasing in each of the last 10 trading days. China appears to be at the forefront in terms of getting back to business, but we're seeing others begin to increase activity as well. South African mines are starting to ramp back up and cargoes are loading in most ports across the world. We believe that as the world is coming back online, there will be a slow normalization in trade flows and a continued recovery in rates. The forward curve is supportive of this expectation with Q4 currently trading around the low to mid $8,000s.
Please turn to Slide 14. Vessel net supply growth was fairly flat as compared with the prior quarter with increased newbuilding deliveries partly offset by increased scrapping. Deliveries are typically elevated in January while scrapping was expected to increase given the weakness in spot rates. A total of 131 drybulk vessels were delivered in Q1 while 47 went to demolition. I think it's important to note that Q1 deliveries and scrapping were not significantly affected by the outbreak of COVID-19, but that is not the case for Q2. Ship demolition came to a screeching halt in late March as countries like India, Bangladesh, and Pakistan enacted lockdowns in order to prevent foreign crews from transiting through and potentially bringing the virus ashore.
Prior to this quarter, it would have been difficult to envision a scenario with such a weak rate environment and virtually no scrapping, but that is exactly what has transpired. For newbuilding deliveries, there is a general consensus that there will be delays, but it's a bit too early to tell exactly what the extent of the impact will be on this quarter or for the year. In addition to delays to completion of vessels, logistics relating to crew travel are very challenging at the moment, making deliveries difficult.
In terms of forward supply growth, things look positive, whereas the drybulk order book currently stands at 9% and for the Supramax/Ultramax segment, just 6%, the lowest level in 20 years. For 2020, dry bulk net fleet growth is expected to come in at 2.5%. We believe it's likely that, that number will come in lower with increased scrapping due to the weak market conditions once restrictions ease at the primary recycling countries mentioned earlier.
In addition, aside from delays on the shipbuilding side, there is the likely potential that many owners will look to push out newbuilding deliveries given prevailing market conditions. A total of 38 drybulk ships were ordered during Q1. To put this in context, the quarterly average during 2018 and '19 was almost 100 ships. As one would expect, we believe Q2 figures will be even lower. As we indicated on our last earnings call, due to a number of factors including the price advantage of secondhand ships versus newbuildings as well as uncertainties surrounding future propulsion technology and now the impact of COVID-19, we remain confident that we will not see a material increase in ordering for the foreseeable future without a significant pickup in rates first.
Please turn to Slide 15. Global growth expectations for 2020 have been revised significantly downwards since our last earnings call due to the implications from COVID-19. The IMF is currently projecting global GDP to contract by 3% in 2020 and then post a strong recovery in 2021 before reaching a more normalized state by 2022. As you can see from the chart though, there's a wide range in GDP forecast due to the extreme uncertainty of how the global economy will perform through the current crisis and beyond.
Following in the same path, drybulk growth projections for 2020 have been significantly revised downward as well given how correlated the industry is with global economic output. A decline in overall drybulk demand of around 4% is projected for this year. However, I think it's important to note that the contraction is weighted toward the first half, implying that we are potentially near the end of the decline in trade demand and the start of a recovery. Commodities which are most likely to be impacted in the short-term include cement, coal, and steel whereas some cargoes such as grain are not expected to be materially impacted and Clarksons is still projecting a year-on-year increase in grain shipments of roughly 2%.
As countries begin to open up their economies, we believe there will be a natural replenishment of stockpiles which have been drawn down and then there is substantial reason and historic precedent to believe that global efforts of economic stimulus will find their way to infrastructure projects in many countries, which is very supportive to drybulk demand. Clearly, these are unprecedented and challenging times. Having said this, we believe that the medium to long-term fundamentals remain favorable for drybulk and particularly in the Supramax/Ultramax segment. As such, I believe Eagle remains well positioned to navigate through this uncertain period given our people, our market positions, our active owner-operator model, and our solid balance sheet. With that, I would now like to turn the call over to the operator and answer any questions that you may have. Operator?
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from the line of Jon Chappell from Evercore. Please go ahead.
Jon Chappell -- Evercore -- Analyst
Thank you, good morning guys.
Gary Vogel -- Chief Executive Officer and Director
Good morning, Jon.
Jon Chappell -- Evercore -- Analyst
Gary, first question is on the active management of the fleet in the situation that we're in right now. I mean, obviously, the flexibility both in the fleet and your strategy is one of your key differentiators, but with certain ports, the issues with the seafarers, with certain regions hit harder than others, how has this pandemic kind of changed the way that you traded your fleet and has that had any impact on your flexibility and quite frankly, your performance?
Gary Vogel -- Chief Executive Officer and Director
Yes, thanks for that. I mean, first of all, the answer is, yes, it's changing because that's one of the benefits of having in our active management platform is the team is making real-time decisions all the time. I mean, one thing, as you pointed out, with certain port restrictions, being at sea is really the best place for a ship. So all things being equal, choosing longer duration voyages where you're out at sea longer as we get through this lockdown period, if you will, has been something we focused on and that's had some impact, of course, on how we normally would trade.
The other aspect is, is that the front haul market, we call it pent-up demand when you invest to come to the Atlantic, has really evaporated at the moment given the low level. So where you typically would maybe be sending more ships out, you're holding back to try and potentially benefit from that when we believe demand will come back. So the simple answer is we've made many changes on a daily basis, all trying to put ourselves in the best position to not only deliver this quarter, but be able to deliver the maximum value as things normalize going forward.
Jon Chappell -- Evercore -- Analyst
Thank you for that. Second question, I know that your response could be -- shouldn't [Phonetic] you answer that, but I'm going to cut that off at the pass and then put it to you [Indecipherable]. When I listened to this conference call and everything you're doing, from the fuel hedging to the FFA hedging to the active management, all the differentiation, all the outperformance relative to the BSI and then I looked at an equity price, it's less than [Phonetic] 50% of the NAV, you know, depending on what your estimate is, it's close to that. What do you do to get credit for all of the differentiation that you've implemented since you've been there? And if it gets to the point where you just feel like you don't, what's the next step?
Gary Vogel -- Chief Executive Officer and Director
Yes, well, there's a lot to unpack there and I probably can speak for a while, but what I would say is we continue to do what we're doing and it matters. I talked about the fact that we have $10 million of mark-to-market on our fuel hedges and if we monetize that or choose to crystallize it earlier or they roll off without changes to that spread, that's cash on the balance sheet and the outperformance, we believe, matters. So at the moment, unfortunately, I think the entire industry is in a situation where the macro environment is overwhelming in terms of the headlines, but we continue to execute and I believe we will get credit for that. So I'm not going to go with what happens when we don't because I believe if we continue to execute, we continue to run the company with good governance. I do think we'll get credit for that and I think it will be reflected long-term.
Jon Chappell -- Evercore -- Analyst
All right, thank you for your thoughts, Gary.
Gary Vogel -- Chief Executive Officer and Director
Okay, thank you.
Operator
[Operator Instructions] Our next question comes from Randy Giveans from Jefferies.
Chris Robertson -- Jefferies -- Jefferies
Good morning, gentlemen. This is Chris Robertson on for Randy. Thanks for taking my call.
Gary Vogel -- Chief Executive Officer and Director
Good morning, Chris.
Chris Robertson -- Jefferies -- Jefferies
Hi, once the oil prices start to recover and fuel becomes more expensive, can you walk us through your thoughts around how much effective supply gets removed from the market based on your comments in the prepared remarks about older tonnage trading at the moment and also things speeding up?
Gary Vogel -- Chief Executive Officer and Director
Yes, sure. I mean what we're seeing today in terms of fuel pricing, it's actually -- it's interesting given the decline in crude, we're seeing VLSFO prices not that dissimilar from where heavy fuel prices were going in the latter part of the year. So while we expected to see a significant slowdown in vessels in this year because of the switchover based on IMO 2020 -- and it started happening and now with the fallback in prices, we're pretty much back at speeds where we were in Q4, I think, in general, notwithstanding the market is weaker. So that has an impact as well, but in terms of fuel price, we're kind of where we were.
If things ramp back up, historically, we've looked at prices of the $450, $500 level. Potentially, you're talking about 4% plus out of the market on a straight-line basis if ships follow their optimal speed curve. As I've said before on our calls, we don't decide what speed to sail our ships at. There's a computer speed curve model that tell us what the optimal speed is, which is an input of both the fuel price and the rate environment that the ship is in.
Chris Robertson -- Jefferies -- Jefferies
Okay, thanks for that. Can you give us any color around the slowdown in the grain trade from Argentina this season due to the low river water levels? Was this just simply offset by the strong Brazilian outperformance?
Gary Vogel -- Chief Executive Officer and Director
Yes, I mean soybeans, Brazil dominates in Latin America and so the answer is yes and Brazil has, by far, the largest export to China. So river levels matter significantly in terms of the economics for the freight cost, but obviously, given the weak environment right now, it's not as pronounced, but ultimately, it really is about Brazil in terms of drybulk for the grain trade this time in the year.
Chris Robertson -- Jefferies -- Jefferies
Got you and then I have a modeling question, if you don't mind. You gave some off-hire days guidance in the release and I was wondering if you could break that down on a per vessel basis by quarter in terms of maybe number of vessels.
Gary Vogel -- Chief Executive Officer and Director
Yes, let me put that one over to Frank to answer that.
Frank De Costanzo -- Chief Financial Officer
Hey Chris, I think it's best we take that one offline. I don't have that information right in front of me at the moment. So we can pick this up after the call, if that's OK.
Chris Robertson -- Jefferies -- Jefferies
Sure, happy to follow-up.
Frank De Costanzo -- Chief Financial Officer
Sure. Thank you.
Chris Robertson -- Jefferies -- Jefferies
All right, thanks guys, appreciate it.
Gary Vogel -- Chief Executive Officer and Director
Thank you.
Operator
Thank you. I show no further questions in the queue. At this time, I'd like to turn the call back over to Mr. Gary Vogel, Chief Executive Officer, for closing remarks.
Gary Vogel -- Chief Executive Officer and Director
Thanks very much. We don't have anything further. So I'd like to thank everyone for joining us today and wish everyone to be safe and healthy and thanks again. Have a good day.
Operator
[Operator Closing Remarks]
Duration: 34 minutes
Call participants:
Gary Vogel -- Chief Executive Officer and Director
Frank De Costanzo -- Chief Financial Officer
Jon Chappell -- Evercore -- Analyst
Chris Robertson -- Jefferies -- Jefferies
