Eagle Bulk Shipping Inc. (NASDAQ:EGLE) Q4 2022 Earnings Call Transcript

Eagle Bulk Shipping Inc. (NASDAQ:EGLE) Q4 2022 Earnings Call Transcript March 3, 2023

Operator: Good day and thank you for standing by. Welcome to the Eagle Bulk Shipping Fourth Quarter 2022 Earnings 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. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today Gary Vogel, Chief Executive Officer. Please go ahead.

Gary Vogel: Thank you and good morning. I’d like to welcome everyone to Eagle Bulk’s fourth 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. We cemented a record annual profit in 2022 achieving net income of $248 million or $19.09 per share basic. These extraordinary results are reflective of the many actions we have taken over the past years, including our vessel sale and purchase strategy, encompassing 55 transactions, our segment leading focus on scrubbers, our differentiated active management approach to trading ships and our efforts to optimize the balance sheet.

For Q4, revenues and earnings came off versus the prior quarter as freight rates continued to weaken through the end of the year and cost came in higher due to expenses relating to recent vessel purchase activity, general inflationary pressures and certain year end non-cash impacts. Net income totaled $23.3 million for the fourth quarter or $1.79 per share basic. Adjusting for non-cash mark-to-market changes on our FFA hedges and other non-cash items, net income came in at $35.9 million or $2.76 per share. As we have stated previously, we believe that adjusted net income more accurately reflects the underlying business in any given period. Based on these results and consistent with our stated capital allocation strategy, Eagle’s Board of Directors declared a cash dividend of $0.60 per share equating to 34% of net income.

This is our sixth consecutive quarterly dividend, bringing total shareholder distributions to $139 million or $10.65 per share since we adopted our capital allocation strategy just 18 months ago. On the sale and purchase front, we continue to act opportunistically and recently acquired three high specification vessels. We purchased a 2015 built Ultramax for $24.3 million. The vessel has been renamed the Gibraltar Eagle and was delivered into our fleet in February. Yesterday, we also announced the acquisition of two 2020 built scrubber fitted Ultramaxes for $30.1 million each. Both ships are expected to be delivered to Eagle during the second quarter and will be renamed The Halifax Eagle and The Vancouver Eagle. Lastly, we sold the Jaeger, a 2004 built Supramax, which was the oldest vessel in our fleet, just ahead of our statutory dry dock.

This transaction is expected to close in March. It’s noteworthy that the Jaeger represents the 22nd and last vessel to be sold as part of our initial fleet renewal program, which began almost six years ago. Pro forma for these transactions, our fleet total 55 ships averaging 9.1 years of age with more than 90% being scrubber fitted, and importantly, now with no vessels exceeding 14 years of age. Please turn to slide seven. For Q4, we achieved a net TCE of $22,062, which represents a decrease of 21% quarter-on-quarter on a headline basis, but a meaningful increase in relative outperformance versus the benchmark BSI Index, equating to roughly 53% or $7,689 per ship, per day. For the full year 2022, we achieved a net TCE of $26,923, a company record, which represents a significant outperformance of 27% relative to the BSI Index.

As we look to the first quarter, spot rates weakened considerably during January and into mid-February. We will discuss market fundamentals later on the call, but as of today, we have fixed approximately 92% of our owned available days for the first quarter at a net TCE of $13,335. Please turn to slide eight. Adjusted EBITDA was down for the quarter, coming in at $55.6 million after adjusting for unrealized P&L impact on our hedges and certain other non-cash items. For the full year 2022, we achieved a record $328 million in total EBITDA. Before we move to the financials, as most of you know, Frank, will be stepping down at the end of March. So before I turn the call over to him, I wanted to take a moment and thank him for his leadership as Eagle’s CFO.

Frank has been instrumental in Eagle’s development over the past six years. I wish him well and all the best in his next chapter, and his future endeavors. Frank?

Frank De Costanzo: Thank you, Gary. Please turn to slide 10 for a summary of our fourth quarter financial results. TCE revenues totaled $102.5 million in Q4 versus $128.9 million in Q3. The decrease was mainly due to lower market rates, offset in part by an increase in available days. Net income for Q4 was $23.3 million. Earnings per share for the fourth quarter was $1.79 on a basic basis. On a dilutive basis, which primarily includes the shares related to the convertible bond, EPS came in at $1.50. Adjusted net income, which excludes unrealized gains and losses on derivatives and an operating lease impairment was $35.9 million for the fourth quarter or $2.76 on a per share basis. On a diluted basis, our adjusted EPS came in at $2.28 for the quarter.

Adjusted EBITDA for the fourth quarter was $55.6 million. Let’s now turn to slide 11 for an overview of our balance sheet and liquidity. Total cash at the end of Q4 was $189.8 million, a decrease of $7.9 million as compared to Q3 2022. The decrease was primarily driven by $23.4 million in dividends paid, $23.4 million paid for the purchase of the Tokyo Eagle, $3.6 million deposit for the purchase of the Gibraltar Eagle and the $12.4 million quarterly amortization payments on the Global Ultraco Debt Facility, offset in part by $55.8 million of cash generated by operating activities. Total liquidity came in at $289.8 million at the end of Q4. Total liquidity is comprised of total cash of $189.8 million and $100 million available under our fully undrawn revolving credit facility.

In addition to this available liquidity, we owned four unencumbered vessels at year end, providing us with additional flexibility to increase our liquidity. In Q1, we took delivery of the Gibraltar Eagle, our fifth unencumbered vessel. Furthermore, we intend to use cash on hand to pay for the Vancouver Eagle, which will provide us with a sixth unencumbered vessel once it is delivered to us in the second quarter. Total debt at the end of Q4 was $341.9 million, a reduction of $12.4 million from Q3, attributable to the Global Ultraco Debt Facility quarterly amortization payment. As a reminder, 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 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 12 for an overview of our cash flow from operations for the fourth quarter of 2022. Net cash generated by operating activities was $55.8 million in Q4 and $298.3 million for the full year 2022. Our working capital management remains robust. The chart highlights 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.

As the chart demonstrates, the volatility caused by working capital largely evens out over time. Please turn to slide 13 for a Q4 2022 cash walk. The chart at the top of slide 13 lays out the company’s cash movements during Q4. The revenue and operating expenditures bars provide a simple look at the company’s operations. The net of these two bars, which total $55 million roughly equals our adjusted EBITDA for the quarter. Some of the larger movements to the right include vessel S&P, dividends paid and debt service. The chart at the bottom of the slide similarly covers the full year cash movements. Let’s now review slide 14 for our cash breakeven per ship per day. Cash breakeven per ship per day was $12,078 for the fourth quarter, a quarter-on-quarter increase of $147 is due to higher OpEx and G&A, offset in part by lower dry docking and interest expense.

Vessel operating expenses or OpEx, exclude non-reoccurring items came in at $6,996 per ship per day in Q4, $430 higher than the prior quarter. OpEx overall was elevated due to a number of factors including takeover cost and dry docking expenses relating to recently acquired vessels, which we run through the P&L versus capitalizing on the balance sheet. Additionally, we incurred an increase in repair cost driven by certain discretionary spend and unscheduled repairs. We also continue to face cost due to temporary housing we have been providing to our Ukrainian seafarers, expenses related to COVID-19, as well as general inflationary cost pressures. We believe OpEx will moderate in 2023, but we will incur incremental cost relating to takeover of newly acquired vessels, as we continue to grow our fleet.

Dry docking came in at $100 per ship per day in Q4, $403 lower than prior quarter on a decrease in dry docking activity. Cash G&A came in at $2,069 per ship per day in Q4, $368 higher than prior quarter. The change in G&A expense was primarily due to an increase in employee-related costs and professional fees. Note that our cash G&A per ship per day is based solely on our owned vessels. If we were to include our chartered-in vessels, cash G&A would improve by $348 to $1,721 per ship per day. Cash interest expense came in at $339 per ship per day in Q4, $245 lower than prior quarter, due to an increase in interest income and lower cash interest expense, as a result of lower debt outstanding. It is important to note that the improved cash interest expense was achieved in an environment where short-term interest rates have remained at elevated levels.

Cash debt principal payments were generally flat at $2,574 per ship per day in Q4. Looking ahead, we expect the following per ship per day in Q1 2023. OpEx is likely to decline to about $6,475. Dry dock is expected to increase to about $975 on higher dry dock activity. G&A is expected to decrease to $1,775. Cash interest expense is expected to come in unchanged at circa $340. Cash debt principal payments are expected to be marginally higher at $2,590. This concludes my comments. I will now turn the call back to Gary.

Gary Vogel: Thank you, Frank. Please turn to slide 16. Freight rates moved downward in the second half of 2022 and into early 2023, with the BSI going from over $18,000 in October to slightly below $7,000 in mid-February. This weakness can be attributed to a number of factors, which impacted both demand and supply. On the demand side, lower global growth and expectations for potential further deterioration in output curtailed commodity purchase across the board, with minor bulk such as steel and cement particularly impacting. Additionally, Chinese trade demand was muted in Q4, due to low domestic activity, and more recently, due to the usual negative seasonality, which occurs up to and around Lunar New Year holidays. Although it’s difficult to quantify, the container spillover trade which was supportive since 2020, has mostly reversed with very few bags and container cargoes still moving on Bulk carriers.

On the supply side, the unwinding of congestion which arose due to COVID-related restrictions and general supply chain issues has effectively increased global ship’s capacity and in turn pushed the world fleet utilization lower. Positively since bottoming on Feb 13, the BSI has posted a sharp and quick rebound and is now trading around $13,000, which represents an impressive increase about 85% in just over two weeks. Furthermore, the forward curve for the balance of the year is in contango, with FFA trades being down around $16,000, likely reflecting the market’s expectations for an improved supply-demand landscape over the medium-term, as Chinese economic growth is revived and global demand stabilizes. Please turn to slide 17. Fuel prices were somewhat lower during the fourth quarter, but spreads between HSFO and VLSFO remained robust averaging $241 for the period.

Pro forma for our recent vessel sale and purchase activity, 50 out of 55 ships or 91% of our fleet is now fitted with scrubbers. This reinforces our position as the largest owner of scrubber fitted ships within the mid-sized drybulk vessel segment globally. On an illustrative basis, based on the 2023 forward curve, we estimate that our scrubbers will generate approximately $40 million in incremental net income on an annualized basis. Please turn to slide 18. Asset price development has been somewhat mixed in the first quarter, with values on mid-aged and older vessels softening a bit, while modern ships have moved up slightly. There appears to be an increasing level of buying interest for modern Ultramaxes and it’s coming not only from traditional drybulk owners, but also from non-drybulk who are looking to diversify away from exposures in tankers and containers.

The older segment tends to be dominated by Chinese buyers and the softening of values is in part reflective of them not really being in the market, during the second half of 2022. As mentioned previously, we have been fairly active on the sale and purchase front, having acquired four modern Ultramaxes since September, including three which are scrubber fitted at attractive levels that I believe reflects our disciplined approach to fleet growth. Looking ahead, notwithstanding some short-term volatility, our view has not changed. We remain constructive on the market and asset prices in the medium-term given the increasingly positive supply side dynamics. Please turn to slide 19. Net fleet supply growth slowed in Q4. A total of 112 drybulk newbuild vessels were delivered during the period, partially offsetting this, 19 vessels were scrapped during the same period.

Notably for Eagle, just nine mid-sized geared vessels were scrapped during 2022, that’s nine ships out of a fleet of over 4,000 mid-size vessels. As we mentioned previously, despite high scrap prices, the low level of vessel demolition 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 in the coming years. In terms of forward supply growth, the overall drybulk order book remains at a historically low level of just around 7% of the order the water fleet. For 2022, drybulk net fleet growth is estimated at 2.8%, which will be down about 22%, as compared with 2021. Looking ahead, 2023 net fleet growth is projected to drop further to just 1.9%, driven by continued muted deliveries, as well as a significant increase in assumed scrapping volumes.

A total of 74 drybulk ships were ordered during Q4, up as compared to the prior quarter, but still significantly below the average over the last five years of roughly 113 ships per quarter. It’s worth noting that the vast majority of ships being ordered today will only be delivered in 2025 and beyond. Please turn to slide 20. This slide, which we included in last quarter’s presentation depicts the average age of a Supramax, Ultramax fleet going back 25 years overlaid against the order book, as a percentage of the on the water fleet. It’s interesting to see how quickly the fleet as aged in recent years, it will most certainly outpace the historical peak of 12 years old reached in 1994. This not only reflects the lower number of newbuildings entering the market, but also a smaller number of older ships that are being scrapped.

As mentioned previously, the order book today remains at historically low level, given the relative cost advantage of secondhand ships versus newbuildings today, as well as the uncertainty surrounding decarbonization and future fuel propulsion technology, we believe ordering will remain low for some time. We expect these dynamics combining a record low order book with a near record fleet age to further improve the supply side in terms of fleet development in the coming years. Please turn to slide 21, after reaching a multi-year high in 2021, drybulk trade demand growth is expected to have come in at negative 2.7% for full year 2022. However, after taking into account the significant and positive ton-mile effect caused by the war in Ukraine, the deficit growth rate improves by 90 basis points.

It’s worth noting that 2022 is only the second time in over 20 years that drybulk demand growth on ton-mile basis has been negative. The impact to demand last year is a direct result of a number of factors including a global slowdown as a result of high inflation and tighter monetary policy, across the developed world, as well as a continuation of China’s restrictive zero COVID policy. For 2023, the IMF is currently projecting global GDP growth to reach 2.9%, a decrease of 70 basis points as compared to 2022. However, in terms of drybulk trade, demand growth is expected to improve by 400 basis points in 2023 to reach a level of positive 1.3%, on a core basis and improving to positive 2.2%, once factoring in the ton-mile effect. Please turn to slide 22.

As we look into 2023, there is a great deal of variability and forecasted growth rates amongst the various drybulk commodities. Volumes for infrastructure related commodities, such as steel and cement are expected to come off based on current views of 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 1.8%, we expect the impact of this figure to be even greater once factoring in the increased ton-mile effect for this particular commodity, as a result primarily 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 5.8%, as grain production led by increased exports of Brazilian soybeans, U.S soybeans and corn and a partial normalization of Ukraine wheat exports, as compared with 2022.

Please turn to slide 23. Our 2022 results demonstrate the advantages of our differentiated strategy. Given our exclusive focus on the mid-size segment with an ability to carry all drybulk commodities and a commercial platform with a track record of meaningful outperformance, we continue to be in an optimal position to maximize utilization and capitalize in a rapidly evolving environment. Looking forward, we remain positive about the medium-term prospects for the drybulk industry, particularly given strong supply side fundamentals. With a modern fleet of 55 predominately scrubber-fitted vessels and roughly $290 million of liquidity at year-end, Eagle’s in a unique leadership position and we are looking forward to continuing to deliver superior results for our stakeholders at large.

With that, I’d like to turn the call over to the Operator and answer any questions that you may have. Operator?

Q&A Session

Operator: Our first question comes from the line of Omar Nokta with Jefferies.

Omar Nokta: Thank you. Hey guys. Good morning. Hi, Gary.

Gary Vogel: Hey Omar.

Omar Nokta: I wanted to — good morning. Just wanted to just follow-up maybe on your comments about the market here, recently you noted that we have seen a sharp rise in the Baltic Index, especially what we have been seeing in the Supras and Ultras, and rates now, it looks like they are above the averages you have secured so far in the first quarter. So this obviously points to a nice end to the first quarter and a solid beginning to 2Q. I guess maybe could you just give us a sense of what’s been driving this latest upturn here the past couple of weeks and so what’s driving that? And then also it seems that Supras and Ultras continued to outperform the larger ships and maybe could you just explain why that outperformance is continuing?

Gary Vogel: Yeah. Absolutely. So, I mean, as you mentioned, it’s up dramatically in just a little over two weeks. Really we have seen in the Atlantic market move up significantly. Definitely South Atlantic, Brazil has come alive and that’s put pressure on even just yesterday, as an example, we fixed one of Ultramaxes out of West Africa with manganese ore going out to China at $20,000, plus the scrubber benefit for the owner, which is around, call it, $25,000 a day and that’s up probably, $8,000, $10,000 from just a couple of weeks ago. And that’s really driven because that there’s a lot more activity out of Brazil. So that ship had an opportunity to balance across and we have seen the Gulf come back too, in terms of we lost a lot of grain volume out of the U.S. earlier because of water levels and so we see more activity there and that puts pressure and pull ships from other parts of the Atlantic.

And in the Pacific as well on the other side of Lunar New Year, we have definitely seen more activity. So it’s — I’d say, if you had to handy cap it, it’s coming more from the Atlantic side, but in general, overall, which is good and not surprising given the seasonality that we see.

Omar Nokta: Okay. And that sounds like it’s primarily coming from the minor bulks and grains, is that what’s been driving it here recently?

Gary Vogel: I mean, I think, that’s the difference overall more than other cargoes. I have actually, I have been — post-COVID I have been out, getting out on our ships and just in the last four weeks, I have been on three of our ships carrying salt to the New York, Boston area. And so those cargoes are much more steady and so, I’d say, the difference we have seen recently is more grain cargoes moving out of the U.S. and now out of Brazil as that market comes on typically with this season.

Omar Nokta: Thanks, Gary. Got it. And then maybe just one final question as a follow-up, you mentioned the S&P market and what’s been going on here recently. There’s a bit more volume. The two ships you just bought that you announced yesterday, those look like they are off maybe 15% from where the peak was maybe nine months ago, so clearly, a nice pricing relative. How would you characterize the market now? Is it — you mentioned there’s more buyers. What do you think in terms of values from here? Do we see stability, do you see upside? Any color you can give?

Gary Vogel: Sure. I mean, I think, we think, generally the modern Ultramaxes that we have bought are slightly less — slightly over slightly over 20% below where they were trading in the second quarter and we have seen — we included a graph in the earnings deck that shows an increase in S&P prices recently. As I mentioned in my prepared remarks, we see buyers competing who typically are in drybulk buyers and a lot of people were saying, I am going to buy — I want to come back into this market, but we are going to see values come off significantly Q1 because of the weak market. We don’t — we didn’t see that so much, because so many people are reading the same tea leaves. We have a rapidly aging fleet. I mean, just in the last three years, we have got about 6% more ships over 20-years-old in the mid-size segment than we had just three years ago.

I mean that’s a pretty significant amount, 250 ships that are eventually scrapping candidates and there’s just not — with an order book of in the mid-sevens, there’s just not new ships to come and fill that gap. So I just think, that’s why you are seeing much more resistance or downward movement in prices than we would have seen in a weaker market. I think most people just see the supply side dynamics. I think, I have been — this is my 35th year in drybulk. I love the setup here in terms of where we are and that’s why that graph that we put in that shows that rapidly aging fleet against the order book, it’s really remarkable. And I think a few years ago, I don’t think, I could have come up with a scenario where you would have a robust market and because of that you have an aging fleet, but you just don’t have a supply-side response.

The order book has really been flat since 2017 in the kind of 7% to 8%. And so, we think asset prices will continue to move up — will continue to move up, they moved somewhat, but especially on the back of improved pricing and the forward market started to go on here. But I think it’s important. The forward market for this year is now trading at around $16,000 in the FFA market. So, yeah, Q1 was weak, but $16,000 is a Supramax. And then you have, if you have — the majority of our fleet now is Ultramax, so those ships are at a premium, and then you add scrubber premiums to that and an active management, which has an ability to outperform and you quickly get back to a really significant numbers way well above — way above cash breakeven, but I am saying significantly profitable level.

So we are really constructive here, we like where we are and we specifically want exposure to this market. I think if we look back, last year, in generating $250 million of net income that’s because we had exposure to this market. And yeah, you — that’s going to mean, there is going to be some volatility around a weaker Q1. But like I said, we like the exposure going forward and really like the four new ships we have added to the fleet.

Omar Nokta: Great. Gary, thanks. Very helpful and very thorough. I will pass it over.

Gary Vogel: Okay. Thanks, Omar.

Operator: Our next question comes from the line of Ben Nolan with Stifel.

Ben Nolan: Hi. Hi guys. Good morning.

Gary Vogel: Good morning, Ben.

Ben Nolan: I wanted to or maybe just carry on where we left off or where you left off on Omar’s question there, just about how you are thinking about asset values, obviously, you have been pretty active buying and it sounds like you are still optimistic for the outlook for asset values. How do you bake that into your capital allocation strategy here? You have had cash on the balance sheet, been able to acquire things really without debt, but debt’s more expensive than it used to be. So if you continue to add the cost of capital is higher. So, at what point do you, say, okay, well, or what’s that sweet spot with respect to leverage, maybe as a way to put it?

Gary Vogel: Yeah. I mean, it’s a great question because we are very cognizant of the fact that although all of our debt is fixed, our bank debt is all fixed at 87 basis points, that’s not going to be the case with any new debt we put on, obviously, right? And so, now you are looking at an all-in cost in the sixes with margin and so it’s meaningful on a standalone basis, of course, blended it’s not and we are very fortunate that we have those, but that’s history. So we have been able to add ships with cash and I think having unencumbered vessels is always a good thing, but if we continue, we are going to put some debt on. So on a blended basis, again, I think, we are fortunate that we are able to have a very low cost of debt, but it’s a different calculation than it was just a year, year and a half ago.

So we are very cognizant of the fact that we want to be prudent with the balance sheet. There’s a lot of work that went into this fleet renewal and balance sheet optimization over the last number of years. As mentioned in the remarks, the Jaeger is the last ship, 22nd ship to be sold under that fleet renewal and the good news now is while for every two ships we bought, we have had to sell one because of the age and the specification over the last five years, six years. We don’t have any ships over 14 years old. So as we add these, well, let’s say, these four ships, of course, we sold one, but new ships, I don’t think you will see us at the moment selling any more ships. So we don’t feel the pressure to add more ships, but it’s going to be opportunistic.

In terms of leverage, there’s no set number at all, we feel it’s really dynamic. We ended the year with almost $190 million of cash and $100 million undrawn revolver. So we feel really good about that. But you are not going to see us lever up this company in the current environment, because we just feel that the real value here comes from our operational leverage and not really from an inordinate amount of financial leverage.

Ben Nolan: Okay. That’s helpful. And the — but just maybe to follow on with that and then I will – I have a quick macro question. So do you — the convert is pretty well in the money, do you view that internally as equity given where it’s at and so it’s not as meaningful from a leverage perspective. And then from the macro side, you talked, Gary, about the fact that you are not really seeing much of the container spillover trading more is effectively gone. As we — as you think about sort of the trajectory for coming out of the recent trough that we have had, how big of a factor is that in sort of the momentum or the relative performance of the Ultra, Supramax segment versus everything else?

Gary Vogel: Yeah. I mean, so I will take the latter part first. I mean, I think, it was helpful, but I don’t think, it’s what drove it. I mean, I think, what drove the outperformance of the Supramax last year and 2021, is the fact that that minor bulks grew at 4% and 4.7%, respectively, in 2020 and 2021 versus drybulk overall or major bulk at averaging two over that period. So more than doubled and that’s really — and that minor bulk doesn’t include the container volumes as well. So it was helpful, absolutely, but I don’t think it was a driver. I think it was the minor bulks outstripping major bulks, really two to one. As we go forward, the good thing about congestion is when it happens it takes supply out of the market in a meaningful way.

The bad thing about congestion is it’s never permanent and so when it unwinds, you have exactly the opposite effect. So at the moment, we have had that unwinding and so we are now in a position where we don’t see that as an overhang. And so but it’s inevitable whenever you see that that it’s going to come the other way, at some point, as the pendulum swings. So we think that although minor bulks are fairly muted and mentioned it’s really infrastructure-related things like steel products and cement were quite weak last year and expect it to actually be slightly negative this year, that can reverse and likely will reverse itself. We haven’t really spent a lot of time speaking about the opening of China. But, of course, China coming back online which severely underperformed last year is really meaningful for anyone in drybulk.

Particularly for the larger sizes, of course, because of their dependence on iron ore and coal, but for any drybulk ship China is really important.

Ben Nolan: Great. And on — how you used to convert?

Gary Vogel: I am sorry. Yeah.

Ben Nolan: Yeah.

Gary Vogel: Yeah. Sorry. Going back to the convert question. So, I think, generally speaking, I think, that’s correct, that we see the convert is equity given how deep in the money it is. We did buy back $10 million of face when our shares were trading significantly lower, just over $40 and we saw that as an opportunistic, almost kind of a proxy for a share buyback. Where we are today though is to the trades — the market trades with the future coupon as well and an implied option price, and we are just about a year away from maturity and right now, we are earning 4.5% on cash in the bank. So the negative carry is only 0.5% on the convert and to pay 5% coupon for the next year and effectively when we can stockpile cash and only pay a 0.5%, just isn’t good math to us where we are.

So we do have — I have mentioned before, but I think it’s important, we do have the option to pay for that using cash or shares and so we think having cash on the balance sheet is opportunistic for that use, or of course, also for other strategic uses.

Ben Nolan: Okay. I appreciate it. Thank you.

Gary Vogel: Thanks, Ben.

Operator: Our next question comes from the line of Liam Burke with B Riley.

Liam Burke: Thank you. Good morning, Gary. Good morning, Frank.

Gary Vogel: Good morning, Liam.

Frank De Costanzo: Good morning,

Liam Burke: Gary, on the macro front, we are talking about puts and takes, especially on the coal and grain front, but how much of your outlook on the macro is dependent on the China reopening?

Gary Vogel: Yeah. So I think, the general view is, we are going to have a opening and particularly the second half of the year will be more positive. But if you look at the numbers that we put forward in our deck, right? It doesn’t show a rapid rebound. I mean, cement was down 14% last year and we are not putting in for growth even against that number this year. So I think there’s upside to a China reopening and infrastructure spend from where we are. But there’s a lot of course a lot of uncertainty there. So we are not, we are not expecting overly immediate drive from that in the minor bulks, it really comes more next year when we see minor bulk is growing at over 3%. And I do think it’s worth pointing out that, the ton-mile effect is really important and it was really important last year, the uplift was almost 1% and is expected to be the same this year and that’s really around grain and coal.

Moving significant amount of coal cargo from places like the U.S. to Europe, even Indonesia to Europe, which simply didn’t exist previously. So we look at the coal front, Europe was up 30% year-over-year last year and is expected to grow slightly so over that highly elevated number. And so those ton miles have been really important in supporting drybulk in the second half of last year and going into and including 2023 as well.

Liam Burke: Great. And excuse me, on the OpEx front, Frank in his prepared statements said, you would expect it to moderate come in 2023. Is there anything you can do actively except eliminate some of the one-time events that occurred in the fourth quarter?

Gary Vogel: Yeah. I mean we are very focused on bringing that number down. I have said it before. I think the most important thing for us to do is maintain our ships in a high state of commercial ability to trade, of course, safety, compliance, things like that and so we will spend what we need to spend. Having said that, the over — the spend in Q4 is simply too elevated, if even stripping out the expenses around acquisitions. And the way from an accounting standpoint, we simply have to expense those costs, which are — I think those are opportunistic and positive. But in terms of core OpEx, the answer is yes. We have also faced significant costs around the fact that the main charter of our pure lies is Eastern Europe, over a third from Ukraine and so travel and flights have been very expensive.

We have and continue to offer temporary housing to our Ukrainian seafarers, which is in that number as well. But we have diversified out and increased the number of seafarers from the Philippines, which is now almost a third and that will help in the numbers two. So we are very focused on bringing that down, as Frank mentioned in the remarks, we expect a reduction of about $500 from Q4 to Q1, but very focused on bringing that down substantially further into and through the year.

Liam Burke: Great. Thank you, Gary.

Gary Vogel: Thank you.

Operator: Our next question comes from the line of Greg Lewis with BTIG. Greg, your line is now open.

Greg Lewis: Hi. Thank you, and good morning, everybody, and hey, Frank, thanks for — good luck, congratulations and thanks for all the years of helping me and help me better understand the industry. Gary

Frank De Costanzo: Thank you, Greg. Enjoyed working with you.

Greg Lewis: Yeah. It was a good run. Gary and I feel like you have touched on it a few times in the prepared remarks, as well as in some of the Q&A about, hey, we have been renewing the fleet, but at this point, we — it looks like maybe there’s one more sale candidate out there. I guess, as I look at ownership days in 2022 versus 2021, it was vessel ownership days, it was flattish. As we look ahead to 2023 and maybe it’s more around timing, so maybe it’s 2024. Should we be thinking about ownership days, total ownership days increasing as we think about the next, I don’t know, whatever timeframe you want to think about or are we kind of, yeah, curious on your thoughts around that?

Gary Vogel: Yeah. So I mean a couple of things, first of all the Jaeger was the last vessel that we intended to sell under the renewal program and our next older ship is only 14 years old. So we don’t have another candidate. I mean, obviously, depending on market developments that can change, but we are done under the initial fleet renewal. In terms of growth, our ownership days increased by just over 1,000 days from end 2021 to end 2022 from $18,000 to $19,200 and then you are going to see them increase now because of the net three ships that we acquired, takeaway Jaeger, but the four ships less the Jaeger, another three ships, so another 1,000 days. So I think it’s been steady. We don’t have a target number of ships, because our view is that each acquisition needs to make sense on its own merits based on price and market expectation.

So we are really constructive on the market because of the reasons I mentioned and the aging fleet and we are operating in a market now with the forwards for this year at $16,000 in what’s been really muted. We had negative demand growth last year of almost 3% and even including ton miles of almost 2% and here we are in a market that, where the FFAs trade for Supramax at $16,000. So we are really constructive that when China comes back and global demand comes back, based on a reduction and a flattening of inflation and things like that, and hopefully, a resolution of the war in Ukraine, that the demand side is going to be incredibly powerful against what’s been really muted fleet and aging fleet. So I think you will see us continue to acquire vessels because of that positive view on the market but we feel no pressure.

And I don’t use the word never often, but you will never hear me say we are going to be X number of ships by the end of next year, because to me, I think, that’s putting the cart before the horse.

Greg Lewis: Yeah. And it does sound — but it does sound like a good time to be acquire — acquiring vessels spot on. Okay. Thank you for that. And then I did just — realizing we don’t give dividend guidance, but I guess, what I would say is, yeah, Q1 seasonally weak, always is, rates are starting to get better. Based on the press release, the bookings are already over 90%. Any kind of way you can kind of talk to how we should be thinking about or at least how you are going to be talking to the Board around, maybe near-term dividends, just so that maybe expectations from investors are appropriately set and how they should be thinking about the dividend in the near-term?

Gary Vogel: Sure. Sure. Absolutely. Yeah. I mean I think our actions speak fairly loudly and that we have pretty much stuck to around 30% or a little above 30% of net income. Of course, the Board has the discretion to do more. But our view is that wherever we allocate capital it’s for the benefit of the shareholder. So if we think that by acquiring assets this quarter has been a good use of capital. I mentioned also we think having cash on the balance sheet to have the option to redeem, if not all, a significant portion of the converting cash is a good use of capital and also gives us optionality having that cash until maturity or some event where we decide to redeem them. So we don’t feel pressure or we don’t feel that we should be distributing excess incremental cash, because it’s sitting on the balance sheet, because of, in particular, those two uses.

So again, the Board always has the ability to do that, but we have been clear about the fact that the dividend is variable as a minimum or 30%. So we will have that discussion, but I don’t want to set an expectation that it’s going to be significantly more, because we haven’t had that discussion and our past actions having dictated that, and as I mentioned, we think acquiring vessels right now is attractive at these levels.

Greg Lewis: Perfect. Okay. Hey. Thank you all for the time and have a great rest of the day.

Gary Vogel: Thanks, Greg.

Operator: That concludes today’s question-and-answer session. I’d like to turn the call back for closing remarks.

Gary Vogel: Thank you, Operator. I have nothing further. So, once again, I would like to thank everyone for joining us today and wish everyone a good weekend.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.