Eagle Bulk Shipping Inc.
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Good day, ladies and gentlemen. And welcome to the Eagle Bulk Third Quarter 2017 Results Conference Call. At this time, all participants are in a listen-only mode [Operator Instructions]. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today’s conference maybe recorded. Joining us on the call today are Mr. Gary Vogel, the Chief Executive Officer and Mr. Frank De Costanzo, Chief Financial Officer at Eagle Bulk. Mr. Vogel, please go ahead.

[Gary Vogel:]

Thank you, and good morning. I’d like to welcome everyone to Eagle Bulk’s third quarter 2017 earnings call. To supplement our remarks today, I encourage participants to access the slide presentation that’s available on our Web site at www.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 include certain non-GAAP financial measures, including EBITDA, adjusted EBITDA and TCE. Please refer to Appendix in the presentation in 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. It is also worth noting that the Baltic Supramax Index or BSI that we will reference throughout the presentation is the BSI 52 Index. Please turn to slide three for the agenda of today’s call. We will first provide you with a brief update on our business. Then proceed with a detailed review of our third quarter financials, followed by an update on industry fundamentals. We will conclude with some closing remarks and then open up the call for any questions. Please turn to slide five. During the third quarter, Eagle continued to successfully execute on its business strategy, achieving superior TCE performance, while actively reviewing the own fleet and strengthening the balance sheet. Notwithstanding some delays and negative impact from recent hurricane, Eagle generated a TCE of 86.60 for the third quarter, outperforming the Baltic Supramax Index or BSI by $238 per day when adjusted for the fleet make-up. This brings our outperforming year-to-date to $948 per day. EBITDA, as adjusted for certain non-cash items, totaled $8.4 million for the quarter while operating cash flow came in at $7.3 million. It’s important to note that this is the third consecutive quarter of positive EBITDA and the first quarter we’ve generated positive operating cash flow in over three years. This is a reflection of both improving market fundamentals and the implementation of Eagle’s active management approach. In terms of sale and purchase and has been reported previously, we successfully completed the acquisition of the Greenship Bulk fleet after taking delivery of the last three Ultramaxes during the quarter. Separately, and as part of our continued objective to renew and optimize the existing fleet, we sold one of our 2010 build Diamond 53 Supermax vessels. Lastly, I’m pleased to report that we repaid $5 million on our revolving credit facility. This action is indicative of the Company’s improved financial standing, as well as our positive view of the market going forward. Please now turn to slide six for a discussion on our operating business. As compared to many of our peer group, which tends to act as tonnage providers essentially outsourcing their commercial business to third parties via time charters or pools, Eagle actively manages its business with the goal of achieving superior TCE performance. We seek to outperform the Baltic benchmark and also maximize the long-term earnings potential of our assets. To speak in real terms, our active management model allows us to punch above our way. The journey for Eagle to transition from tonnage provider to active owner operator began in Q4 of 2015. And as depicted in the chart on slide six, it's taken time since management began its strategic initiative to build at the new team, the operating infrastructure, restructure the balance sheet and improve the fleet composition to its current level. In the first 12 months of this transition over 2016, we underperformed the market, partly due to a significant investment made to reposition our fleet to an optimal geographic balance. Fast forwarding to today and as mentioned previously, for the nine months ended September 30th, Eagle achieved a TCE outperformance of $948 per day, equating to roughly $16 million of incremental cash flow for the Company on an annualized basis, given our current fleet size. This is a dramatic turnaround from 2016. As mentioned earlier on the call, Eagle realized a TCE of $86.60 for the third quarter. This result incorporates the performance of both our owned and chartered-in fleet, as well as the realized P&L from any FFA and bunker hedging. When comparing our TCE performance to the BSI, net of commissions and adjusted for the design profile of our own fleet make-up, we calculate Eagle outperformed the market by $238 per vessel per day during the third quarter. I think it’s important to note that earnings are more dynamic in an owner operator model as we invest to position both chartered and owned vessels to produce long-term value. It’s also noteworthy that our outperformance, while lower than last quarter, was and continues to be achieved in what has been a consistently rising market, which tends to be difficult to attain. Given this inherent volatility, which may skew short-term results, we believe TCE performance is best measured over a period encompassing at least several quarters. As we had discussed in our last earnings call, another way to look at TCE results is by converting into an Ultramax equivalent rate. Meaning if we operated a fleet of only modern Ultramax’s with specifications like those of our recently acquired vessels, our net TCE for the quarter would have equated to approximately $10,300 per day. While this is a theoretical figure, it demonstrates the value creating potential inheriting our business model as compared with that of a peer tonnage provider. Looking ahead, roughly 60% of our fleet is currently positioned in the Atlantic to capitalize for the increased grain export volumes out of the U.S. Gulf and Black Sea seasonally expected in the fourth quarter. As of today, approximately 64% of our available base for the fourth quarter are fixed at a TCE of $10,176 per day, representing an increase of 18% quarter-on-quarter. Slide seven illustrates one aspect of our business model that is particularly relevant, namely our third-party time chartering business. Our active management approach encompasses a number of different commercial strategies, which together can maximize TCE performance. Our third party chartering business do not simply represent as taking in vessels and re-chartering them out in hopes of earning margin. The 22 ships chartered in during the quarter represent vessels taken to cover cargo commitments execute on market opportunities and vessels to take advantage of arbitrage opportunities around our own fleet. Sometimes charters in fact may not be profitable in isolation. The ability to chartering vessels allows us the flexibility to secure cargos while also positioning our own fleet in front of the best revenue opportunities. This combined with an increasing book of cargo contracts and the use of forward trade agreements to hedge market risks, are all part of our integrated approach to create Alpha. In just 24 months, we’ve built up our third-party chartering activity to a total of 1,046 charter days in the third quarter, comprised of 22 distinct vessels. This equates to accumulative annual growth rate of 237% since the third quarter of 2015. Our business model and the ability to execute is based on the experience of our commercial management team, which has developed and executed this owner operator strategy for over 20 years. A global presence with integrated offices, superior market intelligence and a structured approach that seeks to maximize revenue, it’s a business model that yields tangible outcomes, which are reflected in our results. Please turn to slide eight for a brief update on our fleet profile and make-up. As discussed earlier on the call, we completed the acquisition of the Greenship Bulk fleet after taking delivery of the Westport Eagle 2015 build Crown-63 Ultramax in September. On the sales side, we’re expecting to deliver the rent, which was previously reported sold to new owners by the end of November. And as previously mentioned, the recently sold Avocet 2010 build Diamond-53 is expected to deliver to her new owners by January. On the top right hand corner of the slide, we show a summary of our own fleet development since we began to implement our strategic plan to renew and improver the make-up of Eagle’s fleet. As you will note, we have acquired a total 11 Ultramaxes over the past 12 months, averaging over 63,000 deadweight tons and just three years in age at purchase. At the same time, we sold a total of nine Supermaxes averaging approximately 52,000 deadweight tons and over 12 years in age. Each time we acquire a new larger more efficient vessel or sell a smaller older and less efficient ship, we upgrade our overall fleet make-up and improve our ability to generate incremental TCE performance. In this regard, Eagle’s pro-forma owned fleet, taking into consideration the sale of both the Avocet and rent, totals 46 ships equating to almost 17,000 annual vessel days with an average age of roughly eight years. On the bottom right hand corner of slide eight, we depict our peer group fleet profile composition by company. Eagle is uniquely focused on Supermax/Ultramax asset class and owns one of the largest fleets in this class in the world. Owning and operating a large scale homogeneous fleet is a necessary ingredient in our business model as it provides operational efficiencies, which simply don’t exist across mix fleets. Subject to market developments, we intend to continue executing on our fleet growth and renewal strategy, selling off some older and less efficient ships, while purchasing newer and more efficient ones. In this regard, I believe we’re well positioned to continue to take advantage of opportunities as they arise. With that, I’d like to now to turn the call over to Frank who will review our financial performance.

[Frank De Costanzo:]

Thank you, Gary. Please turn to slide 10 for a summary of our third quarter 2017 financial results. Revenue, net of commissions for the third quarter, was $62.7 million, an increase of $9.1 million or 17% from $53.6 million in the prior quarter and an increase of $26.9 million or 75% from $35.8 million in the same period in 2016. Total operating expenses for the third quarter of 2017 were $64.6 million, an increase of $10.7 million from the prior quarter and an increase of $17.1 million for the same period in 2016. The Company reported a net loss of $10.3 million for the third quarter as compared to a net loss of $5.9 million in the prior quarter and a net loss of $19.4 million in the same period in 2016. Net loss per share in the third quarter of 2017 was $0.15 versus a net loss of $0.08 in Q2 2017. Net loss per share was $0.65 in the same period in 2016. Adjusted EBITDA came in at positive $8.4 million for the third quarter, a decrease of $900,000 million from $9.3 million in the prior quarter and an increase of $11.8 million from negative $3.4 million in the same period in 2016. Now please turn to Slide 11 for a walk from net loss to adjusted EBITDA. In the slide, you will find a walk from net loss of $10.3 million to adjusted EBITDA of positive $8.4 million. You will note that the business is profitable in the quarter as measured by both EBITDA and adjusted EBITDA. Both EBITDA and adjusted EBITDA are non-GAAP measurements. You can find additional information on non-GAAP measurements on slide 30 of our presentation. Please turn to slide 12 for a review of the changes in cash flows. In Q3 2017, cash flows from operating activities came in at positive $7.3 million, the first positive quarter in cash from operations in three years. Cash from operations year-to-date 2017 is now positive $1.5 million. As the chart at the top of the slide shows, the positive trend in cash flow continues with cash flow from operations significantly improved from the negative cash flow of $19.5 million recorded in Q1 of 2016. The chart also highlights the timing driven variability that working capital introduces to cash from operations. This variability, even down overtime, as demonstrated by the significant positive cash from operations number in Q3, which is essentially making up for timing issues in Q1 and Q2. Let's now turn to slide 13 for an overview of our balance sheet and liquidity. The Company had total cash and cash equivalents of $64.3 million as of September 30, 2017, down from $68.7 million at the end of Q2. The cash balance decrease resulted from the $5 million pay-down of the revolving credit facility. The Company's total liquidity as of September 30, 2017 was $94.3 million and is comprised of total cash of $64.3 million plus undrawn revolving credit facility availability of $30 million. Total liquidity is essentially unchanged from prior quarter. Total debt, which is net of debt issuance and discount costs, stood at $313.8 million as of September 30, 2017. The outstanding debt under the first lean facility as of September 30, 2017 was $194.9 million, down $8.9 million from the end of Q2. The term loan balance is $174.9 million and the revolver $20 million. As noted, we paid down $5 million on the revolver in the quarter. Since the Company’s refinancing in Q1 of 2016, we have repaid $14.8 million of the term loan, which includes $2.4 million paid in Q2 on the sale and delivery of the Sparrow and $4 million paid in Q3 on the sale and delivery of the Woodstar. The outstanding balance for the Second Lien Facility as of September 30, 2017 was $75.1 million, which includes the accrued PIK interest of $15.1 million. The outstanding balance for the Ultraco Debt Facility as of September 30, 2017 was $61.2 million. The Ultraco Debt Facility was closed on June 28th with the draw of $40 million on six of the nine Greenship vessels financed. A draw off $21.2 million on the final three ships took place in early Q3. Let’s now review slide 14 for our cash breakeven per vessel, per day. Cash breakeven per ship per day in Q3 2017 is $7,356, $50 higher than Q2 2017 and $433 higher than full year 2016 cash breakeven of $6,923. Q3 OpEx came in at $4,627 per day, $352 lower than Q2. The decrease in OpEx in Q3 more than offset the increases of the prior two quarters. Q3 drydocks per ship per day came in at $535. There were three drydocks completed in Q3, which resulted in the increase of $224 versus prior quarter. The three drydocks completed in the quarter were third special surveys, which are more expensive than a normal drydock. No additional drydocks are planned for 2017. Q3 G&A came in at $1,443 per ship per day, down $132 from Q2 on the delivery of the last three Greenship Ultramaxes, bringing the fleet to 48 ships. Also keep in mind that we had 22 chartered in ships, which also add to cost. As a point of reference, the corresponding cash G&A cost per day, when included these chartered in vessels, equates to $1,163 per day. Q3 interest expense is $67 higher from prior quarter at 751 per ship per day. Cash interest expense is higher as a result of the additional Ultraco Debt. Turning to slide 15, you’ll find an overview of OpEx. As mentioned, during our previous earnings call, we continue to focus on creating cost efficiencies while investing in our existing fleets in order to upgrade our vessels and improve technical performance. The decrease in OpEx in Q3 versus Q2 was a result of reduced crew changeovers along with savings and stores and spares. Whiles Q3 OpEx came in just below our full year 2017 budget, given the lumpy nature of payments related to both stores and annual expenses, we think it’s appropriate to look at OpEx under a multi-quarter average. If you exclude extraordinary items relating to certain upgrades, as well as the three vessels that were sold, OpEx for the third quarter of 2017 was $4,458 per ship per day, down about 5% from prior quarter. Turning to slide 16, you will find an overview of our drydock schedule. The chart on slide 16 depicts forecasted drydocks. Looking ahead, we have 11 vessels scheduled for drydock in 2018. The breakdown is as follows

[Gary Vogel:]

Thank you, Frank. Please turn to slide 18. On the back of the ongoing improvement in both supply and demand fundamentals, which we will discuss shortly, the BSI continues to post higher highs. For the third quarter, the gross BSI averaged approximately $9,200 per day. This is up 7% quarter-on-quarter and 30% year-on-year. And as compared to the historical low reached during the first quarter of 2016, the BSI is up an impressive 142%. Today, we’re more than one third of the way into the fourth quarter and the BSI is approximately 10% where it began the quarter. It’s notable that this is the first time the BSI has traded above 11,000 since the third quarter of 2014. As we have indicated previously, although rates have been showing significant improvement, it’s important to note that they remain at relatively low levels from a historical perspective. Excluding extreme high markets of 2007 and 2008, the 10 and 15 year historical averages are around $12,000 and $15,000 respectively. Please turn to slide 19 for a brief update on supply fundamentals. Gross supply growth continues its downward trend, newbuilding deliveries totaled roughly $6.1 million deadweight tons during the quarter or approximately 75 vessels, a decrease of 38% quarter-on-quarter and 46% year-on-year. Comparing the first nine months of 2017 with the year prior, deliveries are down roughly 15%. Demolition of older tonnage amounted to $3.6 million deadweight tons during the quarter or roughly 52 vessels, representing a decrease of 9% over the prior period but an increase of 25% year-on-year based on deadweight tons. Comparing the first nine months of ’17 with the year prior, scrapping is down approximately 52%, something to be expected given the general improvement in the rate environment. Although, newbuilding deliveries for the full year 2017 are expected to be lower than ’16 by approximately 5 million deadweight tons, the year-on-year reduction in scrapping has actually led to an expected increase in net supply growth in ’17 as compared to the prior year. Scrap rates remained at elevated levels and are currently hovering around $380 per lightweight ton. Given the current and expected rate environment and scrap price levels, we believe demolition will continue around its current pasce, implying roughly 15 million deadweight tons being scrapped in ’17 and equating to 2% of the on-the-water fleet. In terms of newbuilding orders, it has been an uptake since last year, but it’s important to note that levels remained close to 20 year lows. As we’ve indicated previously, given a number of factors, including high steel prices and a general lack of cheap capital, we remained cautiously optimistic that we will not see a material increase in ordering unless rates improve dramatically. The order book, as a percentage of the on the water fleet, remains at historically low level of just 8%, the Ultramax order book is just 5% of the overall on the water fleet. Looking ahead, we believe supply-side fundamentals will continue to improve over the next couple of years with less and less ships being delivered. We believe this bodes well for the market and rates overall. Please turn to slide 20 for a discussion on grain market. Global grain seaborne trade has been revised higher for the full year ‘17 and is now expected to reach over 510 million metric tons, representing a year-on-year increase of 6.25%. This is an important trait for Eagle with agricultural related products, representing approximately one third of the total cargos carried during the third quarter. As indicated in our previous call, a major contributor to increase in grain trade has been China’s continued increased demand for soybeans, which is expected to total approximately 95 million metric tons for 2017, an increase of over 13%. The primary sources for Chinese imports is the U.S. and Brazil, which are long-distance high ton mile routes. Drought conditions in North America and Australia are expected to negatively affect weak crops and hence exports from these markets with Russia who has been experiencing a record Wheat crop taking the market share. Russia's wheat exports are expected to increase by 16% to 32 million metric tons. Please turn to slide 21 for a look at the minor bulks. Minor bulk trade, which represents almost 40% of total dry bulk trade, is expected to grow by approximately 2% in 2017 as compared to ‘16 when it was flat on the year prior. The rebound in trade growth can be attributed to the improvement in overall macro environment. But as you will note, it still lags overall dry bulk demand growth. The specific minor bulks, which have primarily driven growth this past year, include agro bulks, fertilizers, scrap metal and bauxite. Trading these commodities will collectively grow by 8% in 2017 to reach almost 540 million metric tons, representing roughly 30% of total minor bulk trade. Please turn to slide 22 for a review of Chinese demand drivers. Chinese GDP growth is expected to reach 6.8% for the full year of ’17, thanks to both strong consumption and production, which impart has been supported by government policies. Iron ore imports remained firm. The third quarter totaled almost 275 million metric or slightly up quarter-on-quarter. For the full year ’17, imports are expected to total almost 1.1 billion metric tons, up 7% year-on-year. On the top right-hand corner, we depict monthly coal imports, which remain around their five-year average level of 18 million metric tons. As we spoken about previously, imported coal is displacing lower quality domestic production and coal imports for the year are expected to reach 235 million metric tons, an increase of approximately 3% year-on-year. Lastly, on the bottom left-hand corner chart, we depict Chinese minor bulk imports. For the eight month period ending in August, imports totaled almost 210 million metric tons, an increase of 19% year-on-year. For full year ’17, projected imports have been revised higher to 316 million metrics tons, an increase of 16% year-on-year. Contributing to this is increased imports of bauxite, manganese ore and forest products. Please turn to slide 23 for a summary on short-term expectations and medium-term projections. For 2017, dry bulk growth has been revised further and is now expected to grow by almost 4% as compared to just 1% growth in 2016. This positive revision follows continued strong demand from China, as well as improvement in the overall global economy with global GDP growth now expected to come in at 3.6% for 2017. We believe drybulk demand could now reach close to 5% growth in the medium to long-term as and if it continues to revert towards its historical mean correlation with global GDP growth. This concludes our market discussion. And I would now like to end the call with a few takeaway points. Please turn to slide 25. We believe Eagle is uniquely positioned to capitalize on improving drybulk market fundamentals for a number of reasons; firstly, our focus is on the most versatile vessel segment. Since Supermax/Ultramax vessels are able to carry essentially all types of drybulk commodities, their earnings tend to be highest from a risk adjusted perspective. In addition, operating in just one asset class provides for operational efficiencies, which don’t exist across asset classes. We have considerable operating leverage with 46 owned ships or 17,000 vessel days, and this number is complemented by a steadily growing third-party charter in fleet. Our strategy of active managing gives us the ability to drive higher TCE performance and results. Our management structure of maintaining all services strategic, commercial, operational, technical and administrative in-house ensures full alignment between Company, management and shareholders. Our Board representation, which is majority independent, provides for strong corporate governance. Our balance sheet provides dry powder for growth, and we have an experienced team with a proven track record. I would now like to turn the call over to the operator, and answer any questions you may have. Operator?

[Operator:]

[Operator Instructions]. Our first question comes from the line of Espen Landmark with Fearnley. Your line is now open.

[Espen Landmark:]

I wanted to start with the rates that has improved throughout the third quarter, whilst your differential compared to the industries looks to narrow little bit versus 2Q and 1Q. I mean, it's still a positive number. But is it anything concrete you would put that on beyond the, I guess, rising markets you mentioned in your prepared remarks?

[Gary Vogel:]

As you may recall, we provided guidance on our last call that we had 68% of Q3 at 8,150 and that was in early August. So by that measure means we fix, the balance of our fixtures were done in 9,700 to come out with the TCE that we did. So you can see there is an inherent lag in earnings. And the majority of the fixtures done that got us to that 8,150 number by early August was done in late-June and in July when the market took a deep. So also as we mentioned, active operating is subject to more volatility than a tonnage provider model. By example, if you fixed a ship out for one-year at pick a number, $9,000 a day then you have 9,000 every day over 12 months. But we may fix a vessel from the pacific back into the Gulf at just $3,000 a day over 60 days and that will impact the quarter significantly, and then we follow-up with over 20,000 going back out to Asia, but it could show-up in a different quarter. So it has a profound effect when you measure things in quarter increments. That’s why we believe and we’ve consistently stated that we think it’s important to look at earnings relative to index over a multi-quarter period. And as you mentioned, and not to believe the point, beating an index in a rising market is not an easy fee. Anytime you contract a ship for a voyage that revenue is flat for the trip. But every day the index goes up your relative performance goes down even though revenue is flat. Of course it works in reverse on a declining market and makes you look better. But as we all know, 2016 it’s been rising quarter-on-quarter since the beginning of the year.

[Espen Landmark:]

I guess on the fleet side, you lined up I think two more ships for sale. Those prices, it seems to be I guess somewhat below our reference values. Would you describe that, I mean, typically they are hard to sign the discount from the Chinese build assets. Is that the main reason or is it more vessels specific?

[Gary Vogel:]

Can you repeat that, you broke up?

[Espen Landmark:]

Just wondering, I mean, you have a couple of more ships lined up for sale and the prices for those, they are a bit below at least our reference values. I mean, it's typically hard to judge the Chinese vessels by the discount that should have to decrease in the Japanese. But is it -- would you say that those are fair market values for the ships today, or is it more vessel specific driving the delta and prices?

[Gary Vogel:]

I think it’s very vessels specific. I mean, we look to selling asset. We look at not just the age, the special survey drydock position, but also the effectiveness of the vessel relative to its value. And we’ve been really on a mission of improving our ships and our fleet overall. In terms of discount, we’re actually, at the moment, we’re not looking to sell any vessels right now. We’re positive on the market development as well. And so we’ve temporized in that regard, but we will continue to sell older and less efficient ships at what we believe is par value or above relative to each specific ship. So we’re not focused on what, let’s say, the market thinks, we run pretty detailed analysis of what we think a ship can deliver in terms of value relative to its price and that’s how we make that decision.

[Espen Landmark:]

And then additional proceeds from those sales, so that was 9 million done payment in 3Q, should we assume that all the cash proceeds should go for debt repayment?

[Frank De Costanzo:]

So actually, under our first lean facility, there is an agreement in it. That 50% of proceeds go to pay down debt and 50% stay on the balance sheet.

[Operator:]

Our next question comes from the line of Magnus Fyhr with Seaport Global. Your line is now open.

[Magnus Fyhr:]

Thank you, good morning. Just first question on the balance sheet, I mean, you guys have made the right things commercially. You made acquisitions timely ahead of asset value increases and with the balance sheet improving. Why do you still have the second lien facility on the balance sheet, and what are the plans to retire that?

[Frank De Costanzo:]

Magnus, thanks for the question. I actually glad you asked it, because I wanted to be sure to address this before we end the call. So it’s an opportune time. While we feel strongly the second lien structural was ideal, just 18 months ago when we restructured the balance sheet really at the depths of the drybulk market, we as a company are keenly aware of the costs and importantly the OpEx of the high pick interest element. And it's suffices to say we are, as always focused on improving and lowering our cost of capital, improving the cap structure and evaluating all possible paths to do so. So in this regard, I can mention that we will be issuing a press release this morning that we’re exploring a potential private placement of bonds in the Norwegian market. Unfortunately, I can’t speak more specifically than that at this stage, but I trust that’s helpful to you.

[Magnus Fyhr:]

Okay, very good, because I think part of the reason why the stock has been lagging is still having that that’s a still balance sheet, so that’s good news. Second question just on the market, in general, I was curious to see. I mean you do good job in laying out the different commodities. And on commodity specifically in the coal market, can you -- that kind remains a wild card going forward. Can you -- your involved trade and India trade, can you give us a little bit flavor on what you're seeing there, both in India and in China as far as incremental growth on the coal trade?

[Frank De Costanzo:]

Yes, so I mean, I think the biggest headline on demand, if you were to look at the one trade, I think that’s really interesting and that’s what we’ll refer to the substitution trade of coal into China. While domestic production is up as they call certain lower quality mines and unsafe mines in China and they replace it with imported coal. And only 7% of coal going into China is imported. So the lever on 1%, either 1% let's say reduction of coal production, domestic production in China or 1% incremental demand increase, is demonstrative on seaborne coal. So that’s what we’re seeing. I mean India, stock piles are low, which bodes well for incremental coal demand there, that’s not a big for us. We're definitely more heavily weighted towards the Indonesian Chinese coal out there, but we see it as a continuing positive and really don't see that substitution trade ending anytime soon.

[Magnus Fyhr:]

And then just one last question on the new building, I know you guys, hopefully not looking at new builds. But what's the earliest I'm sure the shipyards are getting little more aggressive. What’s the early delivery you can get on a ship now in Korea versus China?

[Frank De Costanzo:]

I mean, I'm happy to report. We're not in discussion with any yards in terms of watering ships. We've been pretty clear our view is that the world has enough dry bulk ships, and actions speak louder than words. And we have focused our efforts on acquiring 11 very modern, including resell Ultramaxes. I think if you're looking at Korea, you’re likely looking at 2020. China, you definitely can find yards that will give you a few ships within 19. But ultimately you need to get a refund guarantee in place before that happens. And then many of the yards in China who are out there marketing haven't taken order for quite some time. So whether or not you actually get the ship delivered then is a real question mark. So, I think we feel confident that '18, '19 is really positive in terms of that, more of a focus on what happens as we go out into 2020 in China, as well as Korea and Japan.

[Operator:]

Our next question comes from the line of Fotis Giannakoulis of Morgan Stanley. Your line is open.

[Fotis Giannakoulis:]

We have seen a tremendous improvement in the chartering market in fourth Q. Asset prices they went up earlier this year, but they seem to have lagged the last two months, the improvement in charter rates. And at the same time, we haven't any activity in the period market. Can you please explain that and give us your view if charterers are looking to secure tonnage for longer periods that will allow also asset value just to move higher?

[Gary Vogel:]

So a couple of things. I think if you look at asset prices relative to the current charter market, you’re right. The charter market from, call it, Q2 has moved up dramatically. Having said that relative to the forward curve, I think that you would say asset prices have definitely stayed and stepped and maybe even have gone ahead. The forward curve for next year on the Supermaxes is quite muted. So I think they’re in line and where we would expect them to be given market developments. In terms of period, we see period activity. I mean I don’t know what length you’re talking about. But as a company, we will add one ship for year and half at a rate we felt was above market. In general, we don’t like we letting our tonnage. But when we see it at a level of that we think is demonstrably better then we’ll do that. We’re always looking to create value relative to the curve. So maybe it’s coming back. I think what you see also is significant charters, particularly on the grain side looking a lock and tonnage now. So I think for the first time what we’ve seen is with volatility being back for the first time in really years, getting on the wrong side of a cargo commitment can be expensive. It can cost you $250,000, $300,000, if you book a Gulf China cargo, something like that and get on the wrong side of it. We didn’t have that for years. So people were happy to run spot. But we are, on our market, we’re seeing people taking more coverage for one year, two years. So we’re encouraged that that will continue.

[Fotis Giannakoulis:]

This is growth that you just mentioned between the spot market and the forward curve. What kind of opportunities can create for a company like yours that you were able to take advantage also at the same market. Are you still chartering also more tonnage and do some hedging strategies that can enhance your returns?

[Gary Vogel:]

Absolutely, I mean, it’s a daily occurrence for us evaluating, taking in ship, let’s say, on period and hedging a fixed period by selling paper. I think, recently the physical markets been ahead of the FFA market, so haven’t had the opportunity to do that very much but we’ve demonstrated that we do that. And as I said, we evaluated all the time. Also, we never take, what we call, make a position to the market with the derivative. So even hopefully think the FFA market might be undervalued for next year, we won’t buy it. We have a long position to the market given that we’re an owner. And so therefore, we will only use the derivatives to hedge a ship and/or potentially hedge a cargo position. Having said that, we’ll do it dynamically. So we may hedge a ship position. And then if we feel that the FFA market has backed off too much, we could buy it back and online that hedge and put it back on. So these are all strategies on a conservative basis, a risk-managed basis that can add incremental value. And those strategies are all part of what you see and our mission to and our ability to outperform the market.

[Fotis Giannakoulis:]

Can you clarify how longer you really dispositions are we talking about a few months, or they can extend after a year or longer?

[Gary Vogel:]

They can be longer. But we have only chartered vessels since I’ve gotten here for up to what we call one-year, which would typically be, let’s say, nine to 12 month charter with a fixed period being the nine months. And then we will go and hedge that period. So we haven’t done any FFAs beyond that type of period and again, only against a fixed chartering commitment.

[Fotis Giannakoulis:]

Gary, can you also discuss about how the environmental effort in China is impacting the dry bulk market, both on the coal side that there are plenty of concerns about the weakening coal demand, but also on the iron side and the need for higher quality iron ore from Chinese buyers?

[Gary Vogel:]

Absolutely, I mean, addressed I think the coal substitution that the requirement for higher quality and shutting inefficient and dangerous mines in China is positive. And again, I don’t think you can over emphasize the lever arm effect that only 7% of Chinese coal is imported, right. So it’s quite a powerful lever there. In terms of iron ore, as you know, we don’t carry much iron ore. I mean, clearly, it’s an important market overall for dry bulk and steel production as well. And we’re less dependent on it. I don’t want to imply it’s unimportant, but our ships don’t carry a significant amount of iron ore. And the coal we transport in Asia is mostly steam coal, as I mentioned earlier, Indonesian steam coal. Our biggest cargo as it relates to steel is moving finished and semi-finished steel. In fact, we have regular sailings from Asia back into the Atlantic, what we call back haul cargo. And frankly, we haven’t seen a slowdown in forward cargos to-date.

[Operator:]

[Operator Instructions] Our next question comes from the line of James Jay with Maxim Group. Your line is now open.

[James Jay:]

I have two quick ones. So with the dry bulk looking strong, what are the increased there from charters? I think it's a more long-term fixtures or are they happy with the six to 12 month fixtures, right now?

[Gary Vogel:]

There is definitely more appetite for longer term. And not only from call it charters I’d say from the operators which play a vital role in between. I mean, we as a company, don’t do a lot of re-letting of our ships but the operators have come back looking for opportunistic positions to come in and take advantage of what they deem to be a rising market. So it’s definitely a lot more inquiry if we go compare to a year ago, it’s night and day, right. So I think we’re getting back to a more normal market. As I mentioned, it’s the volatility that brings operators back to market and it’s a volatility that brings charters back that for the first time in a long time can get on the wrong side of a cargo sale or a trade. So it’s definitely there. We’re not back to where we like to be, and we’re ultimately I think we will be. But it’s definitely improving.

[James Jay:]

And then what level would you guys look to do more long-term charters to protect some of the down side?

[Gary Vogel:]

So I think the way to look at it is not necessary just long-term charters. But as we look to lock in cash flows and as an owner operator, we have a number of levers we can pull to do that. We can contract cargos, which give us the opportunity not only to choose Eagle ships but chartering other ships and increase our fleet, which we talked about doing that. We also can sell FFAs and the benefit of an FFA is we maintain our ship. And if we believe that we can achieve $1, 000 a day incremental value over the par then by giving someone else the ship, we lose that ability. By selling an FFA, we maintain the asset and its part of our fleet and our ability to generate that outperformance. So as I said, we do realize ships when we feel we're being paid above par value. But all things being equal, we prefer to book cargo and sell FFAs to lock in revenue streams. And it's not a static discussion that we want, let's say 11,000 or 12,000, it has to do with where we believe the market is going and as well as what our risk appetite is based on the supply-demand fundamentals. And at the moment and we have been for quite some time, we believe that the fundamentals in dry bulk are improving quarter on quarter.

[James Jay:]

Actually just one last quick one, so it seems like there has been an uptick in Chinese bauxite imports. How active are you in that trade?

[Gary Vogel:]

We do some. But I think the majority of what we're seeing a lot of it's going on Panamax stems. So it's an important trade. The other thing, a lot of bauxite at the camps used to go into the U.S. golf and that trade has stopped due to closing of a smelter and that’s now going out to China, which is more long haul much more ton miles. So that’s positive. I think, as I said, we’re not heavily involved in the trade. We do some. But really ultimately we benefit from incremental ton miles across the board for Ultramax/Panamax because there is a cross-over between them. So even if we're not activity in a market, incremental demand of course it helps all using over terminal rising tide raises all ships.

[Operator:]

I'm showing no further question as this time. I would like to turn the call back to Mr. Vogel for and closing remarks.

[Gary Vogel:]

Thank you, Operator. We have no further remarks. So I'd like to thank everyone for their time today and wish everyone a good day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great weekend.