Eagle Bulk Shipping Inc.
Q4 2017 Earnings Call Transcript

Published: 6 Mar 2018

[Operator:]

Greetings and welcome to the Eagle Bulk Shipping Fourth Quarter 2017 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the call over to Gary Vogel, Chief Executive Officer of Eagle Bulk Shipping. Sir you may begin.

[Gary Vogel:]

Thank you, and good morning. I would like to welcome everyone to Eagle Bulk’s fourth quarter 2017 earnings call. To supplement our remarks today, I encourage participants to access the slide presentation that is available on our website 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 the 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 basis to BSI 52 Index. Please turn now to slide 3 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 fourth 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 5; during the fourth quarter, Eagle continued to successfully execute on its business strategy achieving superior TCE performance while actively renewing the home fleet and strengthening the balance sheet. Eagle generated a TCE of $10,452 for the fourth quarter outperforming the Baltic Supramax Index or BSI by $492 per day when adjusted for the fleet makeup as compared to the standard BSI shift. I’m very pleased to note that we’ve now been able to outperform the market for four consecutive quarters, thanks to the development our active commercial management approach and our teams ability to execute. For the fully year 2017, we delivered an outperformance of $783 per day or 9.4% versus the BSI. Adjusted EBITDA totaled 17.2 million more than double quarter-on-quarter and more than four-fold as compared to the first quarter of ’17. Since the first quarter of 2016, when the drybulk market hit an all-time low, our adjusted EBITDA has increased by approximately $127 million on an annualized basis. In terms of sales and purchase, we continued executing on our growth and renewal strategy during the fourth quarter with the acquisition of a 2015 built Crown-63 Ultramax, which has been renamed the new London Eagle. We purchase the vessel for 21.3 million, an attractive level I believe as compared to a recently reported transaction. The new London Eagle is constructed at the same yard and is of the same design as the nine Ultramaxs’ we acquired from Greenship Bulk last spring and hence fits in very well with our existing fleet. The acquisition was financed with cash and debt, a loan which equates to approximately 40% of the purchase price, represents an upside to existing facility that we have in place with ABN AMRO, DVB and SEB and it carries a margin of LIBOR plus 295 basis points and a maturity of almost five years. Lastly, I’m very pleased to report that we completed a significant refinancing on approximately 265 million of debt during the fourth quarter, allowing us to push or turnaround all debt to 2022 or by five years and reduce our annual interest expense by almost $4 million per year. Through the issuance of a $200 million fixed coupon bond, we have also effectively eliminated any exposure to rising interest rates on approximately 60% of our total debt. Our timing appears to have been good, as short term interest rates have increased by over 50 basis points since we priced the bond in November employing a further annualized savings of approximately $1 million thus far. Please turn to slide 6 for a discussion on our commercial performance. The chart on slide 6 depicts our TCE performance as compared to the BSI starting from the first quarter of 2016 onwards. As I mentioned earlier, we’ve been able to outperform the market for four straight quarters now, a significant achievement I believe especially when considering the rising market. Typically performance tends to lag the market when it is trending up, so our performance is challenging to achieve in a rising market and vice versa in a falling market. The fact that we’ve been able to do so through ’17, during a period when the market increased by almost 50% to the validating of Eagle’s operating methodology and commercial team. As a reminder, our TCE rate incorporates the results from our own fleet as well as the net income contribution from our third party chartered in fleet including the realized P&L from a FFA trades and bunker hedging. The TCE outperformance we achieved during 2017 of $783 per day equates to approximately $13.4 million in incremental cash flow for the business basis our current fleet count. This is a significant improvement from ’16 with a year-on-year improvement amounting to $1525 per day or roughly 26.3 million to the positive. Looking ahead, I’m pleased to report that our outperformance trend has continued in to the first quarter, with approximately 90% of our available days now fixed we’ve generated a TCE of $11,015, representing our current outperformance of over $1,000 per day as measured against the BSI for Q1. Having said this, it is worth noting that the spot market has continued to move up maturely since Chines New Year in mid-February where the spot BSI is now over 11,000. So we expect our relative outperformance may potentially come in somewhat from convert levels if the market continues to increase, given that we’re almost fully fixed in terms of revenue for the quarter. As we’ve said in the past, given such dynamics involved with relative performance, we believe looking at this over multiple quarters is the most appropriate approach. Continuing on the theme of relative performance, while a higher headline TCE is what we strive for each and every day, a more important metric for us and we believe for all companies is a relative earnings of a shift to the benchmark or in our case the BSI. The reason for this comes down to yield. For example, while achieving a TCE of 12,500 per day on a 63,000 deadweight Chinese Ultramax may appear to be a solid number. A TCE of say 11,000 on a 57,000 deadweight ton Chinese Supramax will likely provide a better cash-on-cash return. This is because the Ultramax is more expensive than the Supramax of the same vintage and a probe really so because it has a higher earnings capacity based on both its larger deadweight and better fuel consumption. As an example, the generic five year old Chinese Supramax only costs around $13 million, however a five year old Chinese Ultramax from the same yard will cost over 19 million. Given this differential the Ultramax will need to near approximately 2,000 more than the Supramax in order to generate the same return on an unlevered basis. As we’ve discussed in previous calls, another way to look at our TCE results is by converting them to an Ultramax equivalent rate. Meaning if we operated a fleet of only modern Ultramaxs’ with specifications similar to those of our recently acquired vessels, our year-to-date TCE of $11,015 would equate to approximately $12,750. While this is a theoretical figure, I believe it clearly demonstrates the value creation ability inherent in the Eagle commercial platform. Please turn now to slide 7 for a discussion on the makeup of Eagle’s TCE performance. As we’ve explained in previous calls, our active management approach to trading a fleet encompasses the execution of a number of different strategies allow us to maximize TCE performance. These include a focus on voyage chartering with end users, opportunistic chartering, arbitrage; a dynamic hedging with FFA’s and bunker swaps. The chart on slide 7 depicts our historical third party time chartering business as business in vessel days. During the fourth quarter, we had on charter 22 distinct vessels representing a total of 1,050 vessel days. We chartered these vessels in from other owners in order to cover various cargo commitments with operate on voyage basis to profit from arbitrage opportunities and take advantage of market dislocations, deploying a structured approach which creates asymmetric optionality. Our business model which we define as an active owner operator is defined on strategies which our management team and commercial staff have been executing on for over 20 years and brought to Eagle approximately two years ago. It’s a multi-strategy approach designed to add incremental revenue to our core owned fleet’s TCE on a risk manage basis. Please turn to slide 8 for a brief update on our fleet profile and makeup. On the left hand side of the slide, we show a summary of our own fleet development since we began to implement our strategic plan to renew and improve the makeup of our fleet. As you will note, we require a total of 12 Ultramax over the past 16 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 Supramaxs averaging approximately 52,000 deadweight ton and over 12 years in age. Each time we acquire a new larger and more efficient vessel or sell a smaller, older and less efficient ship, we upgrade our overall fleet makeup and improve our ability to generate incremental TCE performance. In this regard, Eagle’s pro forma on fleet taking consideration the sale of the AVOCET and purchase of the New London Eagle equates now to over 17,000 annual vessel days with an average age of about eight years. On the right hand side of slide 8, we depict our peer group fleet profile composition by company. As you will note, Eagle is uniquely focused on this versatile Supramax Ultramax asset class and owns one of the largest fleets in the world. Owning and operating a large scale homogenous fleet is a necessary component in our business model, as it provides operational efficiencies which simply don’t exist across mixed fleets. Subject to market developments, we intend to continue executing on our fleet growth and renewal strategy, selling off older and less efficient ships while purchasing newer and more efficient ones. In this regard, I believe the steps we have taken and the result we have achieved to date position Eagle to continue to grow and act on consolidation opportunities. With that I’d like 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 fourth quarter and full year 2017 financial results. Revenue net of commissions for the fourth quarter was 74.6 million, an increase of 19% from the prior quarter. For the full year 2017, revenue was 236.8 million, an increase of 90% from full year 2016. Operating expenses for the fourth quarter of 2017 was 68 million, an increase of 5% from the prior quarter. For the full year of 2017, operating expenses were 236.9 million, an increase of 20% from full year 2016, when excluding vessel impairments. The year-on-year was driven by the increase in voyage and chartering expenses. The company reported a net loss of 16.6 million in the fourth quarter, as compared to a net loss of 10.3 million in the prior quarter. Excluding the non-cash expense from the extinguishment of debt, net loss in Q4 was 1.6 million. For the full year 2017, the company registered a net loss of 43.8 million, as compared to a net loss of 223.5 million for full year 2016. Net loss per share in the fourth quarter of 2017 was $0.24 versus a loss of $0.15 in Q3 2017. Excluding non-cash expense for the extinguishment of debt, net loss per share in Q4 was $0.02. Adjusted EBITDA came in at a positive 17.2 million in the fourth quarter, an increase of 105% from the prior quarter. For the full year 2017, adjusted EBITDA came in at 39.5 million up from negative 26.5 million in 2016. In the appendix, you will find a walk from net loss of 16.6 million to adjusted EBITDA of positive 17.2 million. Both EBITDA and adjusted EBITDA are non-GAAP measurements; you can find additional information on non-GAAP measurements on slide 30 of our presentation. Let’s now turn to slide 11 for an overview of our balance sheet and liquidity. The company had total cash, cash equivalents and certificate of deposit of 60.8 million as of December 31, 2017, down from 64.3 million at the end of Q3. Cash balance was lower in the quarter due to the purchase of a 4.5 million liquid time deposit to refinancing of 5 million less than the retired debt facilities and approximately 5 million in transaction deeds largely offset by cash generated from operations. The company’s total liquidity as of December 31, 2017 was 75.8 million and is comprised of total cash and certificate of deposit of 60.8 million plus an undrawn revolving credit facility availability of 15 million. The $18.5 million decrease in liquidity from prior quarter can be explained by the changes in cash I just covered, along with a reduction in the revolver availability of 15 million. The 30 million in availability from the old revolving facility was only in part replaced by the 15 million available in the new undrawn Shipco revolving facility. Total debt as of December 31, 2017 was 326.2 million and is comprised of 200 million Norwegian bonds, the 65 million new bank facilities and the 61.2 million Ultraco bank facilities. Please turn to slide 12 for a review of cash flow; starting with the upper chart on slide 12, Q4 2017 net cash provided by operating activities is positive 5.9 million for Q4. Cash from operations for full year 2017 is positive 7.4 million. The blue bars in the upper chart reflect a reported cash flow from operations, while grey bars show the number excluding operating assets and liabilities, largely working capital. You can see the variability that working capital introduces to cash from operations. The variability evens out over time; in regards to Q4 we received $7.1 million in cash in the first 10 days of January expanding the difference between the blue and the grey bars. Now let’s move to the lower chart on slide 12, let’s take a look at the changes in the company’s cash balance over 2017. I like this chart because it really clearly lays out the large deals driving our results and strategy. The two large bars on the left, revenue and operating expenditures are simple look at the operations. The net of the two bars is positive 38 million which comes in close to our full year adjusted EBITDA number. The (inaudible) four bars in the middle right of the lower chart that cover vessel sales and purchase, debt financing, debt repayment and equity proceeds give us a good feel for our fleet renewal program in the financing supporting the process. Let’s now review slide 13 for cash breakeven per vessel per day. Cash breakeven per ship per day in Q4 2017 is $7304, $52 lower than Q3 and flat to 2017 cash breakeven of 7299. Q4 OpEx came in at $4844, $217 higher than Q3, but largely in line with the full year 2017 results. It is important to note that our OpEx number includes certain expenses related to upgrading the fleet with such items as performance modelling equipment and advance hull coatings. Also given the lumpy nature of payments related to both stores and annual expenses, we think it is appropriate to look at OpEx under a multi-quarter average. There were no drydock expenses in Q4. G&A came in at 1459 in Q4 per ship per day, up $16 from Q3. For full year 2017, G&A came in at $1,497. In Q4 we had 22 chartered in vessels. If we include chartered in days, Q4 G&A would have been 1177 per ship per day, $282 lower. Similarly for full year 2017, if we included chartered in days G&A would be $1241 per ship per day down $256. Q4 interest expense is $250 higher from prior quarters at just over $1,000 per ship per day. Cash interest expense is higher as a result of the additional Ultraco debt, the higher coupon fixed rate bond, along with the elimination of the non-cash [pick] note. For 2018, assuming G&A and OpEx remain unchanged; our breakeven per ship, per day would be $8411. The numbers made up of OpEx of $4825, drydocking of $452, G&A of $1497 and debt service of $1637 all per ship per day. This concludes my review of the financials. I will now turn the call back to Gary, who will continue his discussion of the business and provide context around industry fundamentals.

[Gary Vogel:]

Thank you Frank. Please turn to slide 15; the BSI continues its upward trajectory on the back of improving supply and demand fundamentals. For the fourth quarter the gross BSI averaged $10,727, this up 16% quarter-on-quarter and 29% year-on-year. On slide 15, we’ve depicted the historical BSI, highlighting the seasonal period of December through February since 2015. Typically the market falls from December in to January on the back of overall lower demand impacted by the ending of the North American grain harvest and due to the holiday season ending with Chinese New Year in mid-February. Higher supply in January also puts pressure on the market with increased new building deliveries taking place in a month which is supplemented by the delivery of vessels which have been delayed from the prior calendar year. This is a recurring phenomenon where owners push taking the deliveries of vessels in to January in order to benefit from having a ship which is younger by one year on paper. What is particularly interesting to note and depicted by the red arrows is that as the market has recovered over the past three years, aside from each period having a significantly higher BSI average, the change in rate from December 1 to Feb 28 has improved significantly in each year, whereas the market has actually risen since December 1st and currently sits about 5% above its December 1 level. As we have indicated previously, although rates are showing continued improvement, they remain at relatively low levels from a historical perspective. Even when excluding the extreme high markets of 2007 and 2008 for 15 year historical average is around $15,000. Please turn to slide 16 for a brief update on supply fundamentals. Gross supply continues its downward trend, new building deliveries totaled roughly 3.6 million deadweight tons during the fourth quarter or approximately 46 vessels, a decrease of 46% quarter-on-quarter. For the full year of 2017 deliveries are down almost 20% as compared to the prior year. Demolition of older tonnage amounted to 2.2 million deadweight tons during the quarter or roughly 26 vessels, representing a decrease of 40% over the prior period based on deadweight tons. For full year ’17, scraping is down approximately 50%, something to be expected given the general improvement in the rate environment. Although new building deliveries were down significantly in ’17, the year-on-year reduction in scraping led to net supply growth for the year of approximately 3%. Scrap rates have continued to increase and are now around 450 per lightweight ton. I believe this is indicative of an improved macro demand fundamental for [CL]. Given the current and expected rate environment and scrap price levels, we believe demolition will probably be between 10 million and 15 million deadweight tons in 2018 according about 1.5% of the on-the-water fleet. Notwithstanding our expectation for continued market improvement, we believe that both the implementation of Ballast water treatment regulations as well as Sulfur 2020 will act as a catalyst for the scrapping of older tonnage in the coming years. In terms of new building orders, there was an uptick in 2017, but it’s important to note that levels remain near historic lows. As we have indicated previously, given a number of factors we remain 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 10%, and the Ultramax order book is just 6% of the on-the-water fleet. Looking ahead, we believe supply side fundamentals are favorable for the next couple of years with less and less ships getting delivered. We believe this will continue to bode well for the market and rates overall. Please turn to slide 17 for a summary on demand growth. For 2017, drybulk trade growth reached almost 4% as compared with just over 1% in ’16. This is the first time that drybulk growth has surpassed GDP since 2014, highlighting a normalization of demand for drybulk which has historically traded at a ratio of around 1.2 to 1 against global GDP. Strong demand growth during ’17 can be attributed to a number of different commodities including the major bulks where iron ore increased by 4%, coal by about 5% and grain by about 7%, as well as certain minor bulks including bauxite which increased by 20%, fertilizer by 7% and scrap by 11%. Please turn to slide 18, for 2018 world GDP growth is projected by the IMF to increase from 3.7% to 3.9% thanks to ongoing improvement and global macro fundamentals including financial conditions especially as witnessed in advanced economies. Tax reform and fiscal stimulus measure enacted in the US are expected to boost domestic growth but should also have a positive slow over effect for other economies. All this and many other signs point to the positive. There is always uncertainty in demand and just last week the US government announced plans to impose tariffs on both steel and aluminum imports, while China the world’s largest producer of steel has reduced exports to the US over the last few years and now represents just 2% of the US imported steel if enacted this will be negative for steel borne demand or importantly could figure retaliatory actions from other nations. It is something that we need to watch as details of the US policy have yet to have been disclosed and appear to be evolving. In terms of China, growth is expected to be 6.6% in 2018 on the back of continued strong domestic consumption and production. China has been a major driver for drybulk demand especially for the major bulks such as iron ore. Chinese iron ore sea borne demand which reached over 1 billion metric tons in 2017 represents approximately 70% of total global iron ore trade. China is also the largest consumer of coal in the world with an estimated usage of approximately 3.6 billion metric tons. However most of these products gets sourced from domestic producers with imports representing only about 7% of consumption or about 230 million metric tons in 2017. This equates to approximately 20% of global sea borne coal trade. Minor bulks although relying on China’s wealth have a much more diversified demand base with more than 80% derived from non-Chinese buyers. India, whose GDP growth continued to rise throughout ’17 and has now overtaken China as the world’s fastest growing major economy and is expected to grow by an impressive 7.4% in 2018. Global grain seaborne trade is expected to reach 526 million metric tons in 2018, representing a year-on-year increase of 2.5%. This is an important trade for Eagle representing almost one-fourth of the cargo we carried in to 2017. Contrary to major bulks which are expected to grow at a slower rate in 2018 as compared with ’17, minor bulks which represent almost 60% of the cargos Eagle carried in ’17 is expected to grow by 3.2% in ’18, an increase from 2.5 in 2017. Growth expectations are particularly attributed to fertilizer, bauxite, cement, salt, scrap and Petcoke. Please now turn to slide 20 for our final recap. We believe Eagle remains uniquely positioned to capitalize on the improving drybulk market for a number of reasons. Firstly, we focused on the most versatile in vessel segment. Since Supramax Ultramax vessels are able to carry essentially all types of drybulk commodities both major and minor bulks, their earnings tend to highest from a risk adjusted perspective. In addition, operating in just one asset class provides for operational efficiencies which simply don’t exist across different vessel types. Secondly, we successfully employ an active management approach which gives us the ability to drive higher TCE revenue. We maintain an optimum management structure where all services strategic, commercial, operational, technical and administrative are done in-house. This ensures full alignment between company, management and shareholders. We have one of the best Board representations within the industry which is majority independent and we’ve been recognized for our industry leading corporate governance. We have a strong balance sheet with ample liquidity and dry powder for growth. And we have one of the most experienced management teams in the business, one which has a proven track record successfully running and active owner operator business model that delivers value. Finally, as we have illustrated on slide 20, we have considerable operating leverage with 47 owned ships or over 17,000 vessel days. As such, we have new ability to generate significant cash flows as rates improve, given our lower fixed cost structure and exposure to the spot market. The graph depicts our net cash flow generation ability in different historical rate environments from the low market experience in 2016 to the 2010 average with a net BSI equated to $21,000 per day. On these various rate environments, we’ve calculated our net cash flow base as our current owned fleet of 47 ships and our 2018 forecast in cash breakeven rate. In order to be conservative we’ve not assumed any market out performance. As shown basis 2018 Jan-Feb actual and the March through December FFA curve, the net adjusted BSI for the year currently is at $11,200 per day. Given this rate scenario, Eagle could generate net cash flows of over $48 million on an annualized basis. Assuming a 2011 rate environment, a 13,500 net cash flow increases another 40 million. The purpose of this slide is to simply demonstrate the inherent operating leverage that Eagle maintains. Based on our expectations of the market and the near to medium term, I’d believe we are well positioned to capitalize on improving fundamentals. 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 Magnus Fyhr with Seaport Global. Your line is now open.

[Magnus Fyhr:]

Just a question on your chartered in strategy. It looks like the outperformance in the first quarter looking what you’d booked as far as days for the first quarter looks very attractive compared to the BSI and all sorts of the peer group. Have you increased the number of ships in the first quarter? I think Frank mentioned you had about 20 ships at one point in time chartered in.

[Gary Vogel:]

We are not providing mid-quarter guidance for what we’re doing in terms of charter in. But as we’ve said before, our charter in fleet is there to supplement based on a net income basis. In other words, we don’t benefit from having more ships unless they generate positive net income at the end of the year. It’s not a volume driven business. So for us its opportunity based. I will tell you that its part of our methodology and therefore as opportunities and as volatility we charter ships in and as we see dislocations in the market we do it. So I think it’s fair to say that you’ll see that business continue to trend higher overall as the platform continues to develop. But as I said we’re not mid-quarter guidance on that.

[Magnus Fyhr:]

Moving over to your capital allocation strategy, you sold some of the older ships, you refinanced your debt. What’s the strategy now in 2018, do you feel you have the right mix in the fleet or your stock is trading at three big discounts to NAV, so kind of interesting to hear what you think as far as buybacks dividends or continue to expand the fleet, what’s the priorities going forward?

[Gary Vogel:]

The way we look at it capital allocation is simply what is the best use of capital for the shareholders. We think it’s premature for us to talk about the dividend, we’re only recently cash flow positive and although we’re constructive and positive on the market, we are in a volatile business. We also continue to develop the fleet in terms of acquisitions, as you know we acquired the 2015 built ship in the fourth quarter. We’re also looking at consolidation in the industry, and so obviously that takes capital as well. So we are keeping our options open at this stage. We do think based on our track record over the last year and all the reasons that we set forth in the presentation and the summary, we think Eagle is an ideal consolidator for the business and we’ve demonstrated that we’re a good custodian of asset. So as I said, we’re looking at everything from individual ship acquisitions to larger scale, but at this stage we’re not entertaining a dividend policy. But we do look forward to the day that we do --.

[Magnus Fyhr:]

And just one last question, besides the wildcard on steel tariffs, coal and grain are two commodities that play an important role in your mix, both of them showing slower growth in 2018 versus 2017. Can you talk a little bit about some of the wild cards in 2018 that may cause these numbers to be higher than currently forecasted?

[Gary Vogel:]

Sure. That’s a thing, right, there’s great visibility in a near medium term. On the supply side the demand is a wild card or has a number of them and shipping is derivative especially in our segment with the minor bulk so many different which is good because its spread out, but by the same token there’s a lot of different drivers. Coal is interesting, in particular India, right which has now surpassed China as the fastest growing major economy, has clearly indicated that they intend to – coal is their main source for power generation, and although they’ve indicated their intention to supply most of that domestically, supply as well as transportation within India has lagged and therefore we think that imports in to India in terms of coal have significant upside. Also China continues to go back and forth, but potential upside there is continued coving of mining there based on inefficient mines, dangerous mines and also cleaner coal coming from other sources. Those are couple of the wild cards. We have record crops coming out of South America in terms of grain and so that clearly will bode well for long haul trade for us. One of the benefits as well for the Supramax and particularly the Ultramaxs’ in terms of grain is whether it comes from the US, Gulf or from South America, we have the ability to position our ships closer to there as oppose to (inaudible) vessels which powers to longer distances. So whether its bringing cement in to West Africa or taking a ship from the continent in to the US near the US Gulf or in to the US Gulf and then we are potentially down to Brazil with fertilizer. It gives us that competitive advantage by trading the ships in a more advantageous way.

[Operator:]

And our next question will come from the line of Espen Landmark with Fearnley. Your line is now open.

[Espen Landmark:]

Just on the operational side, you mentioned the opportunities on the [grain], so just curious to see where the Eagle [ball-plate] is currently distributed in terms of the base and I know in the past you didn’t provide some numbers on that.

[Gary Vogel:]

I think we haven’t put an end, and the reason is that we see this is a competitive proprietary competitive. We’ve made that decision because we think it’s important that we spread our fleet as we see best for the coming quarters. We’ve done it in the past to show because we think there’s real value in that. I will tell you that the majority of our fleet remains in the Atlantic, I’ll say that. But as some of our peer group starts to emulate our model of active owner operator, we’ve decided to pull back in terms of where our fleet specifically is. For us part of being an active owner operator is determining where the next place to be is as opposed to now based on whether it’s the crop or what have you. And of course it’s not as simple as okay, lets position our entire fleet or most of our fleet for the Brazil crop. I mean that’s a good baseline, but obviously there is a lot of other decisions that go in to it in terms of rate. But I’ll leave it at that that the majority of our fleet still remains in the Atlantic, and in general that’s where it likely will remain given the historic premium. But as that spreads from Atlantic, Pacific widens and narrows as well. There’s opportunities to take money off this table so to speak and be a contrarian.

[Espen Landmark:]

And then you mentioned rates kind of been firming since Chinese New Year and we’ve seen a couple of Ultra’s actually being fixed at 13,000 a day. Given your cash back, you would have a margin of more than 5,000 a day which seems like an attractive – I mean would you consider fixing vessels at those kinds of levels?

[Gary Vogel:]

That’s a very fair question, and the answer is, as the market improves and as it is now, we look to lack in certain revenue streams. But one of the benefit of our multi-strategy approach is unlike having just the ability to time charter our ships out, we can lock in our revenue streams through building our cargo book which gives us optionality in terms of having cargos and the ability charter in more ships, selling FFA’s which are more liquid in the sense that we can hedge the cash flow and then if the market comes out we can buy it back, monetizing that hedge. That’s what we talk about dynamic hedging. But the answer is yes, we’ll also re-let our ships. But only one that we believe that pays a premium to the first two strategies we had, because when we re-let a ship unlike having booking in cargos or unlike the FFA that ship is now out and likely with what we deem a competitor for the most part. Could be an end user but if its repaired its likely a ship operator and we’d rather key the assets ourselves especially we believe we can trade them at a premium and demonstrate that we can trade them historically at a premium to the index. So all things being equal we preferred to book cargos and contracts and use FFAs, but if someone wants to pay us a premium to the market or where we deem to be a premium because of a position they have or what have you, we do reload ships and also if we want much longer coverage than rerouting is definitely something we’ll look at. I think it’s also worth pointing out this out, when you reload a ship for one-year, it’s not really, its typically something like 9 to 11 months and 10 to 12 months. And that too represents an option that you’re giving to someone else. In general terms, very simplistically as an active one operator, we like to get options not give them. So another reason why re-letting ships is not something that, it’s not our first go-to-move in terms of gaining cash flows.

[Operator:]

And our next question will come from the line of Amit Mehrotra with Deutsche Bank. Your line is now open.

[Chris Synder:]

This is Chris Synder, I’m for Amit. So my first question is on the sale and purchase market. Obviously you guys have strong balance sheet and no near term debt maturity, so we do think it could make sense for you guys to look at, trying to consolidate the industry. And my question was, just with the Ultramax and the Supramax segments starting the year on a relatively strong note. Have you guys noticed sellers trying to push the unavailable assets to maybe relative to when you guys were with the New London late last year.

[Gary Vogel:]

I think the S&P markets have been pretty flat since that time. I think we believe we purchased that vessel at an attractive level and I’m not sure it can get reported, but having said that we have seen a material uptick in terms of that. Having said that sellers are always looking to raise the asking price and it’s a dynamic market. So as and if rates continue to push up, we would expect that that will have an impact on the S&P market, but so far year-to-date I would characterize it as flat since Q4.

[Chris Synder:]

And then as a follow-up, just kind of on the steel trade. I know it’s a relative small percentage of the overall drybulk trade, but I was wondering like what asset class, like what size of ships would be most impacted by any sort of negative headwinds to the steel trade?

[Gary Vogel:]

If you talk about trade is finish the steel and again that would primarily geared tonnage being handy size up through Supramax, don’t do a lot of finished steel and some on Ultramax, but mostly Supramax and handy sized in terms of finished steel.

[Operator:]

And our next question will from the line of [Max Ciares] with Morgan Stanley. Your line is now open.

[Unidentified Analyst:]

Just wondering, you guys highlighted kind of your preference for Supramax Ultramax, how does that fit in to the commercial model and maybe what kind of advantage does it offer in arbitrage?

[Gary Vogel:]

The larger sized vessels are the most transparent market and personally I believe very hard to operate and create value around them, fewer routes clearly and as I said, very transparent. The smaller the size, the less transparent model take the market, and that bodes well. Also the fact that we carry the majority of our cargos are minor bulks there’s much more opportunities when we have a ship coming open in China. There’s a myriad of things we can do whether it’s a short 15-20 day within Asia or bringing the ship in to the Gulf as opposed to ballasting to Australia or to South America and what have you. So clearly the smaller sizes lend themselves in my opinion much better to the operating model. Having said that, I really am partial, I have been trading what we call Handymaxs since 1992 when I started doing this and I’ve always felt that the midsized is the most interesting because it also participates, and particularly now with the Ultramaxs participates in long haul trades. And although you cut out some cargo compared to a Panamax, let’s say on a long haul trade from Brazil to Asia with grain, you’re able to position that ship much closer even in to the loading area, carrying something like fertilizer in to Brazil as opposed to ballasting a long way. So it’s that combination of being able to carry all cargos, major and minor bulks, as well as participating in long haul like larger trades on major bulks that really is a positive combination. So that really is why I’ve always and we continue to be focused on the Supramax and Ultramax segment.

[Unidentified Analyst:]

If I could switch over to the market, just how do you guys characterize this, pickup an activity for Chinese New Year this year versus last year?

[Gary Vogel:]

I think it’s been really strong, not too surprising in the sense that there’s definitely less supply that’s come on this year and in early part of the year till last year. What we saw was a quick pick up particularly in Asia which was lagging, not surprisingly that’s where all the new buildings get delivered particularly in Jan-Feb. And on top of it, the Chinese New Year, that’s come back very quickly in particular iron ore and coal has been strong, but also we’ve seen a number of the minor bulks as well. We’re off to a stronger start, that is why we really wanted to highlight also the three look back in terms of the period from December to February because we thought it was – while we were feeling it graph form when you see it with the arrows, it’s really indicative of market that’s not just higher but also we believe stronger.

[Unidentified Analyst:]

And then just one more for you guys, I don’t know if you guys kind of broken it out. But Chinese Steel to US, from India Aluminum, what is the exposure on the tariff regulation?

[Gary Vogel:]

Chinese steel export to the US, its only about 2%, a little over 2% of steel. Chinese export significantly more steel to the US, but other – they’re using a lot of their own steel for infrastructure and so what we’ve seen over the years is, I think it was down about 30% last year, year-over-year. So that in and of itself, as I mentioned earlier, don’t see that as a huge driver, more concerned about what comes next if in fact this gets implemented in terms of retaliatory measures. But just yesterday there was talk about potential exemptions and what have you, so I think it really is a wait and see moment in terms of that.

[Operator:]

And our next question will come from the line of Poe Fratt with Noble Capital Market. Your line is now open.

[Poe Fratt:]

Just a couple of questions, one is that you talked about a premium to BSI a little bit, I think in the 1500 range and last quarter was 490 or so. What are the conditions that you need to see to get that closer to your target over the course of ‘18 and then ’19?

[Gary Vogel:]

Just to clarify, what we talked about in terms of the 1500 was the improvement from 2016, which was a deficit to 2017. So that was ’16 lagged in a rising market, but it was our first year as we were building out the model, developing the team, putting in place process and what have you. So I’ve said this from the outset that our target when I joined it was $1,000 a day and I’m maintaining that in the sense that I’d rather under promise, over deliver. What we need in order to do that? Well first of all, flatter market helps. But having said that I’d rather marginally outperform the index or let’s say outperform by $500 a day and have the market go up significantly like it’s gone over the last quarter. It’s far better for us, for us to have a higher market than to outperform, right. Having said that a flatter market should enable us to outperform the market as oppose to – because what happens on of course is, as you fix a ship let’s say for 30 or 60 days, you have a fixed revenue stream which is booked and then as the market, as and if the market goes up, each and every day, although your revenue is unchanged, your relative performance is dropping, right until at some point if the market goes above what the level you fixed and you’re actually underperforming, whereas in a flat market you don’t have that dynamic. But what we need in order to outperform although we like is volatility because of the ability to trade to make decisions. And so by doing that we can put a stake in the ground and say this is where we want to put our ship and/or an arbitrage opportunity comes up. For instance, if we have a ship that’s going to carry a cargo, but we decide or we think out of the US Gulf, but we think that the Gulf market in particular is going to get stronger in six weeks. So we can charter another ship from the market, maybe at a breakeven, maybe at a loss, but in other words to free our ship up for a market that’s going to get much stronger in the next few weeks. So it’s that volatility more than anything else that leads the opportunities for us.

[Poe Fratt:]

And then looking at your drydocking schedule, you have no balance water treatments for ’18 and ’19. Can you sort of highlight your stance on scrubbers and sort of how this is going to – when you look at sort of your drydocking and potentially looking at scrubbers when will we see the scrubber installation if at all?

[Gary Vogel:]

So the idea of scrubber installation if you were to do it, would be December of 2019. Obviously it’s a significant amount of CapEx and to do it now you would be well in advance of the date of implementation assuming that doesn’t change. But it’s a significant installation and therefore most likely to do it around scheduled statutory drydock, right where the ship is already going to be out of service. So for us as a company, we’re in the midst of doing analysis, continuing to do analysis including engineering, feasibility studies. As you’re aware there’s a number of variables that go in to that decision. One of the primary ones is the future cost and the spread between marine diesel, low sulfur fuel and there’s also some discussion about whether the allowance for what is called an open loop system which discharges the sulfur in to the sea could at some point be regulated. So there’s a lot of things that are up in the air. We don’t believe that there’ll be a delay or significant change right now. We think that’s fairly unlikely, but we’re going to approach the decision cautiously about whether to install scrubbers prior or around the 2020 regulation. There’s always the fallback there which is burning low sulfur fuel and we are – it seems clear to us that the vast majority of the fleet is going to decide to do that.

[Poe Fratt:]

And then strategically growth is the focus, but you do have I think 11 Supers that are over 13 years old. What’s you stance on growth versus maybe potentially since scrapping values are up and probably the asset markets are going to be up and sort of the timing of potentially selling some with an older tonnage.

[Gary Vogel:]

I think I’m a bit believer you know, actions are louder than words and what you can see here is while growth is good, we’ve continued to execute on what I would say is both growth and renewal. We’re larger but we continue to sell older assets, and I don’t think that will change. None of our ships we believe are scrap candidates that they would sell at significant premiums to scrap value and have a significant further trading life. The average age for geared tonnage scrapping is in excess of 25 years. So that scrap pricing clearly has an impact on overall values of older ships, but we don’t see that as an option or as a path for us. So having said that these ships are trading well, so we look at it in concert, they are not decisions made in isolation and as and if we have the ability to continue to require assets at attractive prices, we’ll continue to sell vessels as well.

[Operator:]

And I’m showing no further questions in the queue. So now I’ll take the pleasure to hand the conference back over to Mr. Gary Vogel, Chief Executive Officer for some closing comments or remarks.

[Gary Vogel:]

Operator, we have nothing further today. So I’d like to thank everyone for taking their time to participate and wish everyone a good day.

[Operator:]

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.