Eagle Bulk Shipping Inc.
Q1 2018 Earnings Call Transcript

Published: 10 May 2018

[Operator:]

Greetings and welcome to the Eagle Bulk Shipping First Quarter 2018 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and our 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 first quarter 2018 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 includes 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 now turn 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 first quarter financials, followed by an update on industry fundamentals. And we will conclude with some closing remarks and then open up the call for any questions. Please turn to slide 5. During the first quarter, Eagle continued to execute on its business strategy of active management and fleet renewal helping to achieve superior TCE results for the fifth straight quarter outperforming the Baltic Supramax Index or BSI by over $1100 per day. In terms of sale and purchase as previously reported, during the quarter we took delivery of built Crown-63 Ultramax, which has been renamed the new London Eagle and closed on the sale of AVOSET, a 2010 built time and 53 Supramax. We purchased the New London Eagle for $21.3 million and financed the acquisition with approximately 40% debt which carries a margin of LIBOR plus 295 and the maturity of almost 5 years. In terms of results, Eagle generated a TCE of $11,052 for the first quarter outperforming an FPSI by 1106 or over 11% when adjusting for the fleet makeup as compared to the standard BSI ship. Q1 marks the fifth quarter in a row of significant outperformance, and I believe our consistency and being able to deliver underscores the importance of our differentiated business model and our team's ability to execute. The TCE outperformance we achieved during the quarter equates to approximately $19 million in incremental annualized cash flow for the business based on our current fleet count. Adjusted EBITDA total $18.8 million up over 9% quarter-on-quarter and more than fourfold year-over-year. Since the first quarter of 2016 when the drybulk market hit an all-time low, our adjusted EBITDA had increased by approximately $133 million an annualized basis based on our first quarter results. Looking ahead, I am pleased to report continued improvement and the TCE rates achieved by Eagle thus far in the second quarter with 70% of our quarterly available days fixed, we generated a net TCE of $11,224. Continuing on the theme of relative performance, while a higher headline of TCE is what we strive for everyday a more important metric for us and believe all companies is the relative earnings of the shift to the benchmark index than our case to BSI. As we’ve discussed previously, another way to look at our TCU results is by converting them to an Ultramax equivalent rate, meaning if we operate a fleet of only modern Ultramaxes with specifications similar to those of our recently acquired vessels, our first quarter TCE of 11,052 would equate to almost $13,000 per ship per day. While this is a theoretical figure, I believe it clearly demonstrates the value inherent in the Eagle commercial platform. Please now turn to slide 6 for a discussion on the makeup of Eagle’s TCE performance. As we have explained in previous calls, our active management approach encompasses the execution of a number of different strategies which allow us to maximize TCE performance. These strategies include trading on fleet, voice chartering with end users, vessel and cargo arbitrage, opportunistic chartering and a dynamic hedging strategy utilizing both FFAs and bunker swaps. The chart on slide 6 depicts our historical third-party time chartering business as measured in vessel days. During the first quarter, we had a total of 944 third party vessel days. Although the number of chartering days decreased slightly quarter-on-quarter, it’s worth noting that the numbers made up of the charter’s 25 distinct vessels we took in and increased to three as compared with the last quarter. While the graph clearly shows the significant increase in our third-party chartering activities since implementing our strategy, we can’t emphasize enough that volume itself is not a goal and this activity is only beneficial as it drives overall higher fleet net income. As we’ve indicated previously, we charter in third party shifts in order to supporting supplemental fleet and covering up cargo commitments which we operate on voyage basis and are [privating] from arbitrage opportunities and then taking advantage of market dislocations. Although we expect our chartering activities to continue to grow overtime as we expand our commercial breadth. It's important to note that the number of vessels we take in any given quarter will vary based on opportunities. In this vein, subsequent to the end of the first quarter, we entered into an agreement to charter in a modern high spec Japanese Ultramax vessel for a base period of about 35 to 38 months at a rate of $12,225 per day net with the option to extend the charter in for two additional one-year periods. We expect to take delivery of the vessel during the third quarter of this year. We’ve taken the vessel with a positive view to the market over the course of the charter period. However, in line with our business methodology and in order to reduce market exposure, we’ve hedged a portion of the initial fixed period commitment through the sale of FFAs or forward freight agreements. The objective of this hedging strategy is to create asymmetrical optionality essentially mitigation the downside risk of the commitment while maintaining full upside in the form of the optional charter periods. In addition, by hedging via FFAs, we maintain control of the vessel or can be used as part of our fleet in order to create additional arbitrage opportunities and outperformance. We believe this charter which represents our second-long term commitment is a good example of the opportunistic approach to our operating methodology and fleet risk management. Please turn to slide 7 for a brief update on our fleet profile and makeup. On the left-hand side of the slide, we depict our own fleet development since we started implementing a strategic fleet renewal growth plan. In March, we reached an agreement to sell the motor vessel Thrush 53 Supramax. We expect to deliver the vessel to the new owners sometimes during the third quarter. With this sale, we’ve now divested 10 of the smallest, oldest and least efficient ships averaging 52,000 dead weights in size and over 12 years of age. Against this, we’ve acquired a total of 12 modern Ultramaxes over the past 18 months averaging over 63,000 dead weight tons in just three years of age of purchase. Each time we acquire newer, larger and more efficient vessel or sell a small older and less efficient one we upgrade our overall fleet make up and improve our ability to generate higher TCE rates. Our current fleet totals 47 ships with an average age of just over 8 years. On the right-hand side of slide 7, we depict our peer group fleet profile composition by company. As you will note, Eagle remains uniquely focused on 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 necessity in our business model as it provides operational efficiencies which simply don't exists across mix 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've taken and the results we've achieved to date position Eagle to continue to grow and add some consolidation opportunities. With that, I would now like to turn the call over Frank, who will review our financial performance.

[Frank De Costanzo:]

Thank you, Gary. Please turn to slide 9, for a summary of our first quarter 2018 financial results. Revenue net of commissions for the first quarter was $79.4 million, an increase of 6.4% from the prior quarter. As compared to the same quarter in 2017, we saw an increase of 73%. Revenue net of both Voyage and Charter hire expenses came in at $46.6 million in Q1. 63% above the same quarter in 2017. This improvement is due to the additional owned available days and improvement in the BSI and the commercial outperformance generated by our active management model. Total operating expenses for the first quarter of 2018 were $73.1 million, an increase of 7.4% from the prior quarter. The increase in Q1 versus prior quarter was driven by higher Voyage and non-cash compensation costs. Operating expenses as compared to the same quarter in 2017 increased 45%. The increase resulted from higher depreciation, amortization and OpEx numbers, which were all driven by the net increase in our fleet size. Non-cash compensation also impacted the comparison versus the same quarter in prior year. The increase in Q1 non-cash compensation was caused by the annual company-wide equity awards issued early in the quarter along with accelerated amortization as a result of grade investing schedules for various grants. We expect this number to normalize going forward to -- $1 million for both Q2 and Q3 then fall into circa $1 million in Q4. The company reported net income of $53,000 for the first quarter as compared to a net loss of $16.5 million in the prior quarter. As compared to the same quarter in 2017, we saw an improvement in the bottom line of approximately $11.1 million. As a reminder, Q4, 2017 net loss was $1.6 million when we excluded the non-cash expense from the extinguishment of debt. It is noteworthy that Q1, 2018 was the first profitable quarter as the net profit levels since 2010. Basic and diluted earnings per share in the first quarter were zero, versus the basic loss of $0.24 in Q4, '17 and a basic loss of $0.17 in Q1, '17. Adjusted EBITDA came in at positive $18.8 million in the first quarter, an increase of 1.6 million or 9.4% from prior quarter. As compared to the same quarter in 2017, we saw an increase of 313%. In the appendix of our presentation, you will find a walk from net income of $53,000 to adjusted EBITDA of positive $18.8 million, both EBITDA and adjusted EBITDA are non-GAAP measurements. You can find additional information on non-GAAP measurements in the appendix. Let’s now turn to slide 10 for an overview of our balance sheet and liquidity. The company had total cash of 57.9 million as of March 31st 2018, down roughly 3 million from the end of Q4. It is important to note that we paid down 5 million on our Eagle Shipping LLC revolving credit facility during the quarter. The company’s total liquidity as of March 31st 2018 was 77.9 million and is made up of cash of 57.9 million, an undrawn revolving credit facility totaling $20 million. Total debt as of March 31st 2018 was $329.8 million and is comprised of $200 million shipped in Norwegian bond was $60 million shipping ALC bank facility and the $69.8 million Ultraco Bank Facilities. Please turn to slide 11 for a review of cash flow. In 2018, net cash provided by operating activities came in at positive 14.9 million. The third consecutive positive quarter in cash from operations, up from positive 5.9 million inQ4 ’17 and negative 2 million in Q1 ’17. As the red on the top of the slide shows, the positive streaming cash flow from operations continue to significantly improve from the negative cash flow of 19.5 million in Q1 of 2016. The chart also shows timing driven variability that working capital introduces to cash from operations as demonstrated by the difference between the blue and grey bars. This volatility evens out overtime as denoted by the significant positive cash from operations number in Q1 essentially making up for timing issues in Q3 and Q4. We received $7.1 million in cash in the first 10 days of January driving the strong Q1. Now moving to the chart at the bottom of the slide, let’s look at changes in the company’s cash balances in Q1. I like this chart because it clearly lays out the large themes driving our results and strategy. The two large bars on the left, revenue and operating expenditures are a simple look at the operations. The net of these two bars is positive $80 million which comes in close to our Q1 adjusted EBITDA number. The net of the four bars in the middle right of the lower chart which cover vessel sales and purchase, debt financing and debt repayments gives a good feel for our fleet renewal program and the financing supporting the process. Let’s now look at slide 12 for a cash breakeven per vessel per day. Cash breakeven per ship, per day in Q1 2018 wit 7,946. Systems are in $642 higher than Q4 2017 and $647 higher than the full year 2017 cash breakeven. The increase versus prior quarter was largely driven by the $315 increase in cash interest and a $257 increase in dry dock expenditures. You will note that there were no dry dock expenditures in Q4. Q1 OpEx came in at $4,888, $44 higher than Q4 and $63 higher than full year 2017 results. As we've conveyed before, our OpEx numbers include certain expenses related to upgrading the fleet such as items as performance monitoring systems and advanced hull coatings, which benefit the fleet's reliability and performance. 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. Q1 cash G&A came in at $1,485 per ship per day, up $26 from Q4. For full year 2017, G&A came in at $1,497. It is worth noting that in Q1 we chartered in 25 different vessels, if we included the chartered in days in our calculation, Q1 G&A would have been $1,218 per ship per day $267 lower. Q1 cash interest expense is $1,316 per ship per day $315 higher from the prior quarter. The expense is higher as a result of the additional Ultraco debt, higher LIBOR, the fixed coupon bond along with the pay down of the second lean non-cash pick note. It is worth noting that 50% of our debt was fixed in Q4 as part of the refinancing, which significantly shields the company from increases in short term interest rates. This concludes my review of the financials. I will now turn the call back to Gary, who will continue with discussion of the business and provide context around industry fundamentals.

[Gary Vogel:]

Thank you, Frank. Please turn to slide 14 for a review of the rate environment. Although there was volatility across the first quarter. The gross BSI averaged $10,625 per day for the first 3 months of the year, essentially flat as compared to the prior period and despite the lack of change Eagle's TCE increased by almost $700 per day. First quarter market was negatively impacted by the typical seasonal factors such as decreased trade from the ending of the North American grain harvest, decreased activity due to holiday season in both the West and the East and increased newbuilding deliveries which occurs every January. It's interesting to note and when look back over 10 years of data. The first quarter tends to trade at roughly 10% discount to the annual average. Evaluating the first quarter in more detail, it was really a tail of two halves. Starting in mid-February post Chinese New Year, Pacific market came back to life on the back of significant pickup in trades and trades particularly cold. For the second half of the quarter Pacific Supramax market averaged approximately $10,200 per day gross, representing an increase of over 30% as compared to the first half of the quarter. It's important to note, that this improvement was primarily attributed to pickup in demand within the region, versus the general lack of tonnage. At the same time, the Atlantic Supramax market weakened somewhat during the second half of the quarter due to both the seasonal wind down in North American grain exports and the impact of announcements surrounding trade tariffs. The results of an improved Pacific market in Lackluster Atlantic on a relative basis led to a significant decrease in the Atlantic Pacific premium from over 60% in the first half of the quarter to approximately 20% in the second. As an active owner operator, we see these dislocations as opportunities to rebalance our fleet for higher long-term value. While the first quarter was essentially flat for the Supramax, Ultramax segment averaging $10,625 per day it's interesting to note that the Cape market came up significantly and hit the low of $7051 in early April. As we have discussed before, Supramax, Ultramax vessels carry a much broader array of cargos as compared to the larger asset classes and because of this can see more stable earnings which is important and valuable characteristics of this segment. For the second quarter, rates have been somewhat muted thus far with the growth PSI averaging approximately $10,900 per day quarter-to-date and with spot rates hovering around $11,125. We believe the overall market and sentiment has been negatively affected by both [halfer] mentioned volatility in the cape size segment and by the potential and position of import tariffs by the US and retaliatory actions. Strength in the pacific Supramax has continued into the second quarter while relative weakness in the Atlantic has remained as well. The US decision to enact import tariffs on certain Chinese made products has led to retaliatory declarations by China is announcing in position of import tariffs on a number of US products including soybeans. As the world’s largest importer of soybeans, China is expected to purchase over 100 million metric tons in 2018 from the international market. Approximately 35% or 35 million metric tons was expected to come from the US, but given the imposition of tariffs, Chinese buyers were most likely to shift purchases to other producers. To date we’ve already seen a slowdown of Chinese purchases of the US soybeans with sales of the lowest level in five years. In addition, on a much smaller trade than the soybean trade, US sorghum exports to China have already been affected from an import deposit being enacted equal to the 179%. Although not characterized as a tariff, the deposit enacted acts very much the same way. As this was implemented with immediate effect, certain cargos originally destined for China and on the water have now been diverted to other countries for this charge. Although import tariffs can disrupt typical trading patterns, we do not believe global demand will be impacted overall and expect new different trade patterns to emerge as a result of any tariffs imposed. We believe the effect will be negligible in 10 miles and overall impacts to demand may actually be positive as changes in trades can face new inefficiencies such as congestion and delays. For example, China will likely substitute US soybeans imports with additional Brazilian product while the US would then focus on selling more to Europe and other buyers. Last week’s data shows sales of US soybeans to Vietnam, the Netherlands and Argentina. Cargos which are likely would have otherwise come from Brazil. Please turn to slide 15 for a brief update on supply fundamentals. New building deliveries totaled roughly 8.7 million dead weight tons or approximately 96 vessels during the first quarter representing an increase of 139% quarter-on-quarter basis dead weight. The pickup was expected due to the typical seasonal nature of deliveries. As the year end approaches, owners are incentivized to hold off and taking delivery in the new buildings until after the 1st of the year as it yields a ship which is one year younger on paper. Seasonality aside, the long terms for supply growth has been downward. Looking at the last 12 months, ending March 31st, deliveries totaled roughly 29 million dead weight tons, a decrease of approximately 40% from the same period one year prior. Demolition of older tonnage amounted to just 1.6 million dead weight tons during the quarter or 21 vessels representing a decrease of 27% over the prior period based on dead weight. Looking at the last 12 months ending March 31st, scrapping was down over 40% to not unexpected given the improvement in the overall rate environment. Given the current and expected environment and scrap price levels, we now believe demolition will probably amount to around 10 million dead weight tons in 2018 equating to about 1.2% of beyond the water fleet. As we indicated previously, notwithstanding our expectations for continued market improvement, we believe the implementation of Dallas Water Treatment Regulations as well as the mandated reductions saw permissions coming into force in January 2020 for active catalyst for the scrapping of older tonnage in the coming years. In terms of newbuilding orders, there has been an uptick during the last 12 months, but it's important to note that while we still remain closely historic lows and Supramax, Ultramax tonnage has accounted for just 12% of the tonnage order. As we've indicated previously, given a number of factors, we remain cautiously optimistic that we will not see a material increase in ordering unless we see both rates in second hand values significantly improve from here. The order book as a percentage of on the water fleet remains at a historically low level of just 10% overall for drybulk. The K-Size segment has the highest order book at over 15%, while the Supramax, Ultramax order book is at just 6% of on the water fleet. Looking ahead, we believe supply side fundamentals remain favorable with a decreasing number of new buildings getting delivered and potentially a large number of older vessels becoming less commercially viable due to regulations coming into force. Please turn to slide 16 for a summary of demand growth. Global GDP growth as projected by the IMF is expected to reach 3.9% for 2018 implying the world's growing at the fastest pace since 2011. This is due to ongoing improvement in macro fundamentals including financial conditions especially as witnessed with the advanced economies. Tax Reform and fiscal stimulus measures enacted in the U.S. are expected to boost domestic growth to 2.9% for 2018 up from 2.3 the year prior. And we believe this should have positive spillover effects to other economies as well. While many times points of the positive, there is always uncertainty in demand for example the [enactment] of trade tariffs discussed earlier on the call can create challenges to global growth. While we believe a trade war is unlikely, it's too early to tell whether there will be any real impacts to global GDP growth in trade. As we've discussed in previous calls, historically, there has been a strong relationship between global GDP growth and drybulk trade growth. Looking back at the last 15 years, drybulk has averaged about 1.2 times multiple to GDP growth. Although this relationship has broken at times, it reverted to its historical norm in 2017 when drybulk trade growth came in at around 4%. Looking ahead, drybulk demand is calculated from a bottom up fundamental perspective is expected to be about 2.6% in 2018 representing over 130 million metric tons in incremental trade. Major bulks which are comprised of iron ore, coal and grains are expected to grow by 2% in 2018. Coal which represented over 20% of the cargos we carried during the first quarter is expected to increase by about 20 million metric tons to over 1.2 billion tons. China, who are the largest consumer of coal in the world, with an estimated usage of approximately 3.8 billion tons is projected to import only around 230 million metric tons representing just 6% of total consumption. As has been the case in the past, any swing in Chinese demand or change in domestic production could meaningful impact seaborne trade. For example, in 2016, Chinese coal imports increased by 20% or almost 40 million metric tons. Grains, which represent almost 20% of Eagle's cargos during the first quarter are expected to increase by about 1% and total 500 million metric tons for the year. As we've discussed earlier, potential changes to trade patterns due to actual our potential tariffs imposed could increase ton miles overall, it's simply too early to tell. As denoted in the table, minor bulks which will [add] total trade last year are expected to grow by 3% outpacing the major bulks in overall drybulk demand for the period. This is an important distinction as Eagle’s cargo mix for the first quarter was split 60% in the minor bulks and 40% in the major bulks basically in line with our historic trading pattern. Looking at minor bulks in more detail, 2018 growth is estimated almost 60 million metric tons representing approximately 1,100 Supramax, Ultramax incremental voyages. Growth is expected to be driven by improvements in the fertilizer trade, scrap metal, cement, forest product and bauxite which tend to be long distance leading to increased ton miles. In summary, a demand picture which is favored towards the minor bulks combined with the Supramax, Ultramax having a very attractive order book as a percentage of the existing fleet, create a dynamic that is particularly favorable for Eagle. Please turn to slide 18 for our final recap. We believe Eagle remains uniquely positioned to capitalize on the improving drybulk market for a number of reasons. Firstly, that we focused on the most versatile and relatively stable vessel segment. Since Supramax, Ultramax vessels are able to carry essentially all types of drybulk commodities, the earnings tend to be highest from a risk adjusted perspective. In addition, operating in just one asset class provides for operational efficiencies both on the revenue and cost side which simply don’t exist across different vessel types. Secondly, we successfully employed an active management approach which gives us the ability to drive higher TCE revenue and we continue to demonstrate an ability to record meaningful commercial results quarter-on-quarter. We maintain an optimal management structure where all service is strategic, commercial, operational, technical and administrative are done in-house. This ensures full line of between company management and shareholders. We have one of the best board representations within the industry which is majority independent and we can 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 industry one which has a proven track record of successfully running active owner operator business that delivers value. Finally, as we illustrated on slide 18, Eagle has considerable operating leverage with 47 owned ships for over 17,000 owned vessel days. As such, we have the ability to generate significant cash flow as rates improve given our low 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 calculated our net cash flow basis own fleet of 47 ships and our 2018 forecasted of cash breakeven rates. In order to be conservative, we have to assume any market outperformance. As shown basis 2018 chance for April actual and May through December's FFA curve and net adjusted BSI for the year is currently at $10,800 per day. Given this rate scenario, Eagle could generate cash flow over $40 million on an annualized basis, assuming a 2011 environment of approximately 13,500, net cash flow increases by over $45 million. The purpose of this slide is to simply demonstrate the inherent operating leverage that Eagle maintains and based on our expectations on the market in the near-term, I believe we’re 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:]

With the prepared remarks completed, we will now open the line for questions. [Operator Instructions]. And our first will comes from the line of Amit Mehrotra with Deutsche Bank. Your line is now open.

[Chris Synder:]

Hi, this is a Chris Synder on for Amit. So, my first question is on the acquisition front. You guys are clearly in a strong position to acquire vessels, but you've not yet announced anything. Does this speak to a lack of available [model] tonnage in the market? Are you just waiting for a particular deal perhaps a larger multi-vessel transaction?

[Gary Vogel:]

Yes, thanks for the question. I mean I think first of all, while we didn't announce any new acquisition this quarter, we took delivery of the new Ultramax in January. And so, we've been -- we'll continue to execute and it's not going to be a steady flow. Having said that we clearly look towards something a bit larger. Obviously, it's easier to change the fleet dynamic if you can acquire a number of ships at the same time. And as we've done in the past with the Greenship Bulk acquisition, we believe acquiring sister vessels has advantages both commercially as well as technically and when we acquire the nine ships. But then in the last Ultramax, we took on was the same design and came from the same yard. So, I wouldn't exclude us doing other one-off vessels. But having said that, we clearly look towards doing a larger transaction as we continue to renew and grow the fleet.

[Chris Synder:]

Okay thanks for that. And then as you sort of look at potential multi-vessel acquisition. Will that only be targeting Ultramaxes, and Supramaxes or are you potentially looking at larger vessel classes perhaps trade size just kind of taking on additional risk doing a strong balance sheet and liquidity runway. Or do you think that that kind of just hinders the active management approach that you guys had a lot of success with?

[Gary Vogel:]

Thanks. Well I mean clearly, we believe that having larger fleet within this Supramax, Ultramax gives us efficiencies both from an operational efficiency, from substituting one vessel from other arbitrage, better market information what have you. So, going outside of that asset class, clearly wouldn't benefit that. You're not going to split a big cargo for a number of Supramax or Ultramax vessels. So, we're looking really within our own size. Having said that that there is an acquisition of scale out there which had other asset classes, we wouldn't say we absolutely definitively wouldn't look at that. But we believe that there is benefits to us to grow. Although we're the largest listing on our Supramax and Ultramax vessels, we're still very small part of this fragmented fleet. And we think there is benefits to scale within that.

[Chris Synder:]

Okay makes sense. And then kind of just thinking again about acquisitions. I mean you guys have a very low loan-to-value metric. And kind of when we are projecting potential acquisitions, where do you feel comfortable bringing this metric, given where we are in the cycle?

[Gary Vogel:]

Yes. And so, I think I would say action speak louder than words. What we did on the Greenship was 40% loan-to-value based on the acquisition price. But it really depends on the fleet you're acquiring. Whether there is financing that comes with it, what the amortization profile looks like and what have you. So, I think the modest use to leverage is probably a headline for the way we look at it without putting on too much leverage, having said that, to your point we think there is room if the right acquisition is there for us to increase that a bit. But again, a prudent use of leverage is important for us through the cycle. I've said it before, we're in a volatile industry and we think a bit less rather than a bit more is positive.

[Chris Synder:]

Thank you for that's it's very helpful. And then just as a real quick modeling question around the sale of the Avocet. I think you guys said it will be delivered to the buyers in Q3. Should we model the full quarter of revenue days in Q2 or we’ll need some time to mobilize to the buyer during the quarter?

[Gary Vogel:]

Yeah, I think from a modeling standpoint, I would use the middle of the third quarter. The window is there in our option, so but I would use the middle of the quarter.

[Operator:]

Thank you. And our next question will come from Magnus Fyhr with Seaport Global. Your line is now open.

[Magnus Fyhr:]

Hey good morning. Congrats on turning a profitable quarter. Just kind of follow up question on the capital allocations, it sounds like that you guys have come a long way in the last two years from restructuring the balance sheet and now turning profitable. It sounds like the main focus here going forward is going to be on fleet renewal and perhaps fleet growth but based on current rate environment, looks like you’re going to generate some free cash flow here pretty nicely in 2018 and 2019. Beyond the fleet renewal and fleet growth, how do you look at debt reduction versus buying back stock given that the stock is still trading at a discount to NAV.

[Gary Vogel:]

Yeah, I think at this point Magnus, as I said before we feel there is interesting opportunities out there given where we are in the cycle and asset values and that’s where we’re focused right now but your point with a positive market improvements and generating cash flow, then it’s a discussion as to what is the best use of the shareholder’s capital and I think that is a dynamic discussion whether given wherever the share price is at that time when we don’t feel that we want to keep that on the balance sheet for acquisitions. You know what’s the best way to return that and I think that’s a discussion at that time whether you know again where the share price is and the share buyback is it a dividend. I think the most important thing is when we instituted divided that is sustainable for the long haul and that’s something we’ll evaluate but right now we see opportunities again we’re constructive on the supply demand balance and although values have come up significantly from when we did our first acquisitions from a historic standpoint they’re still very attractive especially given where we are on supply demand in the curve.

[Magnus Fyhr:]

And I guess most of the acquisitions, I mean it's been kind of fleet renewal. I mean what’s the right size of the fleet going forward and you got the 11 vessels over 12.5 years. I assume you will replace those but kind of growing the fleet beyond what’s your view there?

[Gary Vogel:]

So, there is no magic number for us, I mean each acquisition needs to stand on its own in terms of being beneficial accretive for the shareholders but having said that you know if we can demonstrate the ability to outperform the market and I believe we have, then scale is beneficial. I mentioned in answering Chris’s question, operational efficiencies I’ve also talked about the fact that previously if we have a larger fleet then we’re able to potentially open another one or two small regional offices getting closer to decision makers in place, for instance, Latin America, grain exports very important for us and what have you. So, its incremental but I’m not going to put a target out there but its incremental but I’m not going to put a target out there because I think that its putting a cart before the horse. I think it's about finding the right acquisitions and then that will give us opportunities and better information. So, I think all in all you’ll see I think you’ll see Eagle grow but that’s not a goal in of itself from an operations standpoint.

[Magnus Fyhr:]

Alright, thank you. And then there has been a lot of volatility in the larger ships whereas the smaller ships have been more -- pretty steady here as of late. How do you see the seasonality developing over the next 2 quarters for your segment?

[Gary Vogel:]

So, I think it's really been pretty much as expected. There is always nuances and what have you. But if you look at the historic the spread between the Atlantic and the Pacific very strong in the fourth quarter. And then that's narrowed. I think the second quarter which is often the rise in the market drive off of the South American grain is typically comes later than people expect kind of like okay second quarter where is it? And there is clearly cargo moving. But we saw it as well last year that it takes time. So, I think we're kind of where we expect it to be. And ultimately, I think it's the fundamental the very high level the fact that we believe that demand will outpace supply overall for drybulk but particularly for the minor bulks which is the dominant area that we trade. So, I think as we go along we're very comfortable where it is I mean the forward curve is also a little bit from where it went in March. But we don't really see a change here, we think that as fewer ships get delivered the lion's share of vessels were delivered in the first months of the year and that's waning. And as again demand continues to improve we think we'll be a catalyst for higher rates.

[Magnus Fyhr:]

Okay. And just one last modeling question. You mentioned you plan to charter in vessels for 38 months and you're hedging it through FFAs. What were the breakeven rate be for that ship with the FFAs?

[Gary Vogel:]

Yeah, I mean I think the way to look at it is, she is Japanese high stack Ultramax vessel. And if you're look in our appendix, it was actually a page where we give guidance in general terms. I think it's page 27. We give guidance in general terms where Ultramax versus Supramax vessels are. And so, you can look at what that ship should be able to earn on a relative basis. And then as you look at the forward curve that's available in terms of what can we done on the FFA rates. And you can see that it would wind up roughly with where we are in terms of our charter and in taking that ship in. So that's effectively where the call it the breakeven is on the ship itself and hedging. We wouldn’t do this to hedge at a loss. So, I think that should give you guidance as to how to model that.

[Operator:]

Thank you. And our next question will come from line of Fotis Giannakoulis with Morgan Stanley. Your line is now open.

[Fotis Giannakoulis:]

So good morning gentlemen and thank you. Gary, I want to ask you about your plan to grow further and buy more ships, asset values have increased significantly especially for second hand vessels since you made your first acquisition. At what point do you think that you will abstain from buying more ships and focus more on either delivering more aggressively or paying back dividend surplus given you are leveraged already quite low. Is the 10% increase in asset values, 20% increase, trying to ask how long do you think that this drybulk cycle can last and how longer this market continue to move higher.

[Gary Vogel:]

Again, it comes back as a dynamic calculation right. And I think asset values have moved higher, but still have the forward and [clear] rates at which you are able to generate revenue against that commitment and our expectations is that those rates will go higher and that’s really the calculus. I mean at a certain point as values go up we will reach a point where we don’t believe this further upside in that and that as I said we are in cyclical market and that, that will turn but we think we’re still given where supply is and the order book, we think there is legs here and whether that’s 10%, 15% it really will depend on also what the forward order book looks like and what have you. So, we’re not going to say that I’m not going to put out that there is a certain number there, but we think that there is significant upside to rates given where we are. And we look back over the last few years, it's been a challenging environment but tribal grades when they move can move very quickly and substantially and all of a sudden you look back and where asset values are today kind of look like a very inexpensive acquisition. So that’s where we are today and we’ll make that determination but ultimately, it's not -- again we don’t have a drive to just grow for the sake of growth and we have full alignment with the shareholders in terms of capital allocation here. So, from that standpoint when we don’t see that opportunity there, then it's about returning the value to the shareholders, whether that’s through dividend, share buyback and what have you.

[Fotis Giannakoulis:]

And then can you give us your view over how long you think this cycle -- I mean we had a very long period of a weak market, the market seems to -- it has turned profitable just very recently. Is this a two-year cycle, three-year cycle, so we think your outlook over the next few years?

[Gary Vogel:]

Yeah, I mean it's very hard. I mean if we look and to put a number on that, if we look from a supply standpoint I think things are really encouraging for the next two years and I think a lot will depend on what the supply side does in terms of people ordering more shifts. They’re always going to be orders, we’ve seen orders much less in the first three months of this year than the annual rate from last year. Overall it's down about 20% and in the Ultramax side its down 70%. And the other thing is what we see here on the demand side is the global economy that’s growing and that’s positive. So, the question is how long you think that will be on that. And then you have things like ballast order and Sulphur which I think are really positive and what happens in January 2020 as with potentially much higher fuel cost and vessels likely to slowdown in that environment, rates much higher. So, I think there is a lot of things out there that will ultimately determine how long. But if we look over out over the next 18 to 24 months, things look extremely positive and that gets us to January 1st of 2020 and then there is some other interesting things on the horizon. So, we’re very positive about where we are right now and I think I’ll leave it at that.

[Fotis Giannakoulis:]

Thank you, Gary. One more, I would like to ask about your operational model and you have shown that you have delivered some very positive returns outperforming the bulk team that. I’m trying to think a little bit more long-term, how do you envision your company taking advantage of this opportunity that you have? Would you be willing to expand your charter in tonnage significantly? Can we see in the future Eagle Bulk turning itself into one of the large operators like older [door] for MUR and trying to take advantage of this ability to charter in tonnage and chartering out at higher levels.

[Gary Vogel:]

Yeah. I think I would look to what we're doing, because we are growing our business right. Our growth has been pretty significant over the last few years. We're taking ships in. Having said that our view is to do it on a risk managed basis and do so in support of our own fleet. So, I think what you'll see is a step up in continued increase of the overall operating side of the business, but again in support and as our own fleet gets larger we will be able to increase the operating side but operating by itself not in support let's say of the fleet. Where it gets so large that it's bigger than say our own fleet. I don't think that's likely, we are in Ultramax, Supramax owner and I think our model is very helpful in driving outperformance there and that's how we see ourselves.

[Fotis Giannakoulis:]

Thank you. If you allow me one final question. I'm trying to understand the impact of the disruption from this talk about tariffs and about the sanctions on our own result. If you have seen a tool bucket in the Atlantic market that we attributed to these events. What can be the impact have you seen in the market if that's the case that can be reversed and strengthen probably a year or even later next year after trade normalized and the cargos they find different routes to be delivered to the destination.

[Gary Vogel:]

Yeah. I mean I think first of all the answers we have seen some impact. I believe the best thing to do is follow demand. Because ultimately if there is a desire for the cargo then if they will find it's home. And if you look yes, we seen sorghum trade is not existent now from the U.S. because of this effective tariff. And in fact, we had a vessel going to China that was deviated to Japan carrying that. So, we're seeing that. Having said that cargo which is primarily used as feed will need to be replaced and whether it's sorghum from another supplier or other feedstock, ultimately that cargo will get moved because the alternative is not feeding the livestock or whatever else that cargo is used for. So, we have seen a disruption and clearly that hasn't impact on the stock market. But then there is backfill that comes into change that, and what we've also seen I mentioned in the prepared remarks is that certain cargos not going to China soybean and yet other countries coming in. So, Brazil the largest exporter of soybean doesn't even have enough to fully supply China in terms of the expected 95 million ton. So, some of that will come from U.S. but there will be an arbitrage there where more cargo will likely go from Brazil to China. And then cargo that might have been brought from Europe from Brazil we'll get substituted from U.S. I mean there is clearly differences in the Cargo higher protein content especially this year from Brazil but ultimately that cargo is going to move I believe.

[Operator:]

Thank you. [Operator Instructions]. And I'm showing no further questions over the phone at this time. So now I'll hand the conference back over to Mr. Gary Vogel, Chief Executive Officer, for some closing comments or remarks.

[Gary Vogel:]

Thanks very much. And thanks everyone for joining us today. We have no further comments, so I wish everyone a good day. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation on today's conference. This will conclude the program and we can all disconnect. Everybody have a wonderful day.