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Edited Transcript of EGLE earnings conference call or presentation 8-Aug-18 12:00pm GMT

Q2 2018 Eagle Bulk Shipping Inc Earnings Call

New York Aug 22, 2018 (Thomson StreetEvents) -- Edited Transcript of Eagle Bulk Shipping Inc earnings conference call or presentation Wednesday, August 8, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank C. De Costanzo

Eagle Bulk Shipping Inc. - CFO & Secretary

* Gary S. Vogel

Eagle Bulk Shipping Inc. - CEO & Director

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Conference Call Participants

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* Charles Kennedy Fratt

NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst

* Christopher M. Snyder

Deutsche Bank AG, Research Division - Research Associate

* Magnus Sven Fyhr

Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst

* Max Perri Yaras

Morgan Stanley, Research Division - Research Associate

* Sean Edmund Morgan

Evercore ISI Institutional Equities, Research Division - Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Eagle Bulk Shipping Second Quarter 2018 Results Conference Call. (Operator Instructions) And as a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. Gary Vogel, Chief Executive Officer of Eagle Bulk Shipping. Sir, you may begin.

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [2]

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Thank you, and good morning. I'd like to welcome everyone to Eagle Bulk's Second Quarter 2018 Earnings Call. To supplement our remarks today, I encourage participants to access 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 and our earnings release filed with the Securities and Exchange Commission for more information concerning non-GAAP financial measures and a reconciliation to the most comparable GAAP financial measures.

It's 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 to Slide 3 for the agenda for today's call. We will first provide you with a brief update on our business, then proceed with a detailed review of our second quarter financials, followed by an update on the rate environment and industry fundamentals. We will conclude with some closing remarks and then open up the call for any questions.

Please now turn to Slide 5. Our active management business model and fleet renewal continue to drive superior TCE performance for Eagle. TCE for the second quarter equated to $11,453 per day, representing a beat of over $1,000 per day as compared to the adjusted net Baltic Supramax Index, or BSI. I am pleased to report that the second quarter marks the sixth consecutive period during which we've been able to outperform the BSI. I believe our consistency in being able to deliver outperformance underscores the value and significance of our differentiated business model and our team's ability to execute on it.

In terms of sale and purchase, and as previously reported, we closed on the sale of the Avocet, a 2010-built Diamond 53 Supramax in early April. And we entered into an agreement to sell the Thrush, a 2011-built Diamond 53 Supramax.

On the buy side, we purchased a 2014-built SDARI-64 Ultramax for just below $21.2 million. EBITDA, adjusted for certain noncash items, totaled $21.1 million for the second quarter, up over 12% quarter-on-quarter and more than 125% year-on-year.

Operating margin improvement is being driven by both higher rate environment, but also from our ability to generate added value through our active management model. As depicted in the chart on the right-hand side of the slide, our TCE outperformance contributed over $4 million towards EBITDA in -- for the period.

Since the first quarter of 2016, when the dry bulk market hit an all-time low, Eagle's adjusted EBITDA has increased by approximately $142 million annualized based on our second quarter results.

Looking ahead, our TCE for the third quarter is presently $10,808 per day, with about 68% of available days fixed for the period. Similarly to last year, we elected to fix some ships on backhaul voyages in the third quarter, essentially repositioning them into the Atlantic, in order to be able to benefit from the historically strong Atlantic fall market, which we expect to see. This has had an impact on our third quarter TCE to date, as backhaul rates are approximately $6,000 below the index average today.

Looking to the left on the graph, back to Q3 of last year, you will note the quarter took on a similar profile with repositioning voyages impacting TCE. Given the lumpy nature of trading revenue streams in our business, we believe the most appropriate way to evaluate performance is over a long and multi-quarter period. In this regard, our outperformance for the last 12 months ending June 30 equated to $713 per day.

Continuing on the theme of relative performance, we have consistently spoken about the importance to benchmark vessels against the relevant index taking into account individual ship specifications, such as size, speed and fuel consumption. For example, in order to compare the earnings performance of a 5-year-old Chinese Ultramax, which typically costs about $6 million more than a similarly aged Chinese Supramax, an adjustment needs to be made to the BSI index, which is based on a 52,000 deadweight ship. Simply stated, the Ultramax needs to earn significantly more than the Supra in order to justify the additional investment cost.

In the appendix, we included a slide, which provides some guidance on how various Supramax/Ultramax vessel types compare in terms of earnings capacity against the BSI index. We encourage you to reference this slide and hope you will find it helpful.

Additionally, Vesselindex, a new third-party web-based tool, allows its users to calculate ship's specific index factors against the newer BSI 58 index by entering basic time charter descriptions. We believe this tool can be helpful for analysts and investors in evaluating relative TCE performance across the peer group.

An industry publication recently ran an article highlighting TCE performance between a number of companies utilizing Vesselindex. Since the article was published, we've received a number of inquiries about how Eagle's performance would stack up using Vesselindex's tool compared to our own model. And I am pleased to report that their calculation methodology is very much in line with ours and produces similar results.

Basis Vesselindex's model and evaluation tool, our Q2 TCE figures equate to an outperformance of approximately $1,040 per day or plus 10% as compared to the adjusted net BSI 58. We think it's an important shift by the industry towards a focus on normalized relative performance, something we have been advocating since the implementation of our active management strategy more than 2 years ago.

Please turn to Slide 6 for a discussion on the makeup of Eagle's TCE performance. As we 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 our own fleet, voyage 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 charter-in business as measured in vessel [days]. During the second quarter, we had a total of 867 third-party vessel days . Although down slightly from last quarter, the figure was comprised of 22 distinct ships on charter. Also as we've mentioned previously, charter-in business volume in itself is not a goal, and its activity is only beneficial if it drives overall higher fleet net income. We charter-in third-party ships in order to support and supplement our own fleet to cover cargo commitments as well as to take advantage of arbitrage opportunities and market dislocations.

Although we expect our charter-in activity to continue to grow overtime as we expand our commercial breadth, the number of vessels we take in any given quarter will vary based on opportunities and the risk reward profile they present.

Please turn to Slide 7 for a brief update on our fleet make makeup. On the left-hand side of the slide, we depict our own fleet development since we started to implement a strategic fleet renewal and growth plan. As mentioned earlier on the call, we've entered into an agreement to acquire 2014-built SDARI-64 Ultramax. We expect to take delivery of the vessel during the fourth quarter, and we'll rename the vessel the Hamburg Eagle after the port city and the home for our European operations. This purchase marks the 13th modern Ultramax we've acquired over the past 21 months, averaging over 63,000 deadweight tons and around 3 years in age of purchase. In March, we reached an agreement to sell the Thrush, a 2011-built Diamond 53 Supramax and expect to deliver this vessel to her new owners by September. With this sale, we've now divested of 10 of the smallest, oldest and least efficient vessels that were in our fleet averaging over 12 years of age.

Each time we acquire a newer, larger and a more efficient vessel or sell a smaller, older and less efficient ship, we upgrade our overall fleet makeup and improve our ability to deliver on our value proposition and generate higher TCE rates.

Pro forma for the acquisition and sale just mentioned, our own fleet totals 47 ships averaging around 8.5 years in age. It's noteworthy that Eagle's average fleet age has remained unchanged over the last 3 years based on the implementation of our fleet renewal strategy.

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 the versatile Supramax/Ultramax asset class and owns one of the largest fleets in the world. Owning and operating a large-scale homogeneous fleet is a vital ingredient 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've taken and the results we've achieved to date position Eagle to continue to grow and act on consolidation opportunities.

With that, I would now like to turn the call over to Frank, who will review our financial performance.

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Frank C. De Costanzo, Eagle Bulk Shipping Inc. - CFO & Secretary [3]

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Thank you, Gary. Please turn to Slide 9 for a summary of our second quarter 2018 financial results. Revenue, net of commissions for the second quarter, was $74.9 million, a decrease of 6% from the prior quarter. The decrease reflects a change in the revenue mix between time and voyage charters in the current quarter. However, as compared to the same quarter in 2017, we saw an increase in revenue of 40%.

Revenue, net of both voyage and charter hire expenses, came in at $47.6 million in Q2, an increase of 2% from the prior quarter. The increase was driven by the higher TCE, partially offset by fewer available days as a result of the 5 drydocks performed during the quarter.

We believe that revenue, net of both voyage and charter hire expenses, best reflects core top line company performance. Revenue, net of both voyage and charter hire expenses, was 41% higher than the same quarter in 2017. The increase was driven by additional owned available days, an increase in the BSI and the commercial outperformance of more than $1,000 per day generated by our active management model.

Total operating expenses for the second quarter of 2018 were $65.9 million, a decrease of 10% from the prior quarter. The decrease in Q2 versus prior quarter was driven by lower voyage expenses and noncash compensation costs. Operating expenses, as compared to the same quarter in 2017, increased by 22%. The increase results from higher charter hire and voyage expenses along with depreciation, amortization and OpEx numbers, which were all driven by the net increase in our fleet.

The company reported a net income of $3.5 million for the second quarter as compared to a net income of $52,000 in the prior quarter. As compared to the same quarter in 2017, we saw an improvement in the bottom line of approximately $9.3 million.

Basic and diluted earnings per share, or EPS, in the second quarter of 2018 was $0.05 versus 0 in Q1 2018 and a basic loss of $0.08 in Q2 2017.

Adjusted EBITDA came in at $21.1 million for the second quarter, an increase of 12% from the prior quarter. As compared to the same quarter in 2017, we saw adjusted EBITDA increase by 127%.

In the appendix of our presentation, you will find a walk from net income of $3.5 million to adjusted EBITDA of $21.1 million. Both EBITDA and adjusted EBITDA are non-GAAP measurements. You can also 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 $76.9 million as of June 30, 2018, an increase of approximately $19 million from the end of the quarter. The increase was a result of cash flow generated from operations and proceeds from the sale of the vessel Avocet. The company's total liquidity as of June 30, 2018, was $96.9 million and is made up of cash and undrawn revolving credit facilities totaling $20 million.

Total debt as of June 30 was $329.8 million and is comprised of the $200 million Shipco Norwegian bond, the $60 million Shipping LLC Bank Facility and the $69.8 million Ultraco Bank Facility. Total debt is unchanged from the end of Q1 2018.

Please turn to slide 11 for a review of cash flow. During the second quarter, net cash provided from operating activities came in at positive $9.9 million, down from positive $14.9 million in Q1 2018 and up from the second quarter of 2017. The second quarter result was the fourth consecutive positive quarter in cash from operations. As the chart on the top of the slide shows, the positive trend in cash flow from operations continues with cash from operations significantly improved from negative cash flow of $19.5 million in Q1 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 the gray bars. This volatility evens out over time as denoted by the significant positive cash from operations numbers in Q1 and Q2, essentially making up for timing issues in Q3 and Q4 of last year.

Now moving to the chart at the bottom of the slide. Let's look at the changes in the company's cash balance in Q2 2018. I like this chart because it clearly lays out the large themes driving our results and strategy. The 2 large bars on the left, revenue and operating expenditures, are a simple look at the operations. The net of the 2 bars is positive $21 million, which comes in very close to our Q2 adjusted EBITDA number.

To the right, you will find the bars covering the $3.5 million we paid for drydocks in the quarter and $9.7 million we received for the sale of the asset, partially offset by vessel improvements.

Let's now review Slide 12 for our cash breakeven per vessel per day. Cash breakeven per ship per day in Q2 2018 was $8,473, $527 higher than Q1 2018 and $1,174 higher than the full year 2017 breakeven. The increase versus prior quarter was largely driven by a $564 increase in drydock expenditures, as we drydocked 5 vessels during Q2 2018. The number of drydocks in the second quarter was an outlier. We expect just 4 drydocks for the remainder of 2018.

Q2 OpEx came in at $4,792, $96 lower than Q1 2018 and $33 lower than the full year 2017 result. As we have conveyed before, our OpEx number includes certain expenses related to the upgrading the fleet with such items as performance monitoring equipment and advanced hull coatings, which increased upfront costs but benefit the fleet's reliability and performance. We believe that given the lumpy nature of payments related to both stores and annual expenses, it is appropriate to look at OpEx under a multi-quarter average.

Q2 cash G&A came in at $1,510 per ship per day, up $25 from Q1. For the first 6 months of 2018, cash G&A remained essentially flat when compared to the full year 2017 number. It is worth noting that in Q2, we chartered in 22 different vessels. If we were to include the chartered-in days in our calculation, Q2 G&A per ship per day would have been $1,257 or $253 lower.

Q2 cash interest expense is $1,350 per ship per day and is marginally higher when compared to Q1. For the first half of 2018, interest expense is $514 higher than the full year 2017 average. The increase in cash interest versus prior year is primarily a result of higher LIBOR along with the elimination of the noncash second lien PIK note.

It is worth noting that 60% of our debt was fixed In Q4 2017 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 his discussion of the business and provide context around industry fundamentals.

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [4]

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Thank you, Frank. Please turn to Slide 14 for a review of the rate environment. The gross BSI averaged $11,031 per day for the second quarter, up 4% quarter-on-quarter and 28% year-on-year. Although a broader index was fairly static throughout the period, as depicted by the bold dark blue line on the chart, there was significant volatility realized between the regional markets. This is also illustrated in the chart where we depict the Atlantic submarket in green and the Pacific in orange.

As you will note from the chart, while dynamic, the Pacific market typically trades at a discount to the Atlantic. This spread is due to a number of reasons, including a general overhang of excess ships, which have taken cargo to the Pacific region as well as the fact that all new vessels are delivered in Asia. Anecdotally, as mentioned earlier, due to the structural imbalance, repositioning a ship from the Pacific to the Atlantic requires an investment, utilizing significant working capital.

Notwithstanding the historical discount spread, the Pacific market was relatively stronger in Q2, and during the month of May traded well above the Atlantic for a period of time. The relative strength in the Pacific can be attributed to a few reasons, including increased coal movements within the region as well as increasing cargo movements around and out of the Persian Gulf, specifically minor bulk cargoes, such as aggregates, cement and slag moving from the Persian Gulf to Africa, India and China.

While the Pacific market strengthened, the Atlantic market was down from the prior period, averaging $10,671 per day. The decrease was influenced by the ending of the North American grain export season as well as the disruption of stems to China based on both the expectation of tariffs on soybeans as well as implementation of actual duties on imported U.S. sorghum. Additionally, a slow start to the South American grain season, based partially on a short crop in Argentina, helped push Atlantic rates down somewhat. While the Atlantic has rebounded and presently trades above the Pacific, overall rates in the third quarter have been trading relatively flat overall to the prior period, with the gross BSI averaging approximately $11,000 per day quarter to date.

We believe the current market sentiment continues to be impacted by talk around tariffs as well as uncertainty as to further potential retaliatory actions. As we've indicated previously, although import tariffs can disrupt traditional trading patterns, we still do not believe global demand will be impacted overall and would expect new different trade patterns to emerge as a result of any tariffs imposed.

We believe the effect will be negligible on ton miles and overall impacts to trade demand may actually be positive as changes in trades can create new inefficiencies, such as congestion and delays. As stated earlier, our real concern would rest with the potential impact to global GDP growth.

Please turn to slide 15 for a brief update on supply fundamentals. Newbuilding deliveries totaled roughly 6.9 million deadweight tons or approximately 74 vessels during the second quarter, representing a decrease of 21% quarter-on-quarter and 30% year-on-year basis deadweight. The sequential quarterly drop reflects the typical seasonal effect in deliveries, while year-on-year decrease reflects the shrinking order book.

Demolition of older tonnage amounted to just 600,000 deadweight tons during the quarter or 12 vessels, representing a significant decrease of 63% over the prior period basis deadweight tons.

Looking at the last 12 months ending June 30, scrapping is down 46% amounting to just 8 million tons. And we believe this simply reflects the ongoing improvement in rates as well as positive supply-demand fundamentals when looking ahead.

Given year-to-date demolition figures, expected rate environment and current scrap price levels, scrapping is now forecasted to come in lower for the year at just around 6 million deadweight tons, equating to below 1% of the on-the-water fleet.

As we have indicated previously, in addition to our expectation for a continued market improvement, we believe that both the implementation of ballast water treatment regulation as well as the mandated reduction in sulfur emissions coming into force in January 2020 will act as a catalyst for increased scrapping and will also potentially decrease capacity utilization.

In terms of forward supply growth, newbuilding orders totaled approximately 40 million deadweight tons for the 12 months ending June 30. This represents an increase of approximately 30 million tons from the prior 12-month period, but it's important to note that this comparison is against orders placed during the historically distressed market of 2016.

The majority of orders placed over the last 12 months have been for Capesize and Kamsarmax vessels, whereas Ultramaxes represent just 13% of tonnage order.

Year-to-date, only 32 Ultramaxes have been ordered, which is down 6% as compared to the same period last year and on an annualized basis represents just 1.5% of the on-the-water fleet.

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 also see both rates and secondhand values increase significantly from current levels.

As of today, the order book, as a percentage of the overall fleet, remains at a relatively low historical level of around 10% basis deadweight tons. The Capesize segment has the highest order book at over 14%, while the Supramax/Ultramax segment stands at just 6% of the on-the-water fleet. As you will note from the dotted lines on the graph on Slide 15, net fleet growth is low for dry bulk overall, with expected net growth of 2.6% in '18. And it looks even more favorable when drilling down to the Supramax/Ultramax segment, where net fleet growth is expected to be just 2% of the on-the-water fleet.

Looking ahead, we believe supply side fundamentals remain favorable, and net fleet growth will be even less in 2019, given that less vessels are due for delivery and an increasing number of older vessels are becoming less commercially viable due to regulations coming into effect.

Please turn to Slide 16 for a summary on demand. From a macro perspective, global growth expectations remain robust at 3.9% for both 2018 and 2019. Although growth expectations have not really changed since our last earnings call, risk to the forecast has increased somewhat due to a few reasons, including higher oil prices, a stronger U.S. dollar and higher U.S. yields as well as a general concern surrounding the potential for an escalation in trade tensions and tariffs.

While we believe actions to date have not been too impactful to dry bulk, and a full-scale trade war is unlikely, it remains to be seen whether there will be any real impact to global GDP growth.

Dry bulk demand, as calculated from a bottom-up fundamental perspective, is expected to grow by 2.6% in 2018, representing over 130 million metric tons in incremental trade for the year. When taking into consideration expected ton mile expansion, 2018 forecasted demand growth should be higher at over 3.3%, requiring roughly 265 additional vessels. Within the 2.6% real demand growth, major bulks, which are comprised of iron, ore, coal and grains, are expected to grow by 2% in '18.

Coal, which once again represented over 20% of the cargoes we carry during the second quarter, is expected to increase by around 30 million metric tons this year to over 1.2 billion tons. Grains, which represented almost 20% of Eagle's cargoes during the quarter, are expected to total around 481 million tons for the year.

As denoted in the table on the bottom left-hand corner, minor bulks, which lagged total dry bulk trade last year, are expected to grow by 3% in 2018, outpacing the major bulks and overall dry bulk demand for the period. This 3% growth represents over 60 million metric tons of incremental demand or approximately 1,200 Supramax/Ultramax voyages.

This growth is being driven by improvements in trades, such as fertilizers, scrap metal, cement, forest products and bauxite. It's noteworthy that as depicted in the pie chart on the right-hand side of the slide, roughly 60% of the cargoes Eagle carried during the second quarter were comprised of minor bulks.

In summary, we believe a demand picture, which is favored towards the minor bulks, combined with the Supramax/Ultramax having the lowest order book as a percentage of the existing fleet, creates a dynamic that is particularly favorable for Eagle, given our fleet makeup.

I would now like to turn the call over to the operator and answer any questions you may have. Operator?

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Operator [5]

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(Operator Instructions) Our first question is from the line of Jon Chappell of Evercore.

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Sean Edmund Morgan, Evercore ISI Institutional Equities, Research Division - Analyst [6]

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This is Sean Morgan, on for Jon. I just wanted to ask about the kind of sales and purchase market a little bit. You said you've bought 13 since 20 -- since the end of 2015, sold another 10. With rates kind of arising, we assume and it's still the purchase market for Ultramaxes and Supramaxes, are you still going to be trying to aggressively renew the fleet? And sort of just give us a little bit of detail on what you're seeing.

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [7]

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Yes, absolutely. Thanks for the question. I mean, I'm a big believer of you know actions speak louder than words. We acquired the 2014 SDARI during the quarter. It was a follow on to a ship that we acquired at the end of last year. So we continue to see value in acquiring modern vessels. And the last ones we've done were 2015 and 2014. Given our belief in the positive fundamentals of dry bulk and in particularly the Supramax/Ultramax segment, we think there's significant upside in both cash flow generation as well as asset values. And I think it's notable that the price that we paid for this 2014 SDARI is about -- just about 5% more than the end of last year. And we think that's a pretty attractive level, given the continued progression in the dry bulk market.

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Sean Edmund Morgan, Evercore ISI Institutional Equities, Research Division - Analyst [8]

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Okay. And just as a follow-up on that same theme, are you seeing any opportunities to buy larger fleets? Or are you kind of looking opportunistically at 1s and 2s, what's the view there?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [9]

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Yes. I mean, I've said before clearly renewing and growing the fleet one ship at a time. We will continue to do that, but it's definitely -- there's advantages to more large-scale acquisitions. And we clearly have identified a number of groups of ships and continue to engage in various discussions. But those transactions are more complex, but we clearly would like to do something upscale. And we think that every quarter we move forward where we're able to demonstrate the efficiencies and benefits of our active owner operator model, makes Eagle a more attractive partner for somebody to join up with, also in addition our focus on the Supramax/Ultramax exclusively. So nearly absolutely, we'd look to -- we'd like to do something on a larger scale, but in the meantime, we won't exclusively -- we won't cut out the idea of doing one ship acquisitions as we have over the last couple of quarters.

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Operator [10]

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Our next question comes from the line of Magnus Fyhr of Seaport Global.

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Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [11]

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Just 2 questions, starting on the chartered-in fleet. It's been declining, I guess, since third quarter '17. Is there any seasonality on that? Or how do you kind of manage the number of chartered-in vessels on a quarterly basis?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [12]

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Yes, thanks, Magnus. There's not a seasonality to it. It's about the risk/reward profile that's presented to us based on arbitrage opportunities. And so the numbers, while clearly the graph shows down slightly, it's pretty -- still significant, 22 ships in the quarter against our own fleet of 47 vessels. And I expect that number will fluctuate and will increase again, but it's really about opportunity. I mean, if we wanted to drive that higher, and we have no reason to, we easily could, and a lot of that would be, some would be probably, some would be cost money. But the net effect probably wouldn't be different. So what I would look at really what is how it contributes to the overall performance. And it's kind of doing the hard work every day. It's the men and women on the trading desk there who are making those decisions as to what ships to take in and not. So again just to repeat, I'd focus on the output, not on the number there. But I also would say I would expect that number to -- not to continue to trend down, but to be -- go up and down and be choppy.

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Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [13]

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Right. And still significantly higher than a year ago. So...

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [14]

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Absolutely.

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Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [15]

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Okay. Moving over to the commodities that you transport, a lot of focus on China and the tariffs they plan to impose on soybeans. Can you kind of talk a little bit about the trade routes and the implications of this? I mean, Brazil is still the largest supplier of soybeans to China. It looks like with them addressing some of the infrastructure issues that they definitely could ramp up exports further, how does that impact the kind of the ton mile demand in the market?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [16]

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Yes, I mean, it's clearly impactful in terms of disruption to trade routes. But overall, Brazil has capacity for further export. And what we're seeing here is that it's seasonal as well. So Brazil exporting now, and towards into the third quarter, they typically would be exporting more to Europe. Whereas even though it's not the season for -- high season for U.S. soybean, we're seeing U.S. cargoes going to Europe and there's a substitution trade going on. So in terms of ton miles, though, U.S. Gulf, China versus Brazil, there's not really a big difference there. We're actually -- what we're seeing here, though, is that the Indian Ocean market has been strong based on some of the minor bulks we've talked about in terms of Supramax and Ultramax, which is keeping ships in that area as opposed to coming around and ballasting towards Brazil. But ultimately, our view is to follow the demand. And as we mentioned in our prepared remarks, new trade routes effectively can cause inefficiencies. I mean, trade finds its most efficient routes, whether -- pricing and other things. And so when you ramp up exports or -- from a certain area, often you end up with things like congestion, waiting times and that takes effective supply out of the market. So we don't see it as particularly negative, the specific tariff that's going on right now for dry bulk, but having said that, of course, it's the impact of a greater impact and negative on global GDP that we're focused on.

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Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [17]

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Okay. Great. Just one last question on capital allocation going forward. I mean, you have a decent cash position and revolver of close to $100 million. And it looks like cash is going to start building here with rates probably likely to improve going forward. Is your main priority still fleet renewal, or any thoughts on potentially starting a dividend or some share buyback with the stock still trading at a pretty big NAV discount?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [18]

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We look it all the time, but we believe there's opportunities for acquisitions today with -- as I said on previous question with significant upside in terms of cash flow generation as well as asset values. So for now, our view is to focus on that, but again it's an ongoing discussion. And when we believe that there is -- the best use of capital is not to invest in acquiring Ultras and Supras vessels, then clearly we'll look to what's the best use of that. It's the shareholders' capital and, ultimately, it's how do you return that to them and whether that's through dividend, special dividend, dividend policy or buyback, that will be determined. But for now, we're still focused on fleet growth and renewal.

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Operator [19]

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Our next question is from the line of Amit Mehrotra of Deutsche Bank.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [20]

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This is Chris, on for Amit. My first question is around the S&P market. It sounds like acquisitions are still the number one priority. For March, it seems like the asking price from owner tonnage has increased pretty materially over the last couple of months. Have you felt this as you looked at potential acquisitions? And has it impacted your ability to get deals done?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [21]

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Yes, thanks, Chris. I mean, I think, again, if we look at what we've done, right, we acquired a 2015-built Ultramax at the end of last year and paid virtually the same price that we paid for 2014 this quarter, so about 5% more. There clearly have been other acquisitions done at higher levels than that. So we think, no question. There is ask -- the ask is higher amongst certain owners, but we've maintained that our view is to acquire vessels at attractive levels, not just acquire quantum. And so I think the 5% increase from December until June is instructive on how we see the market, and we're willing to pay. So it, of course, limits the quantum as opposed to paying more than that, but we feel that what we paid is fair value, given where we are in the cycle. And there are other vessels we continue. We're continually inspecting vessels. And again, so we think there's ample vessels out there. And we've been able to demonstrate that we can execute on an ongoing basis. As mentioned earlier, we're now up to 13 ships over the last 2 years.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [22]

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Thank you for that. And has this rising ask price changed, potentially, how you think about acquisitions versus chartered-in vessels? Is there a way to increase exposure to a potential recovery here?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [23]

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Yes. I mean, it's great question. And I think the way we see Eagle, right, is as a shipowner, and we supplement that owned fleet through charter-in, but we do it in a structured way. So every time we've taken ships for 1 year or more, we've sold derivatives to hedge the market risk on significant portion of the fixed period, which would really negate a lot of that upside of just taking that charter in with a view to a higher market. And we've done that because we have significant exposure and operational leverage to the market through the ownership of 47 vessels. And there is a slide that we have had in the earnings deck that we moved to the appendix that speaks about that, that every $1,000 a day of increase in index, whether through the market itself or outperformance, is about $17 million of incremental cash flow. So we feel we have significant exposure there. So we look at our charter fleet as a supplement to the owned fleet. So we would not look to take on, let's pick a number, 5, 6, 7 ships long-term and leave them exposed to the market. That's simply not the business methodology of Eagle Bulk.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [24]

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Okay. That make sense. Then second question come -- more around the market rate environment. I really appreciate your guys' color around repositionings weighing down Q3 bookings. More broadly speaking, it feels like rates have been mostly moving sideways for the large part of the year. Is there anything on the horizon or potential catalyst that kind of jumps start Ultramax/Supramax rates? Or do you expect just continued tightening and just a gradual [grant hire]?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [25]

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Yes, I mean, I think that, ultimately, we said we think there's an impact on the market through the sentiment on the tariffs. I mean, what we've noticed is a lot of cargoes and short-term contracts have been pulled in. People are doing things more tightly on the next month, 1.5 month as opposed to 3, 6 months out. And that has an effect, right, less buyers, so to speak, "buyers" on the charter market and operators and things like that. So -- but ultimately, I'm a believer that fundamentals prevail. And so what we have is each and every month, we have supply coming down, and demand growing and minor bulks are growing at a faster pace than dry bulk overall. So -- and the one thing I don't believe is that we'll have a gradual movement in this market. That's simply not historically how dry bulk rates have moved. So we're in the mid -- we're in August now. And clearly, we'll look to the post summer for what it is. But ultimately, I believe there will be a catalyst that moves this market sharply, based on underlying fundamentals that have been improving month-over-month. And we'll look back and see, okay, that's where was there. And then, of course, we look forward to as ballast water implementation is happening and ships are now install -- have to install and older vessels more likely are going to go to the scrap yard as opposed to a capital -- significant capital expenditure, and even though scrapping is extremely low at the moment, around 6 million tons this year, that will act as a catalyst. And then, sulfur IMO 2020, January 1, we think will have a significant impact on this market. And that is that the vast majority of dry bulk ships and in particularly, I think, the Supramax/Ultramax fleets will not be fitted with scrubbers. And therefore, the higher prices for fuel will effectively lead to ships wanting to slow down, taking supply out of the market, which then acts as circular reference to higher rates for the ships being able to carry the cargo necessary. So we think there's a number of positives in that regard, but ultimately the catalyst will be probably something seasonal that we will catch up on that. And of course, a cooling down of discussions and a walk back on some of the trade tariff, we think, would be extremely positive as well.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [26]

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And just real quick on Atlantic grain season. I know you guys had got off to a slow start, but could you provide any color on how demand stands today and your outlook for the next couple months?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [27]

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Yes. I mean, I think, overall, grain this year is bit over 1% growth. So not expected to be the driver of leading dry bulk overall. I mean, it's the lowest of the major bulks. And so -- but ultimately, grain has been a growing commodity in terms of consumption, and particularly we see that in Asia. So overall, we think it continues to be a catalyst. This year what we've seen is the Russian wheat harvest has been early and robust, which has definitely moved the Eastern Med market, but it's a very seasonal one. So the grain market tends to act as a catalyst and move things. But overall, we think it's not going to be the main driver this year in terms of overall growth. Having said that, long term, I think what's -- one of the things that's interesting is that we see a shift in a lot more imports into Asia overall, Indonesia has become the -- surpassed Egypt as the largest wheat importer in last year. And that's based on a changing increasing middle-class and change to Western diet. So overall, I think things bode well for continued grain growth, but this year, as I said, fairly muted relative to overall dry bulk at just over 1%.

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Operator [28]

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Our next question comes from the line of Max Yaras of Morgan Stanley.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [29]

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Sticking with Chinese tariffs, you mentioned soybean slowdown and maybe some other kind of near-term slowdown. But are there any other specific routes that are specifically slowing down around specific commodities? And what is the potential for Chinese stimulus? And what would that mean for your business specifically?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [30]

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Yes, thanks. I mean, I would just want to make sure we're not saying it is a slowdown. And clearly, there's been a change in exports from the U.S. soybean export down, being supplemented by Brazil and then a transfer of trade from some U.S. cargoes even though this isn't the highest season to Europe. So ultimately, if you follow demand, I think that's the way we see it. So it's not a slowdown overall, but there's an impact on kind of the long-term planning. And obviously, the tariffs have an impact on where the cargo is purchased from. But we don't see -- we haven't seen an impact on other -- on cargoes, per se, into China. It's really a disruption of where those trade flows come from. So overall, I think it's really -- at the moment, it's been sentiment-driven in terms of keeping the period market and forward market in terms of bookings down, but we haven't seen an impact on actual trade flows.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [31]

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Okay. Fair enough. And then maybe one for Frank. When you guys are looking at acquisitions now kind of how are you targeting long-term or through-cycle leverage? Obviously, a very modest leverage at this point. And maybe are trade tensions kind of a factor in your term acquisitions, or how much did they weigh in?

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Frank C. De Costanzo, Eagle Bulk Shipping Inc. - CFO & Secretary [32]

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Max, it's Frank. I'll start and then Gary will pick up to finish off. Is the -- our view on leverage is modest or moderate as always. You'll note on the Ultraco transactions with the green ships last year that we only used about 40% loan-to-value. It is somewhat cyclical, our target. And there's no fixed target. It's based on where we are in the cycle and our view in the future. So we stay flexible and nimble, but always with the underlying belief that you should use leverage in a modest manner. I don't know, Gary, if you have anything to add there?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [33]

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No. I would. And the only thing, Max, you mentioned tariffs. We haven't really changed our view overall. We do think that a full-scale trade war is unlikely, as we've said in our prepared comments. So we clearly need to be aware of it. And short term, there's been an impact, but we are extremely positive on supply-demand fundamentals overall. And on that basis, that's why we continue to make acquisitions. But as Frank said, what we've done in the past is-- should be instructive, and that is moderate amount of leverage in what's a fairly volatile business.

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Operator [34]

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And our next question comes from the line of Poe Fratt of NOBLE Capital Markets.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [35]

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I just wonder if you'd like -- if you had talked about financing for the Hamburg and just we assume 40%, is that sort of the number? Or would you move it up to like 45% or 50%?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [36]

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Yes, I mean, we haven't made a determination yet. The ship is expected to deliver into the fourth -- in the fourth quarter. We do have an accordion feature on the Ultraco facility, which is at 40% LTV. Having said that, we are looking at other potential ways to finance the vessel. So -- but I think if you were to look at as a base case, the Ultraco Facility at 40%, I think that would be an appropriate way to model it at this stage, but with a view that we're always looking at potential, more beneficial structures as we go forward.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [37]

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And great. And Frank, I noticed on the debt summary appendix that there was a footnote with -- that there is a extra 25% payment due in the first quarter 2019. My calculation, that's -- what about $4 million in the fourth -- in the first quarter and what's driving that?

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Frank C. De Costanzo, Eagle Bulk Shipping Inc. - CFO & Secretary [38]

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In 2 of the facilities, there's -- there was some timing around the first coupon or the first amortization payment, and so we have essentially one in January and then one later in the quarter. But then after Q1, that really all evens out. There's a -- there will be a next schedule in the Q that comes out that will give you full color on to the timing.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [39]

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Okay. Great. And then, Gary, you talked about that leverage slide, that operating leverage slide. And it looks like relative to the first quarter, the second quarter when you look at actual plus the curve, that cash flow number was down about $1.8 million. Is that -- I mean, my sense is that potentially it's just because of the repositioning that's gone on in the third quarter so far? Or could you give me some color on how that changed?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [40]

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Yes. Sorry, you're talking about cash flow of the quarter, quarter-over-quarter or looking forward on the leverage side of the $38 million?

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [41]

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Looking forward on the leverage slide.

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [42]

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Yes. That -- sorry, that's just an illustrative document. If you look at the footnoting, we have no market outperformance on that. It's just taking very high level, year-to-date, forward curve breakevens and just showing what an increase in the market means in terms of cash flows. And so I wouldn't -- that is not meant to be a reflection of where we are based on our performance today for the year. But just if you pull back and look in various rate environments, what those earnings would be, again, not overlaying Eagle's performance and things like that. Is that help?

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [43]

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That's help -- that helps a lot. And then if we could just focus on the quarter-to-date, just chartering in activity at this stage in the quarter, is it running ahead of or behind the second quarter? Can you give me sort of a color on that?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [44]

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Yes. We seem to always be right around 2/3 covered at the time of our earnings call, except for the first quarter, which is later -- or sorry, the fourth quarter, which is later given the year-end. So we're always at this time, say, 5 weeks in, we're about 2/3 covered. And so if you look at the performance slide, if we actually slide back, if you will, the performance about 6 weeks, that probably gives you a good idea of when ships are off and fixed relative to the market. We've talked about how it's hard to catch a rising market, part of the reason is we're fixing vessels in June that are now showing up in this quarter. And so in a rising market, obviously, we're being benchmarked against today's rates quarter and some of them are done previously. Having said that, it goes the other way, too, and in a falling market, it's easier to outperform as your revenues are captured in a higher market and then benchmarked against the lower one. So I think we are essentially on track. I would use the opportunity on your question, though, to just kind of reiterate that backhaul business is impactful on TCE, and so there is a timing issue. As an operator, we do both front and backhaul cargoes as compared with a tonnage provider that earns a static revenue stream when you fix a ship out, say, for 12 months at X. And so we have rates in our mix for the quarter that are over $20,000 a day as well as ones that are under $5,000 a day. And ships coming into the Atlantic at low rates, they build up, they invest and they build up, what we refer to internally as, pent-up value. And then that can be -- excuse me, that can be released at a time in the future when we feel market conditions are optimal. If you go back and look at our TCE slide and look at last year's Q3, you'll see that the profile is very similar, and then Q4 was a very profound increase. So that's, again, why we think it's important to look not at each quarter, but over the long haul. And as we mentioned, the last 12 months, the outperformance was in excess of $700 a day, and that's $12 million for Eagle. So we continue to see it that way. We don't look at revenue when we're working on the trading side of things. We don't look at the quarterly revenue. We looking at maximizing value over the long haul.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [45]

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And just to double-check, it sounds like from your comments about IMO 2020 that there's no change in your philosophy as far as scrubbers?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [46]

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Yes. I think I'd reiterate our previous comments. And that's namely that we're carrying out diligence. We continue to refine our views in order to determine the path forward for dealing with 2020. And a lot of that work is internal, but we are actively engaged in discussions with various stakeholders and potential suppliers, as we make the best determination for Eagle to stay competitive, I mean, what's a very significant impact to the industry. So for now, I think I would leave it at that in terms of what our plans are.

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Operator [47]

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Thank you. And at this time, I am showing no further questions. I like to turn the conference back over to Mr. Gary Vogel for any closing remarks.

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [48]

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Thank you, operator. We have no further remarks. I'd like to thank you, everyone, for joining us for our call, and wish everyone a great day.

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Operator [49]

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