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Edited Transcript of EGLE earnings conference call or presentation 30-Jul-19 12:00pm GMT

Q2 2019 Eagle Bulk Shipping Inc Earnings Call

New York Aug 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Eagle Bulk Shipping Inc earnings conference call or presentation Tuesday, July 30, 2019 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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* Amit Singh Mehrotra

Deutsche Bank AG, Research Division - Director and Senior Research Analyst

* Espen Landmark Fjermestad

Fearnley Securities AS, Research Division - Equity Analyst

* Jonathan B. Chappell

Evercore ISI Institutional Equities, Research Division - Senior MD

* Liam Dalton Burke

B. Riley FBR, Inc., 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's Second Quarter 2019 Results Conference Call. (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; and Frank De Costanzo, Chief Financial Officer. And Eagle Bulk Shipping's Mr. Vogel, 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 2019 Earnings Call. To supplement our remarks today, I encourage participants to access a slide presentation that is available on our website at eagleships.com. Please note that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and are inherently subject to risks 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 today is basis to BSI-58 Index.

Please turn to Slide 3 for the agenda for today's call. We'll first provide you with a brief overview of our recently completed convertible bond issuance and the acquisition of 6 Ultramax vessels that we plan to make from the proceeds of that issuance, followed by a discussion on our business performance and fleet scrubber initiative. After that, Frank will provide a detailed review of our second quarter financials. We will then wrap up the call with a brief review of the rate environment, industry fundamentals. This will be followed by Q&A.

Please now turn to Slide 5. As reported previously, we issued a $100 million 5-year convertible bond last week. The bond carries a coupon of 5% and a conversion premium of 25% over Eagle's closing price on July 24. The strike price related to the convert is equal to $5.62 (sic) [$5.61] per share. In addition, and subsequent to the pricing, a customary greenshoe was exercised, bringing total gross proceeds to $114.1 million. Proceeds from the bond will be used towards vessel acquisitions and general corporate purposes. On the acquisition front, we've entered into 2 agreements, which are subject to customary closing conditions, to acquire a total of 6 high-specification SDARI-64 Ultramax vessels for an aggregate purchase price of approximately $122 million. The acquired vessels have an average age of just 3.3 years. 4 of the vessels will be delivered to us with exhaust gas cleaning systems or scrubbers, thereby eliminating any off-hire time typically associated with retrofits. We intend to install scrubbers on the 2 remaining vessels utilizing contracts we currently hold. We expect to take delivery of the first 4 ships by October and anticipate taking delivery of the remaining 2 vessels sometime between Q3 and Q4. We believe the price we are able to achieve is attractive relative to recent comps, and that timing is ideal given current rate developments and the impending onset of IMO 2020.

Please turn to Slide 6 for a review of the transaction benefits. We believe both the capital raise and related acquisitions will provide long-term benefits. From a financing perspective, we're incurring unsecured debt at what we believe to be an attractive interest rate, which is significantly below our secured bond cost. In terms of the acquisitions, we believe it's an important step forward for Eagle as we continue to renew and grow our fleet and execute our strategy around IMO 2020. The acquisitions will meaningfully improve our fleet makeup and operating results on a pro forma basis as well as provide further capacity for growth. The 6 vessels increase our fleet size by 13%, bringing the total to 50 vessels and taking into consideration the 1 Supramax vessel sold in July. It increases the percentage of our fleet comprised of Ultramaxes to 40% with a total count now of 20 vessels.

It's worth noting, just 2.5 years ago when we began our fleet renewal strategy, Eagle owned no Ultramaxes and hadn't acquired a new vessel in over 5 years. It also reduces our fleet average age by 0.6 years, bringing pro forma age down to 8.3. It increases the percentage of the fleet which is to be fitted with scrubbers to 82%, bringing the total to 41 vessels. It improves earnings generation capacity by adding larger and more fuel-efficient vessels. In this regard, we estimate our pro forma fleet will generate an improvement of approximately $150 per day on a pro forma run rate basis before taking into account any incremental outperformance we may generate as a result of our larger platform or through our active management model as well as any benefits earned by scrubber-fitted vessels under the new regulations. We believe it will help reduce OpEx per vessel per day by adding younger and more efficient tonnage to the fleet. We estimate the reduction to be approximately $100 per day on a pro forma run rate basis across the entire fleet. It will reduce G&A per vessel per day with little to no incremental overhead expecting. As such, we estimate the reduction to be approximately $200 per day on a pro forma run rate basis. We also expect to generate incremental P&L earnings. And in the current rate environment, believe the transaction will be modestly accretive to EPS.

Finally, it's worth noting that the 6 vessels are being acquired using the proceeds from the bond offering. Since these vessels will all be unencumbered, they provide us with dry powder, and we have the ability to apply some traditional bank debt for further acquisitions, if and when appropriate.

Please now turn to Slide 7 for a snapshot of our pro forma liquidity and debt. As you will note from the slide, we estimate our pro forma liquidity comprised of cash and undrawn availability under our RCF to be approximately $135 million after taking into consideration the convert issuance, spend on the 6 acquisitions and proceeds from the 1 vessel sale. Our pro forma debt increases to approximately $455 million, while our average cost of debt decreases by over 40 basis points to 6.29%.

Please now turn to Slide 8 for a review of our fleet makeup evolution. In addition to the 6 SDARI-64 vessels the company is acquiring, subsequent to quarter end, we reached an agreement to sell the Kestrel, a 2004-built Supramax, for a gross price of $7.3 million. We expect to close on the sale and deliver the vessel to her new owners within the next month. I think it's important to mention that the Kestrel is being sold ahead of a statutory dry dock due in September, saving Eagle approximately $1.5 million in total CapEx spend related to statutory maintenance and requisite installation of a ballast water treatment system. Inclusive of these transactions over the past 3 years, we have bought and sold a total of 34 vessels: Divesting of 14 of our smallest, oldest and least efficient Supramaxes, which averaged roughly 13 years of age at sale; and acquiring a total of 20 modern Ultramaxes, averaging around 3 years of age of purchase. Together, we believe these S&P transactions have transformed our fleet makeup and significantly improved our earnings generation capability. At the same time, we've managed to keep the average age of the fleet essentially flat over the past 3 years, between 8 and 9 years of age. We believe this is a sweet spot in terms of fleet average age, balancing operating capacity and efficiencies with maximizing yield through the lower amount of invested capital as compared with all newer ships.

Please turn to Slide 9 for a discussion on our TCE performance. Eagle's TCE for the second quarter equated to $9,731 per day, which is somewhat higher than where our Q2 TCE was when we discussed it during our last earnings call. I'm pleased to report that this result equates to beating the adjusted Baltic Supramax Index or BSI by almost $2,000 per day. The gray bars on the chart on Slide 9 depict our historical third-party time charter in business as measured in vessel days. During the second quarter, we had a total of 970 third-party vessel days, made up of 22 distinct ships we took on charter. We charter in third-party ships as part of our active management strategy 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. This, combined with a dynamic hedging strategy, has enabled us to drive market outperformance on a risk-managed basis.

I'm very pleased to report that the second quarter marks the 10th consecutive period for which we've been able to outperform the BSI. Over the last 12 months, we've achieved an average TCE outperformance of approximately $1,441 per day equating to almost $24 million in annual value creation based on our current fleet size prior to the announced acquisitions. The market has strengthened since the second quarter ended and the gross BSI is now averaging around 11,400 per day, and the third quarter average is about 10,250 thus far. As of today, we fixed approximately 57% of available days for the third quarter at an average net TCE of $10,285 per day. It should be noted that a significant portion of these days were fixed before the market began to improve in a meaningful way. In addition, we currently have a greater percentage of our fleet trading in a weaker Pacific as compared to a normal state as we've been repositioning tonnage for scrubber installations at yards in China. As such, we believe our TCE performance has and will be continued to be affected somewhat for the balance of the year as a result of our scrubber installation program. This, of course, is an investment we're making today that we expect will positively impact earnings generation of our fleet starting in 2020.

Please turn to Slide 10 for a historical view of our EBITDA performance. EBITDA adjusted for certain noncash items totaled $10.4 million for the second quarter or roughly $70 million for the last 12 months. It's worth noting how impactful and important the company's outperformance has been to incremental EBITDA. This is illustrated by the green portion of the columns. For the second quarter, our TCE outperformance equated to approximately $7.8 million.

Please turn to Slide 11 for a brief update on our fleet scrubber initiative. Inclusive of the 4 scrubber-fitted vessels, which we are acquiring, we now expect to have a total of 41 vessels scrubber-fitted to comply with IMO 2020. Our target is now to have 38 fitted vessels operational by the end of this year and the balance in the first months of 2020. As we've stated previously, we believe early adopters with scrubbers will derive the maximum benefit as we expect fuel spreads will likely be widest during the period just after implementation of IMO 2020 in January before moderating over time. 9 scrubbers have been installed to date with the riding crew now onboard, completing installation work, while the vessels continue to trade. One scrubber is being commissioned as we speak. Based on recent experience, our timing for the scrubber work has been between 11 and 12 days, which is within our budget of higher estimates. By the end of September, we expect to have 9 scrubbers commissioned and operational, and 16 additional installed, with riding teams on board, completing the installations for commissioning. This is in addition to the 4 on vessels being acquired.

With that, I'd 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 13 for a summary of our second quarter 2019 financial results. Revenue, net of commissions for the second quarter was $69.4 million, a decrease of 10% from prior quarter. The decrease reflects a change in the revenue mix between time and voyage charters. As compared to the same quarter in 2018, we saw a decrease in revenue of 7%. The decrease is a result of the decrease in the TCE and owned available days, offset by an increase in chartered-in days. Revenue, net of commissions, voyage and charter hire expenses, came in at $37.3 million in Q2, a decrease of 7% from prior quarter. The decrease was primarily due to fewer available days resulting from dry dock and scrubber related off-hire days, in part offset by marginally higher TCE. We believe that revenue net of commissions, voyage and charter hire expenses best reflects core top line company performance. Revenue net of commissions, voyage and charter hire expenses was 22% lower than the same quarter in 2018. The decrease was driven by fewer owned available days and a decrease in the TCE.

Total operating expenses for the second quarter of 2019 were $68.9 million, a decrease of 3% from the prior quarter. The decrease in Q2 versus prior quarter was primarily driven by lower voyage expenses as a result of a change in the revenue mix, lower G&A, in part offset by a lower gain on sale of vessels. Total operating expenses as compared to the same quarter in 2018 increased by 4%. The increase resulted from higher charter hire and voyage expenses, offset by a decrease in stock-based comp and an increase in gain on vessel sales. The company reported a net loss of $6 million for the second quarter as compared to a net income of $29,000 in the prior quarter, and a net income of approximately $3.4 million in the same quarter in 2018.

Basic and diluted earnings per share, or EPS, in the second quarter of 2019 was a basic loss of $0.08 versus $0 in Q1 of 2019, and an earnings per share of $0.05 in Q2 2018. Adjusted EBITDA came in at $10.4 million for the second quarter as compared to $15.4 million from the prior quarter, and $21 million from the same quarter in the prior year. The lower TCE was the primary driver in the decline from Q2 2018. In the appendix of our presentation, you will find a walk from net income or loss to adjusted EBITDA. 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 14 for an overview of our balance sheet and liquidity. The company had total cash and cash equivalents, including restricted cash of $65.5 million as of June 30, 2019, a decrease of approximately $14.5 million from the end of the first quarter. The decrease was primarily driven by $2 million spent on dry docks, $10.1 million on interest paid, $12.6 million on scrubber and ballast water treatment installations, $5 million on a principal payment for the Ultraco debt facility and $4 million for a principal payment on Norwegian bond, along with $3.5 million of cash used in operating activities, all in part, offset by proceeds from the sale of the Thrasher.

The company's total liquidity as of June 30, 2019, was $135.5 million and is made up of cash, including restricted cash and undrawn revolving credit facilities totaling $70 million. As indicated earlier by Gary, post transaction, pro forma total liquidity is essentially unchanged from Q2, with proceeds from the sale of the Kestrel essentially offsetting the cash required to close on the 6 Ultramaxes being acquired.

Total debt as of June 30 was $340.4 million and is comprised of the $192 million Shipco Norwegian bonds and the $148.4 million new Ultraco debt facility. Net debt over adjusted EBITDA came in at 4 turns, up from 3.3 turns in the prior quarter. The lower trailing 12-month EBITDA number that largely resulted from the lower charter rates in the first half of 2019 was the primary driver in the tick up in leverage. The recent improvement in chartering rates, which picked up momentum earlier in the month, will likely drive improved profitability and cap the modest increase in leverage.

Please turn to Slide 15 for a review of cash flow from operations. During the second quarter, net cash used in operating activities was $3.5 million, down from a positive $11.9 million in Q1 and a positive $9.9 million in the second quarter of 2018. The dip in cash flows was mainly due to the negative $9 million change in working capital. Excluding the working capital change, as reflected in the light blue bar, cash flows from operations was positive $6 million in the current quarter.

Please turn to Slide 16 for additional color on cash flows. At the top of the slide, let's look at the changes in the company's cash balance in Q2 2019. As I have noted in prior calls, I believe this chart clearly lays out the large themes driving our results. The 2 large bars on the left, revenue and operating expenditures, are a simple look at the operations. The net of 2 bars is positive $10 million, which comes in very close to our Q2 adjusted EBITDA number.

To the right, you will find the bars covering $12.6 million we paid for scrubber and ballast water installations, the $9 million we paid in principal payments and the $10.1 million we paid in interest payments, offset in part by the $9.8 million we received for the sale of the Thrasher. The chart at the bottom of the slide covers cash movements year-to-date 2019.

Let's now review Slide 17 for our cash breakeven per vessel per day. Cash breakeven per ship per day in Q2 2019 was $10,437, $907 higher than in Q1 2019. The lower operating breakeven was more than offset by the increase in debt principal payments or amortization. Q2 OpEx came in at $4,787, $43 lower than Q1 2019 and $62 higher than full year 2018. Q2 drydocking was $475 per ship per day, $133 lower than Q1 and essentially unchanged from the full year 2018 number. Q2 cash G&A came in at $1,634 per ship per day, down $40 from Q1 and marginally higher than full year 2018 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 $1,326, or $308 lower. Q2 cash interest expense is $1,371 per ship per day, down $29, while debt principal payment increased by $1,152, both when compared to Q1. Debt principal payments are higher on the Ultraco Bank facility amortization payments, which started in the quarter.

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 19. Supramax/Ultramax rates were fairly range-bound during the second quarter, with the gross BSI averaging $8,485 per day, up 7% from the prior period. The Atlantic BSI market averaged $8,937 per day during the second quarter, up 11% quarter-on-quarter, while the Pacific BSI market decreased by 5% during the same period to average $7,596 per day. Although the broader index was generally stable during the quarter, the Pacific market experienced some volatility to the downside, driven primarily by choppiness surrounding Chinese coal imports. The overall dry bulk market has posted a strong recovery since mid-June on the back of a material pickup in Brazilian iron ore exports. This has primarily benefited Capes, but it has also led to positive demand and sentiment for Panamax and Supramax, Ultramax as well.

In addition, we've seen a meaningful pickup in grain exports out of South America and the Black Sea. We believe some of the incremental demand is a result of the drought in Australia, primarily impacting lead volumes. These factors have helped the BSI reach over $11,000 per day, an increase of over 35% from the lows experienced in Q2.

Please turn to Slide 20 for a brief update on vessel supply. Dry bulk newbuilding deliveries totaled roughly 9.3 million deadweight tons or approximately 99 vessels during the second quarter, representing an increase of 1% quarter-on-quarter. Demolition of older tonnage amounted to 2 million deadweight tons during the quarter or 22 vessels, representing a decrease of 4% over the prior quarter, but notably, up almost 70% year-on-year basis vessel count. As you will note from the light blue dotted line on the graph, net fleet growth is historically low for dry bulk overall, with expected net growth of 2.5% in '19. But is even more favorable when drilling down to the Supramax/Ultramax segment for net fleet growth as depicted by the darker blue dotted line is expected to be just 2.3% of the on-the-water fleet.

Please turn to Slide 21 for a look at newbuilding ordering. In terms of forward supply growth, newbuilding orders totaled approximately 4.3 million deadweight tons or 26 ships in the second quarter, down 62% over the prior quarter basis vessel count. As of the latest information, we have no Ultramaxes ordered during the quarter. As we've indicated previously, given a number of factors, including an increase in newbuilding prices as a result of Tier III regulations as well as uncertainty on future regulatory requirements, we remain cautiously optimistic we will not see a material increase in ordering, unless we also see both rates and secondhand values increase significantly from current levels. Unchanged from last quarter's call, the order book as a percentage of the on-the-water fleet stands at 12% basis deadweight tons. The Capesize segment has the highest order book at over 16%. Most importantly, the Eagle, the Supramax/Ultramax order book stands at just 8% of the on-the-water fleet, which is around a 20-year low. Looking ahead, we continue to believe supply side fundamentals remain favorable, given the low order book and the increasing number of older vessels, which are becoming less commercially viable due to regulations coming into effect.

Please turn to Slide 22 for a summary on demand. From a macro perspective, global growth expectations, as forecasted by the IMF, have been revised down somewhat since our last earnings call. Global GDP growth is now forecasted at 3.2% for '19, down 10 basis points. Downside risk to global growth remain due to a number of factors, which we've highlighted on previous calls, including slowing Chinese and [euro area] growth, uncertainty around both Brexit and continued trade tensions. Dry bulk demand growth, as calculated from a bottom-up fundamental perspective, is now expected to reach roughly 1.3%, down about 50 basis points since our last earnings call. The downward revision is due to lower expectations from major bulks. Within the 1.3% real demand growth, major bulks, which are comprised of iron ore, coal and grains are expected to be flat in 2019, with negative growth in iron ore driven primarily by the effects of Vale's production cuts is effectively offsetting growth in grain and coal trades.

Demand for coal, which typically represents about 15% to 20% of the cargoes we carry, is expected to grow by 0.6% this year to total 1.27 billion tons, a marginal decrease of approximately 10 million since our last earnings call. Demand for grains, which represents anywhere from 10% to 20% of the cargoes we typically carry in a quarter, is expected to grow by about 1.3% this year to around 477 million tons.

Most importantly, to us, minor bulk has been noted on the last line of the table, and which typically makes up about 2/3 of the cargo Eagle carries, are expected to once again surpass overall dry bulk and is forecasted to increase by almost 4% in 2019. Conversely to the major bulks, this number is up from the time of our last earnings call, when growth was forecasted at 3.5%. The growth represents roughly 80 million metric tons of incremental demand, and is being driven by improvements in trades such as fertilizer, nickel ore, manganese ore, forest products, agri-bulks and bauxite. We believe the demand picture, which remains favored towards the minor bulks, combined with the Supramax/Ultramaxes' historically low order book as a percentage of the existing fleet, creates a dynamic that is particularly favorable for Eagle, given our fleet makeup.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Amit Mehrotra with Deutsche Bank.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [2]

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I guess, just maybe to start with, I just wanted to ask, obviously, about the convert, the drivers of the decision to pursue that route. And I fully understand, obviously, it's a much more flexible piece of capital, but it's also in the context of very low leverage profile already, partly related to the restructuring you had to do kind of back in 2016. So if you can just help us think through that? And also related to that, I guess, with respect to the prospective financing opportunities related to the unencumbered vessels that you mentioned, Gary, can you just help us with the thinking there in terms of how you think about the magnitude of the dry powder, I would just think the convert path was partly chosen due to pro forma leverage consideration. So if you can just talk about that as well.

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [3]

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Yes. Thanks, Amit. Absolutely. So we -- of course, we considered the broad spectrum of potential ways to support this. I mean, first of all, this is a decision based on the commercial aspects, all the benefits I mentioned about the scale Ultramaxes -- efficient vessels, 4 of them being scrubber-fitted and what have you. And then solving for the capital structure. From -- on one hand, straight equity to something like lease financing. And we felt that this was in the sweet spot. I think we've shown, we're open to different kinds of financing. Obviously, we have bank debt. We have a Norwegian bond. And in this regard, we felt that the combination between the unsecured debt and a higher, obviously, conversion price and straight equity was a good balance.

Also, I think, while I'm confident we could have raised straight equity, the quantum would have been less. And this sets us up, as you mentioned, and we talk about, for more than just these 6 ships, if that's where we feel it's appropriate and want to go. In that regard, we have an accordion feature on our Ultraco facility, where we can draw 55% on new vessels -- and I'm not saying we will go there, but we have that opportunity. So as mentioned in the call earlier, we effectively can cover this with the proceeds itself. But clearly, we have a view that at the right time, that kind of leverage could be appropriate. Although I will say, and I said this before, we're constructive on the market, but this is a volatile industry. And I think Q1, if anything, showed that you need to be prepared for periods of weakness. And so there's a difference between constructive and sure, at any given time. I don't ever want to think we want to put this company in a position where the market has to do something on a given day. And I think that the convert here has struck that balance well for Eagle.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [4]

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Yes, that makes sense. And just related to that, I guess, it would be safe to say that you want to see, kind of, how the market progresses over the next 12 months or so, maybe get that -- hopefully, get that net debt number down before you want to pull some levers on the unencumbered vessels to get more dry powder to maybe further grow the fleet. Is that kind of the right way to think about the cadence? Or would you maybe want to do that now because asset values are still low. I would imagine you want to be more prudent on that front.

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [5]

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Yes. I think it's a decision, you walk through the door every day, and you need to evaluate where you are. I think, in general, this is a large acquisition for us, 6 vessels. The last time we did something this large was Greenship, which was 9 ships, now 2.5 years ago. I think that all things -- I wouldn't say a year, but I'd like to approach IMO 2020 and see how things develop. But I'm not saying we wouldn't do anything. But in general, yes, we'll do this, we'll take a pause, be erring on the side of caution and see where we are and then look to do something. And also, as I mentioned, we're also looking at -- we always look at potential other M&A activity, and this gives you more capacity on the balance sheet as well. So what comes around in the future will determine how we act. But I think your initial look at, we'll do this and take a pause, is appropriate.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [6]

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Okay. That makes sense. Let me just ask one operating question, if I could. Specifically with respect to IMO 2020. Is there -- you guys obviously have a good history of actively managing the fleet, and you talk about -- show that chart relative to the index. Does that get impacted at all? Would the need to maybe reposition the fleet either to source [hot soil] for fuel oil or install scrubbers. Can you just talk about what you're doing on the active fleet side that may be different in the back half of the year with respect to kind of the January 1, 2020 deadline?

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

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Yes, absolutely. I touched on it, and clearly, we feel that positioning vessels for scrubber retrofits is impacting our decision. If you think about it, when you have a free hand and you make whatever decisions you can to maximize revenue on a risk-managed basis, you're going to have the best numbers. And any time you have to make a determination that, that ship has to go left instead of right, and it's not just about numbers, it's going to have an impact. So if Bo, our Chief Commercial Officer, was here with me, he'd say, "You're tying my hands because I've got to get 34 ships, or in our case, 32 ships out to China and back, and that's not helpful." So I think it is impactful. Having said that, compared to where we think the benefits will be, it's just part of the business that needs to be seen as part of the total package of investing for IMO, our strategy around IMO 2020. So we've been able to, obviously, have good performance. And I think we will continue to do so, but it would be wrong to say it's not impactful.

Now as we look forward to IMO 2020, no one knows exactly how this will play out. And so will it impact our trading methodology? Absolutely. And some things will be more challenging, but I also think it's going to open up some really amazing opportunities. We only expect 10% of the fleet -- the Supra/Ultra fleet to be scrubber-fitted by the end of 2020. And because of that, you're really going to be competing with a very small number of vessels that are looking for effectively trades, which are very long-haul because ships which are most efficient want to spend the most time at sea, relative to the time in port. So you'll be looking for long-haul business, but you're only competing with effectively 10% of the fleet. And in that 10%, obviously, Eagle has a decent percentage of that. So in that regard, that will be beneficial. Of course, we have to plan for where we -- where we pick up fuel.

If you tell me that 40%, 50% of the Supra/Ultra fleet would have scrubbers fitted, I'd be more concerned about competing for that and having to carry additional fuel to secondary/tertiary ports. But because it's fairly limited, we're confident we'll be able to trade around that. And as I said, spending more time on long-haul trades is something that I think, scrubber-fitted ships will naturally end up doing. For my whole career, we've always talked about how many tons per day a ship burns in terms of fuel, but starting January 1, it's not how many tons a day you burn, it's how much -- how many dollars a day you spend, right? Because it's the first time that we're going to have ships burning fuels that we believe will have very significant differences in terms of fuel costs. So hopefully, that...

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Operator [8]

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Our next question comes from Jon Chappell with Evercore.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [9]

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Following up on your efficiency points and kind of tracking the other side of the S&P equation, post the Kestrel and the Thrasher, now you're down to 8 ships that are over 12 years old. Do you feel that those are natural sell candidates to continue to, kind of, modernize the fleet? And then second, I think the Kestrel, if you kind of look at the transaction holistically, you can say that, that kind of cover the cash component that the converts fell short on -- how would you think about use of proceeds from continuing to modernize the fleet through sales? And the stock's obviously taken a big hit lately, would that be something that could be attributed to a buyback, would it accelerate the payback -- or the -- pay down the debt?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [10]

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Yes. So first of all, I mean, it happens that the Kestrel quantum matched the hole, if you will. But of course, cash is fungible. Clearly, the 8 ships, the older ships, if you look at our actions, I'm a big believer actions speak louder than words. If you look at what we've done so far. Yes, those 8 ships are clearly vessels that we will, in the future, look to monetize as we, kind of, look to renew the fleet and keep our average age in that area I was talking about, right? Because if we do nothing, obviously, the fleet gets a year older every year. Just like us. So in that regard, I think that the -- what we do with that capital is effectively -- it's a decision, again, that we take every day.

We don't comment on short-term share price development. And it's only a few days after the convert. So I think it's a little early to talk about what we might do relative to share price in terms of a buyback -- obviously, haven't done that in the past. And as I said, I think it's just a little early for that. But as we sell older -- older less efficient vessels, we clearly will look to continue to acquire. It's not necessarily -- it can't be a 1:1, given the price for an older vessel versus a new one, but it's not even $1 for dollar. We see selling these vessels as strategic to continue to renew the fleet -- to renew the fleet and keep the age young, and then acquiring newer vessels is to grow it. So obviously, they're connected. But it's not a 1:1 or a 2:1.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [11]

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That makes sense. And then on the IMO 2020 opportunities. I mean, you said no one knows how it's going to play out, and I completely agree with that. However, there is a significant amount of, I think, the 11 to 12 days of off-hire time with the stuff you're not doing at sea is pretty low on the totem pole of off-hire times. But there's clearly a short-term operational disruption as you mentioned, by shifting some of the ships out of the preferred region. So maybe the cost is a little bit greater than just the monetary spend. Now with 9 ships fitted, are you seeing any difference in the way charters are kind of -- charters are approaching those ships? Or do you view the opportunity is just going to be your ability to be more flexible with the fleet as opposed to locking in kind of a spread by having those more efficient ships with the scrubbers?

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

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Yes. A few things, I think, to unpack there. First of all, the 11, 12 days that we're spending, whether we did a full in-yard installation of 25 to 30 days or the 12 days, the ship still has to get to the yard in China, and then we will ultimately reposition it back to where we want. So that doesn't change. And while the riding crew is on board, the ship is not hindered at all in terms of its commercial -- so I think those are the same.

Just to be clear, the -- our first scrubber is being commissioned right now. So the 9 -- I think the number was 9, are towers installed. So the yard portion is done, but there's riding crews on board, finishing piping, electrical work, things like that, and those will be commissioned over the next couple of months. At the moment, having a scrubber-fitted ship will have some benefit when you're trading in Ecozones. Our scrubbers have the ability to scrub down 3.5 fuel down to 0.1. So in that sense, when you're trading around, for instance, coastal United States, U.S. Gulf and in Europe, in areas where scrubbers are allowed, you'll be able to burn 3.80 instead of 0.1. The majority of that time we'll be in port, where our ships burn roughly 2 tons a day, and you'll save by being able to burn 3.5 versus 0.1. But that's obviously not where the lion's share comes from, which will be at sea once IMO 2020 kicks in.

In terms of charters, we've had some discussions. I think it's fair to say that charters at the moment, in my opinion, aren't willing to pay for full value, what we think the scrubber benefit will be. And we also think, given our active management model, we're best positioned to maximize that revenue stream, right? I talked about before that we get paid a dollar per ton basis to carry cargo when we do things on a voyage basis, which we prefer. And in that regard, the oil price becomes an internal cost. So if you're paying less for fuel, every dollar of that saved goes straight to the bottom line. So I'm not saying we won't re-let ships at the right time if people pay us what we deem to be full value. But as you know, we don't do a lot of long-term re-lets because of the optionality you need to give away in terms of redelivery and things like that. So to date, we haven't chartered out any of our scrubber-fitted tonnage, and I don't really see that changing over the next few months, but we'll have to see how it develops.

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Operator [13]

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(Operator Instructions) And our next question comes from Liam Burke with B. Riley FBR.

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Liam Dalton Burke, B. Riley FBR, Inc., Research Division - Analyst [14]

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Gary, if we're looking at scrubber installations and more efficient fleets at the higher end, do you think that, over time, they will force faster scrapping and further help the supply side of the order book?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [15]

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So I think a lot will be dependent on rate development as well as fuel spreads. So wider fuel spreads will simply make less efficient ships even more inefficient, relative to eco-ships and more efficient ones. And in particularly, scrubber-fitted ships. So the wider the fuel spread, the more the answer to that, I think, would be, yes. Having said that, if ships slow down because of higher fuel costs and rates go up, then people go -- there's less of an impetus for people to scrap. Obviously, on an older vessel, cash flows become more robust and people are willing to take a discount to the market and still be making money. So there's a number of variable inputs into that. But in general, I think IMO 2020, I think, is a positive catalyst for scrapping. Scrapping this year is expected to be about a little over 9 million tons, which is double last year, which I think is obviously -- obviously, we see that as positive. And I think there's more capacity for that to increase on the back of IMO 2020. But as I said before, we need to see how it plays out in terms of fuel spreads and rate development.

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Liam Dalton Burke, B. Riley FBR, Inc., Research Division - Analyst [16]

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And your cash breakeven prior to debt service was better this quarter than the previous quarter. How much of that is just working the individual vessel versus your overall fleet management?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [17]

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Yes. I mean, it's -- obviously, each individual ship goes into that. We're working to maximizing our efficiencies in terms of OpEx every day on every ship. But as we've said before, these numbers tend to be choppy based on when expenses come in. We also look at this in a long-term basis -- hitting an OpEx number is something you can do on a given quarter. But it's the same as you can pay me now or you can pay me later. We also have been -- we took one ship out of -- out of service last -- during the quarter to put on a very high-specification silicon-based paint, which we think will pay for itself, clearly pay for itself over the period. And as a business, case made a lot of sense. But it hit our OpEx, I think the number was about $120 per day across our fleet, which there's no visibility to that inside. So we could have easily just gone and had the bottom cleaned for $10,000 and moved on, but our view is we're going to make the right business decision. So we're always looking to improve -- improve it overall, but sometimes you don't see it in the numbers based on -- based on whether it goes into OpEx or it goes in efficiency.

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Operator [18]

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And we have a question from Espen Landmark with Fearnley.

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Espen Landmark Fjermestad, Fearnley Securities AS, Research Division - Equity Analyst [19]

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Just a question on the transaction. I mean, I guess, this is about the first time we see vessels fitted with scrubbers changing hands in the second-hand market. So just curious, do you -- any premium beyond the replacement costs for those scrubber-fitted vessels?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [20]

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No, I would say that the scrubber component, if you will, was very much in line with our cost -- about $2 million. So we didn't have to pay a premium for that, relative to the market on the other ships.

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Espen Landmark Fjermestad, Fearnley Securities AS, Research Division - Equity Analyst [21]

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And going forward, if you were to do another acquisition with vessels with scrubbers. Would you potentially open up for paying beyond the CapEx part of it?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [22]

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It's a great question. I think we have access to scrubbers. Obviously, we have relationships with existing manufacturers, it really would come -- I think that would come down more to what kind of -- what the present value was. In other words, how long would it take to get a scrubber manufactured and installed on a ship versus getting a ship immediately, and how much benefit you would get out of it. So I think for us, it would be fairly limited, given that we feel confident we can acquire one and install it. But that's, I think, more of a math question, and I think you have to be inside of, kind of, an imminent IMO 2020 with significant spreads to justify that in my mind. I think we're comfortable with our -- with our position right now. And I don't -- in the near term, I wouldn't see us paying up for a scrubber.

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Operator [23]

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Thank you. And I'm showing no further questions at this time. I'd like to turn it back to Mr. Gary Vogel for any further remarks.

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [24]

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

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Operator [25]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.