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Edited Transcript of EGLE earnings conference call or presentation 7-Nov-19 1:00pm GMT

Q3 2019 Eagle Bulk Shipping Inc Earnings Call

New York Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Eagle Bulk Shipping Inc earnings conference call or presentation Thursday, November 7, 2019 at 1:00:00pm 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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* Christopher M. Snyder

Deutsche Bank AG, Research Division - Research Associate

* Jonathan B. Chappell

Evercore ISI Institutional Equities, Research Division - Senior MD

* Randall Giveans

Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping

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Presentation

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Operator [1]

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Greetings and welcome to the Eagle Bulk Shipping Third 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 of Eagle Bulk Shipping. 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 third 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 now turn to Slide 3 for the agenda for today's call. We will first provide you with a brief update overview on Eagle's business and our fleet scrubber initiative. After that, Frank will provide a detailed review of our third quarter financials. We'll then wrap up the call with a brief review of the rate environment and industry fundamentals, and this will be followed by Q&A.

Please turn to Slide 5. Since the beginning of the third quarter, Eagle's been very active on a number of strategic and financial fronts. As previously reported, we relocated our European offices to Copenhagen, continued to execute on our fleet scrubber installation program, reached agreements to acquire 6 modern high-specification Ultramaxes for approximately $122 million and raised $148 million in debt, which was comprised of $114 million convertible bond and a $34 million upsize to our term loan facility. As of today, we've taken delivery of 4 of the 6 vessels, all of which are scrubber-fitted and expect to take delivery of the remaining 2 Ultramaxes this quarter.

We also closed on the sales of the Kestrel, a 15-year-old 50,000 deadweight ton Supramax for $7.3 million. The vessel was sold basis drydock due, saving the company approximately $1.3 million in total CapEx spend relating to the statutory maintenance as well as the requisite installation of a ballast water treatment system. Please turn to Slide 6 for a review of our fleet makeup evolution.

Inclusive of our recent sale and purchase transactions, we now have acquired and sold a total of 34 vessels over the past 3.5 years, divesting 14 of our smallest, oldest and least efficiency Supramaxes, which average roughly 13 years of age at sale; and acquiring a total of 20 modern Ultramaxes, averaging around 3 years of age at purchase. Our fleet now totals 50 Supramax/Ultramax vessels, making us the largest publically listed owner of these types of vessels globally. The fleet growth and renewal initiatives we've undertaken over the past few years has significantly enhanced our earnings generation capability, while also improving our operating efficiencies as it relates to vessel speed and fuel consumption.

Please turn to Slide 7 for a discussion on our TCE performance. Eagle achieved a TCE for the third quarter of $11,014 per day. Although we experienced a meaningful improvement quarter-on-quarter of approximately 13%, we lagged the BSI which averaged $11,590 per day on a net adjusted basis. As we've mentioned in previous calls, it's more difficult for an owner to outperform the market when it's rising, especially when it gaps higher. This is due to the fixed revenue nature of contracted voyages against the constantly moving market. The BSI increased roughly 50% quarter-on-quarter, coming up from a low of less than $8,000 per day in Q2.

In addition to facing a rising market, our performance during the quarter was impacted by other factors, including vessel acquisitions. As mentioned earlier, we took delivery of 4 vessels, all of which delivered in the weaker Pacific region and we also began to position them into the Atlantic which incurs a significant investment relative to the BSI. Furthermore, our performance has been affected by the repositioning of our fleet as it relates to the scrubber installation program. Over the last 9 months, we've positioned 32 ships or about 2/3 of our fleet in and out of yards located in China. This notwithstanding, approximately half of our fleet is now next open for business in the Atlantic. This is no small feat, as we've been limited in our ability to fix vessels in the most commercially optimal manner due to the requirements to meet and adjust the yard schedules. The upshot is that we are now essentially finished with positioning vessels and can get back to the business of freely operating ships and executing on our active owner-operator model unencumbered.

The scrubber installation program has been impactful to this year's results, both from an operations and off-hire perspective. However, we firmly believe at being ahead of the curve and getting almost all of our scrubbers fitted in advance of 2020 will pay meaningful dividends next year. As we've stated in all of our previous calls, we do not manage our fleet for quarterly results and believe it's long-term value creation that's important. In this regard, inclusive of the third quarter, we've achieved an average TCE outperformance over the last 12 months of approximately $1,266 per day, equating to roughly $23 million in annual value creation based on our current fleet size of 50 ships.

Looking ahead and as of today, we've fixed approximately 61% of available days for the fourth quarter at an average TCE of $13,150 per day. This equates to a significant outperformance for the quarter based on actual quarter to day rates and the forward curve for the balance of the period. Please turn to Slide 8.

EBITDA, adjusted for certain noncash items, totaled $13.2 million for the third quarter, an improvement of approximately 27% quarter-on-quarter. Over the last 12 months, EBITDA has totaled just over $62 million with approximately 1/3 being derived from TCE outperformance. Please turn to Slide 9 for a brief update on our fleet scrubber initiative.

As of today, we've completed the manufacturing of all 41 scrubber towers and have installed 29 to date. Of these, 7 ships are fully commissioned and we expect to have an additional 28 ships commissioned by the end of '19, with 3 more in the first weeks of January and the remaining 3 in Q1. As previously advised, we shifted 15 vessels from partly at-sea installation to full yard in order to substantially complete our scrubber program within 2019. We've just commissioned the first of those full yard installs this week and currently have 8 ships in yards carrying out retrofits. As has been widely observed and reported, companies which are installing scrubbers as well as those doing statutory drydocks in China, have been experiencing significant delays due to a number of reasons, including the backlog of ships at yards and shortage of labor caused by the extensive amount of work now being performed.

While we were fortunate to have the majority of our fleet out of yards prior to October, our ships there now are also being impacted and we expect to incur an additional average of 12 days off-hire for the 15 installs during Q4, as compared to previously disclosed estimates. The result of this is an aggregate 185 off-hire days. While impactful, we believe getting these completed now in order to benefit from IMO 2020 or ready from January 1 is clearly preferred to delaying the work or spreading the retrofits out over next year, thereby forgoing fuel differential benefits.

Inclusive of these numbers we're calculating an average of 24 days incremental off-hire per ship for scrubber installation across the fleet. As you'll note on the chart on the right-hand side of the slide, this year dramatically stands out as a significant period of investment in off-hire in order to set up the company for IMO 2020 and beyond. Please turn to Slide 10 for an update on fuel spreads and scrubber economics.

With just 53 days to go before IMO 2020 goes into effect, we believe we're particularly well-prepared to benefit from the regulation based on our preparations as well as our active management approach. As we've indicated previously, we also believe early adopters of scrubbers will benefit most, given that fuel spreads are expected to be widest during the period just after implementation of IMO 2020 in the first half of the year before moderating over time.

Fuel spreads have been fairly volatile as of late, but in general have been trending upward. Over the past weeks, we've begun to lock in some of the fuel spread and currently have about 10% of our 2020 scrubber fuel exposure hedged by selling the spread between 0.5 LSFO fuel and 3.5% HFO. The average price of those hedges is approximately $240 per metric ton. While there's always basis risk with derivative hedging, we calculate that a spread of $240 would equate to annual cash flow of about $46 million. Separate from this, we also believe that with only about 7% of the Supra/Ultramax fleet being scrubber fitted in early 2020, it's very likely that the fleet will experience a net slowdown as a result of more expensive fuel, which will take effect the supply out of the market, acting as a positive catalyst for rates.

With that, I'd 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 12 for a summary of our third quarter 2019 financial results. Revenue net of commissions for the third quarter was $74.1 million, an increase of 7% from the prior quarter. The increase is the result of higher charter hire rates, in part offset by less available days. The lower available days in the current quarter were impacted by a greater number of off-hire days due to statutory drydocks, along with the installation of scrubbers and ballast water treatment systems on our vessels.

As compared to the same quarter in 2018, we saw an increase in revenue of 7%. We believe evaluating revenue, net of both voyage and charter hire expenses, best reflects core top-line company performance. In that respect, revenue for the third quarter, net of both voyage and charter hire expenses, came in at $43.3 million, an increase of 16% from the prior quarter. Revenue, net of both voyage and charter hire expenses, was 7% lower than the same quarter in 2018. The year-on-year decrease was primarily driven by a decrease in the charter hire rates and lower availability days.

Total operating expenses for the third quarter of 2019 were $68.3 million, a decrease of 1% from the prior quarter. The decrease in Q3 versus prior quarter was primarily driven by lower voyage expenses. Operating expenses as compared to the same quarter in 2018 increased by 13%. The increase was driven by higher charter hire and voyage expenses. The company reported a net loss of $4.6 million for the third quarter, versus a $6 million net loss for the prior quarter. This compares to a net profit of $2.6 million in Q3 2018. Basic and diluted loss per share in the third quarter of 2019 were both $0.06, versus a loss of $0.08 in Q2 2019 and down from basic earnings per share or EPS of $0.04 in Q3 2018.

Adjusted EBITDA came in at $13.2 million for the third quarter, as compared to $10.4 million in the prior quarter and $20.2 million from Q3 '18. In the appendix of our presentation, you will find a walk from net loss of $4.6 million to an adjusted EBITDA of $13.2 million. Both EBITDA and adjusted EBITDA are non-GAAP measurements. You can find additional information on non-GAAP measurements in the appendix.

Let's now turn to Slide 13 for an overview of our balance sheet and liquidity. The company had total cash of $101.1 million as of September 30, 2019, an increase of approximately $35.7 million from the end of the second quarter. Total cash included $29.6 million of restricted cash. The increase in Q3 was the result of the cash proceeds received from the convertible bond offering, along with the sale of the Kestrel, in part offset by the purchase of 3 Ultramax vessels, deposits on an additional 3 Ultramax vessels to be delivered in Q4 and spending our scrubber program.

The company's total liquidity as of September 30, 2019 was $171.1 million and is made up of cash and restricted cash, along with undrawn revolving credit facilities totaling $70 million. Total debt as of September 30 was $449.5 million, which increased by $109 million from the last quarter. Total debt is comprised of the $192 million Shipco Norwegian bond, the $143.4 million new Ultraco debt facility and the $114.1 million convertible bond. Please note that subsequent to the quarter we have borrowed an additional $34.3 million on the new Ultraco debt facility, utilizing the accordion feature. We intend to use the funds for capital expenditures relating to the installation of scrubbers and general corporate purposes. The additional debt is collateralized by the 3 vessels delivered to the company in September. The new Ultraco facility debt outstanding currently stands at $172.6 million post the accordion draw and an amortization payment of $5 million.

Please turn to Slide 14 for a review of cash flows from operations. During the third quarter, net cash provided from operating activities came in at a positive $10.5 million, a $14 million increase from Q2 2019 and down $3.2 million from Q3 of 2018. As the chart shows, the positive trend in cash flows from operations continues with cash from operations significantly improved from the negative $20 million recorded in Q1 of 2016. The chart also shows the timing-driven variability that working capital introduces to cash from operations, as demonstrated by the difference between the dark blue bars which are the reported cash from ops numbers, and the light blue bars which strip out changes in operating assets and liabilities, essentially working capital. As the chart demonstrates, the volatility caused by working capital largely evens out over time.

Now please turn to Slide 15 for a Q3 and 2019 year-to-date cash walk. I like these cash walk charts because they clearly lay out the large themes driving our results. Let's now review the chart at the top of the slide for the changes in the company's cash balance in Q3 2019. The two large bars on the left, revenue and operating expenditures, are a simple look at the operations. The net of these two bars is $16 million, which comes in reasonably close to our $13 million Q3 adjusted EBITDA number. The relationship also holds with the year-to-date chart at the bottom of the slide, with the net of revenues and operating expenditures at $40 million and adjusted EBITDA for the same period at $39 million.

Back to the chart at the top of the slide and to the right, you will find a bar covering the $2 million in costs for drydocking 3 ships in the quarter, a bar totaling $21 million for CapEx spending on scrubbers and ballast water treatment systems, a bar totaling a net of $62 million for the vessels bought and sold in the quarter, a bar totaling $113 million representing the net cash proceeds we received from the convertible bond offering and finally a bar totaling $7 million for debt principal and interest paid in Q3.

Let's now review Slide 16 for our cash breakeven per vessel per day. Cash breakeven per ship per day in Q3 2019 was $9,671, $766 lower than Q2 2019 and $1,313 higher than the full year 2018 breakeven. The decrease versus prior quarter was a result of lower debt amortization, in part offset by the increase in interest expense and G&A. Please note that Q3 cash breakeven numbers are impacted by timing, as the anticipated increase in owned days on the acquisition of the 6 Ultramax vessels did not fully occur in the quarter. We expect that the debt and G&A breakeven numbers will normalize by Q1 of 2020.

Q3 OpEx came in at $4,801 per ship per day, $14 higher than Q2 and $76 higher than full year 2018 results. 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. We are also leveraging the scrubber installations to perform additional vessel improvement that will have a positive impact on OpEx over time.

Q3 cash G&A came in at $1,755 per ship per day, up $121 from Q2 and $189 higher than full year 2018. G&A was impacted by one-time charges for the closing of our Hamburg and the opening of our Copenhagen offices. If we were to include the 6 newly purchased Ultramaxes for the full quarter, Q3 G&A per ship per day would have come in at $1,563. Additionally, if we were to include the chartered in days in our calculation, Q3 G&A per ship per day would be $1,303. Q3 cash interest expense is $1,526 per ship per day, $155 higher when compared to Q2 and $175 higher when compared to the full year 2018. The increase in cash interest is primarily a result of the convertible bonds which closed in Q3 and less ownership days, which will correct itself over the next 2 quarters as the final 2 acquired Ultramaxes are delivered. Q3 debt amortization is $1,215 per ship per day, $955 lower when compared to Q2 and $983 higher than full year 2018.

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 18 for a discussion on rates and industry fundamentals. Supramax/Ultramax rates averaged $12,511 per day for the quarter, an increase of 47% over the prior period. It's noteworthy that the index reached $15,233 during the quarter, a 6-year high. The Atlantic market averaged $15,049 per day, up 69% quarter-on-quarter, while the Pacific market increased by 38% during the same period to average $10,726 per day. The improvement in rates through September was driven by a number of factors, some of which we had identified on our previous call. These include continued strong volumes of South American and Black Sea grain exports, which benefitted in part due to the drought impacting Australian wheat exports. Countries such as Indonesia and the Philippines which tend to purchase a large amount of product from Australia, were being forced to look at Black Sea exports, a longer haul trade; a rise in year-on-year Chinese coal imports of roughly 10% and an increase in nickel ore exports out of Indonesia as buyers acted to secure product ahead of the export ban which was scheduled to go into effect as of January 1. Indonesia is the world's second-largest exporter of nickel ore with almost all of it going to China.

The BSI peaked in early September and has come off to levels around $10,500 per day. Apart from the normal volatility which inherently exists in our market, we believe rates have been negatively impacted due to a few reasons. Of note, Indonesia abruptly brought forward the nickel ore ban on October 28, which was only supposed to go into effect in January. This has had an immediate and significant impact to the Pacific market, with spot ships now looking for alternative cargos. Notwithstanding this, the situation remains fluid, as Indonesia recently stated they may allow for nickel ore exports to resume within the next 1 to 2 weeks. In addition, it appears that some Chinese ports are starting to restrict coal imports purportedly under quotas being reached. There is, however, no clear guidance. And as of today, we continue to carry some volumes of steam coal into China.

Probably the biggest factor impacting rates is relative weakness in soybean movements. It's not surprising that Brazilian exports have dropped, given the time of year. But November is typically a strong period for U.S. exports to Asia. Unfortunately, as we saw last year and with the continuing tariffs on U.S. seen, little product is moving on what was an important long-haul trade that typically supports rates in Q4.

Please turn to Slide 19 for a brief update on vessel supply. Dry bulk newbuilding deliveries totaled roughly 10.6 million deadweight tons or approximately 121 vessels during the third quarter, representing an increase of 6% quarter-on-quarter. Demolition of older tonnage amounted to just 1 million deadweight tons during the quarter or 13 vessels, representing a decrease of 46%. As you'll note from the light blue dotted line on the graph, net fleet growth is now expected to reach 3.5% for 2019 or 1% higher than what we were projecting back in August. This reflects upward revisions to deliveries made by Clarkson, but also lower than expected strapping driven by the improvement in expectations in the underlying market.

Please turn to Slide 20 for a look at forward supply. In terms of forward supply growth, newbuilding orders totaled approximately 4.8 million deadweight tons or 34 ships in the third quarter, down over 41% over the prior quarter basis vessel count. As of the latest information we have, only 4 Ultramaxes were ordered during the quarter and 47 for the year, excluding 5 ship carriers which are specialized vessels typically built for contract trades. To put this in perspective, 102 Ultramaxes were ordered last year by this time.

Our view on future ordering remains unchanged. Given a number of factors, including the price advantage of second-hand ships versus newbuildings as well as uncertainty on future regulatory requirements, we remain optimistic that we will not see a material increase in ordering for the foreseeable future, unless there is a significant pick-up in rates. The dry bulk order book as a percentage of the on-the-water fleet stands at 11% basis deadweight tons. The Capesize segment has the highest order book at over 14% or most importantly to Eagle, the Supramax/Ultramax segment 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 lower order book and the increasing number of older vessels which are becoming less commercially viable due to regulations now imminently coming into effect.

Please turn to Slide 21 for a summary on demand. From a macro perspective, global growth expectations as forecasted by the IMF have been revised down again since our last earnings call. Global GDP growth is now forecast at 3% for 2019, down 20 basis points since our last call and a full 90 basis points since last July when tariffs were first imposed in the U.S.-China trade dispute. This reduction in global GDP equates to about $700 billion of lost production for 2019. This, combined with demand shocks from both Vale and the Asian swine flu have clearly impacted dry bulk rate development. However, we believe the resilience in rates this year speak to an underlying strength in the fundamentals within dry bulk.

As we speak, there seems to be more concrete and positive news regarding a potential deal between China and the U.S. Given the above, this would of course be a very welcome development. We also think the timing could be fortuitous, given the recent and ongoing soybean harvest in the U.S. Dry bulk demand growth, as calculated from a bottom-up fundamental perspective, is now expected to reach roughly 1.5% for 2019 or up 20 basis points since our last earnings call in August. I think it's important to note that all projected demand growth in dry bulk for this year is coming from the minor bulks, which represent about 40% of total trade and which are expected to grow by almost 4%, while the major bulks which are comprised of iron ore, coal and grain, are expected to remain flat overall for the year.

Demand for iron ore, impacted by the Vale dam collapse in the early part of the year, is expected to decrease by 1.3% to total 1.45 billion tons. Demand for coal, which typically represents about 15% to 20% of the cargos we carry, is expected to grow by 1.2% this year to total 1.28 billion tons, a marginal increase of approximately 10 million tons since our last earnings call. And demand for grain, which represents anywhere from 10% to 20% of the cargos we typically carry, is expected to grow by about 1.5% this year to total around 480 million tons. Most importantly to us, minor bulks as denoted 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 forecast an increase by almost 4% in 2019. This growth, representing roughly 80 million metric tons of incremental demand, is being driven by improvements in trades such as fertilizer, nickel ore, manganese ore, forest products, [agri-bulks] and bauxite.

We believe a demand picture which remains favored towards the minor bulks, combined with the Supramax/Ultramax historically low order book as a percentage of the existing fleet creates a dynamic that is particularly favorable for Eagle, given our fleet make-up. This positive supply-demand dynamic combined with the impending IMO 2020 regulation with its potential impact to slowing vessel speeds, along with Eagle's forward-leaning scrubber strategy makes for a truly exciting period for our company.

With that, I'd 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) Our first question comes from Jonathan Chappell with Evercore.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [2]

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Good morning, Gary, just a quick 2-parter for you. The fuel spread you said you'll be able to hedge roughly 20% of the fuel spread economics. Is there liquidity to do more of that and is that your initiative? Or do you kind of want to just lock in 20% and let it ride on the widening spreads that seems to be occurring right now? And the second part is, given the fact that your ships call on multiple ports and now that we're less than 60 days away from the start of the regulations, are you still confident in your ability to get enough high-sulfur fuel oil to make the scrubbers worthwhile when the regulations start up?

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

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First of all, just we've hedged about 10% of our scrubber fuel demand for next year, not 20. There is liquidity in the 2020 market. At the moment, we could definitely do more. We're actually bullish on the spread. But we thought putting some in place to start to do that makes sense. But we've seen it kind of hovering between the 225 and 245, almost 250. As of this morning, it's actually about 232 in both Rotterdam and Singapore. So we may do more as things develop. But we don't feel a particular need because as I said, we're generally bullish that we think that the demand for 3.5 fuel when it falls off that that price is likely to drop from where the forwards are today around 220 in Rotterdam and then 250 in Singapore. We're really confident. We feel really good about where we are in terms of the dynamics. One aspect about fuel availability is that we do a lot of business that trades around major bunkering hubs as well. If 50% of the Supras and Ultras in the world had scrubbers, I'd be more concerned. Because we would be relegated to competing for business in kind of the secondary tertiary ports where fuel wasn't necessarily available. But we expect just 7% of the fleet to have scrubbers in early 2020, the fleet of Supras and Ultras that we compete with. So we think we'll be able to pick trades that are around there, and we also of course can carry sufficient fuel to go up, let's say, past Singapore into North China and then come back down and pick up fuel and things like that. So we feel quite good about it. We like where the spread is developing. And we're excited to get there on January 1.

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Operator [4]

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Our next question comes from Randy Giveans with Jefferies.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [5]

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So looking at your scrubber installations, you know it seems like some of those installations obviously slipped from the third quarter to fourth quarter and now into maybe January. So is that your decision at all? I know that there's been some owners deferring scrubber installations. Or is that purely related to the shipyards? And then looking at kind of your new scrubber guidance or off-hire guidance of 587 days in the fourth quarter, how many vessels will be off-hire during that quarter? I'm just trying to get an average off-hire days per vessel.

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [6]

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Yes, so that's -- I mean the 587 is across the fleet. There's 15 ships in Q4 that are doing full yard installs. So originally those ships would have gone in kind of during third quarter, early fourth quarter and then had riding crews onboard. The riding crew aspect has been successful in that we've limited off-hire on those ships down to around 12-13 days for time in the yard. The problem was they've taken longer. That doesn't impact the economics to us because the ships have continued to trade. And the cost for these riding crews on a longer period isn't borne by Eagle. The problem was as we got towards November-December, we could have continued with that program and kept off-hire days down. But then those ships likely wouldn't have been commissioned until well into the first quarter, second quarter. We talked about the fact that at the current fuel spread, we're estimating roughly $46 million of cash flow on an annualized basis. So if we were -- let's say if our fleet starts with scrubber fitted on July 1 instead of January 1 across the fleet, we'd forgo $26 million. So the incremental off-hire in Q4 to us is really was a no-brainer, right?

To bring that forward and take the kind of short-term pain for the long-term or what we think will be significantly more benefit. So we went from kind of that 13 days. We expected it would be around 30 days and/or 28. And now we've indicated that because of delays going on in China, we've added another 12 days per ship on average. So that's the economics around it. But again, it was our decision. Some of the ships we've pushed back simply because yards are so full. It doesn't make sense to sit there. And so we just ended up, instead of doing it in Q3, to spin a ship. But it gives me the opportunity to talk about the fact that this has clearly impacted our business model. We've had ships that have arrived basically finished up with business in order to go into the yard to retrofit a scrubber and there's a backup at the yard, so we spin the ship at 30 days. Now anytime you make a decision that's not fully commercial, it's going to impact your revenue model and that's what's happened here. So spinning a ship in the Pacific at let's say, 10 when the market is 12 overall, it hurts our performance. We think it's the right thing overall as opposed to sitting at a yard. But those are 2 different parts of the same basket.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [7]

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Got it, got it. All right, and then just kind of an industry question. How much of the dry bulk trade is impacted by this kind of Indonesia nickel ore ban? And are we hearing -- this is mostly impacting Supramaxes, I believe. Have you seen this weakness kind of in your operations?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [8]

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Yes, so it's impactful in the sense that it's very concentrated in the area of Southeast Asia and it happened overnight. So I mean if you look at it from a total percentage to dry bulk, it's small. But all of a sudden, the nickel ore ban was supposed to happen in January. And so what we ended up with was -- and this has happened before when Indonesia has done this -- you end up with more ships carrying nickel ore to try and get in under the wire. And then that's why Indonesia said, all right. We're going to stop this right now. And it literally was overnight. So ships that were on their way to the load port became free and started competing for other cargos, at the same time as it seems that coal cargos are backing off. So I think in a kind of micro level, it's impactful because it's so immediate and so concentrated in that area. But it's about 15 million tons that it impacts. But again, it went from kind of hyper movement of cargo to zero overnight.

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Operator [9]

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(Operator Instructions) Our next question comes from Amit Mehrotra with Deutsche Bank.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [10]

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This is Chris Snyder on for Amit. So you guys talked a bit about how vessel repositioning is weighing on TCE performance and your ability to outperform on the back of the active management approach. So as we look out to 2020, I mean I think this was touched on a little earlier. But you guys service a high number of ports, many of them are small and may not sell high-sulfur fuel oil. So I guess the question is, how does this limit your trading flexibility as you need to potentially reposition the fleet for refueling? And how does that impact the active management approach?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [11]

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Yes, so I think we are definitely going to manage our fleet and operate differently last year. But we always solve for the TCE. And so what that means is whether we can carry more lucrative cargo or burn cheaper fuel, ultimately money is fungible. So we'll chase the highest TCE. If there's an opportunity for operating, first of all we're still going to have 9 nonscrubber-fitted ships and we charter in ships as well. So if we see an opportunity on a nonscrubber-fitted trade and we want to do something because we have a scrubber-fitted ship, we can charter in ships and operate around that. So I think our fleet will trade differently. But I don't think it will hinder us. The problem right now is that we're focused on positioning ships into a specific area. It's not as impactful, for instance, on a Capesize vessel, which typically often ends up discharging in China and then ballasting away. So when you finish discharging our cargo in China, you go into scrubber retrofit and then you ballast back towards Australia or Brazil. We don't have -- that's not really our trade. So that's why it's impactful for us. Getting ships from China, of course we could ballast. But the economics aren’t there on a Supramax/Ultramax typically for a ballast away from China. So we need to find backhaul cargos which are not that prevalent, hence the backhaul and the lower value on them. So we're looking forward clearly to get on the other side of this and get back to our business, which is outperforming the index, something we've done for a few years now, notwithstanding this quarter,

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [12]

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Okay, yes. That makes sense. I appreciate the color. And then as we're trying to think about the scrubber premium realized, your chart on Slide 10 shows that the spread relative to low-sulfur fuel oil is $230 and the spread relative to MGO is $340. And that's a pretty wide range when we consider all of that is essentially margin. So how do you think about the scrubber premium realized? Is it going to come out to a midpoint there? Any color there would be appreciated.

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [13]

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Sure. So we try and operate on a voyage basis, meaning we get paid a per-ton basis to carry cargo. And the beauty of that is, is that fuel is an internal cost. What we pay for fuel isn't negotiated. It isn't part of the rate. So ultimately the fact that I have a scrubber-fitted ship and paying less for fuel, whether that's $200 less for fuel, $250 or $300 is our own cost and our own business. So when we do voyage business, we believe we will capture 100% of that value because ultimately if we pay less at the pump, so to speak, we keep the differential. When you do time charter, it becomes a negotiation, right, willing buyer, willing seller. So if you're a time charter tonnage provider and you have a scrubber-fitted ship and you say my ship is worth market plus $4,000, it's only worth market plus $4,000 if people will pay you that. So the fact that we have an active owner-operator model, the fact that we have trading desks in Stanford and Copenhagen and in Singapore, we think we're uniquely positioned to capture the maximum amount of that value. So I'm not saying we won't do time charter out. But we will be in a position to say that if we don't capture the full value for that, our alternative is doing voyage business where we can. So we're pretty confident that the vast, vast majority of that premium will go to the bottom line for Eagle.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [14]

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Okay, I appreciate that. But I guess the question is, in the voyage business when things are priced on a lump-sum basis, is that market lump-sum basis do you think going to be reflective of the MGO price or the low-sulfur fuel oil price, or it going to be port-specific?

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

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Yes, it's a good clarification. I think it's going to be based on the low-sulfur price in the Supra/Ultra because we think 93% of the ships we're competing with are going to be carrying that. So we were actually talking about it yesterday afternoon. Our job next year is to essentially run all calculations basis low-sulfur fuel, allow the market to price freight on low-sulfur fuel, because that's the vast majority of ships. And then we can be more competitive than that. But we don't want to be too much more competitive, even if we can, right? Because then we're leaving money on the table. So we absolutely think that it will be driven by the low-sulfur fuel oil price, because that's where the vast, vast majority of ships will be paying for fuel. I think as you move into the larger size where 35-40% potentially of a segment like Cape is fitted with scrubber. You potentially could have a different dynamic, depending on if you have 5 ships competing and 3 are scrubber, ultimately it's whoever is willing to lower the price. So it's also how people are pricing it and how sharp they are. Because I think if you are using much cheaper fuel, you could have a potential to offer freight that seems attractive to you, but maybe too attractive than what you have to do compared to people burning more expensive fuel. It's going to be a totally new market. There's going to be some transition and teething around it. But again, I think we -- given our business model, we feel that we're really in a good position to make that transition very smoothly and capture value quickly.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [16]

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I appreciate that. And just one last quick one if I could, on Slide 21 it shows the minor bulk trade growth falling about 1% in 2020 relative to the growth we are seeing 2019. It's a little surprising, because we're seeing the overall dry bulk trade go higher, GDP go higher, the major bulks go higher. I'm assuming that doesn't factor in any sort of positive U.S.-China trade resolution. But what are you seeing there that's causing that deceleration in 2020?

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

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Yes, I mean so we use numbers from Clarkson. But bauxite has been growing quite dramatically and that's coming off a fair amount. Cement trade is almost at 4% a year. They're projecting to increase by 1.4% next year. And so there's a number of things within minor bulks that are coming off. In fact, within their analysis of minor bulks, aside from the top 8, others which is a lot of small things, capture 25% of minor bulk trade overall, which is 10% of dry bulk. And that this year is growing at 5.5% and they have it down to 1.4%. So that's a basket of a lot of different cargos. Again, I don't have the detail of everything down to the bottom. But there's definitely impact across those. I don't think that it takes into account the U.S.-China trade war lifting. For us, that's soybeans, which is a major bulk, of course. I mean the U.S. soybean trade, to put it in perspective, went from 40 million in '17 to 20 million in '18 to 14 million projected this year, so pretty demonstrative disruption in terms of volume. So we think there's definitely upside potential on that. And of course, one thing in the minor bulk for next year that is in there would be the nickel ore ban from Indonesia, which of course now has been accelerated, but maybe unwound. So that's a liquid development.

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Operator [18]

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Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Gary Vogel for any closing remarks.

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [19]

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Thank you, operator. We have no further comments. I'd like to thank everyone for joining us today and wish everyone a good day. Thank you.

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Operator [20]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.