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Edited Transcript of EGLE earnings conference call or presentation 10-May-18 12:00pm GMT

Q1 2018 Eagle Bulk Shipping Inc Earnings Call

New York May 12, 2018 (Thomson StreetEvents) -- Edited Transcript of Eagle Bulk Shipping Inc earnings conference call or presentation Thursday, May 10, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank C. De Costanzo

Eagle Bulk Shipping Inc. - CFO & Secretary

* Gary S. Vogel

Eagle Bulk Shipping Inc. - CEO & Director

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Conference Call Participants

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* Christopher M. Snyder

Deutsche Bank AG, Research Division - Research Associate

* Fotis Giannakoulis

Morgan Stanley, Research Division - VP, Research

* Magnus Sven Fyhr

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

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Presentation

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Operator [1]

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Greetings, and welcome to the Eagle Bulk Shipping First Quarter 2018 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 of Eagle Bulk Shipping. Sir, you may begin.

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

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Thank you, and good morning. I would like to welcome everyone to Eagle Bulk's First Quarter 2018 Earnings Call. To supplement our remarks today, I encourage participants to access the slide presentation that is available on our website at www.eagleships.com.

Please note that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and are inherently subject to risk and uncertainties. You should not place undue reliance on these forward-looking statements. Please refer to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties that may have a direct bearing on our operating results, our performance and our financial condition.

Our discussion today also includes certain non-GAAP financial measures, including EBITDA, adjusted EBITDA and TCE. Please refer to the appendix in the presentation and our earnings release filed with the Securities and Exchange Commission for more information concerning non-GAAP financial measures and a reconciliation to the most comparable GAAP financial measures.

It's also worth noting that the Baltic Supramax Index or BSI that we will reference throughout the presentation is basis to BSI 52 index.

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

Please turn to Slide 5. During the first quarter, Eagle continued to execute on its business strategy of active management and fleet renewal, helping it achieve superior TCE results for the fifth straight quarter, outperforming the Baltic Supramax Index or BSI by over $1,100 per day. In terms of sale and purchase, as previously reported, during the quarter, we took delivery of a 2015-built CROWN-63 Ultramax, which was renamed the New London Eagle and closed on the sale of the Avocet, a 2010-built Diamond 53 Supramax. We purchased the New London Eagle for $21.3 million and financed the acquisition with approximately 40% debt, which carries a margin of LIBOR plus 295 and a maturity of almost 5 years.

In terms of results, Eagle generated a TCE of $11,052 for the first quarter, outperforming the net BSI by $1,106 or over 11% when adjusting for the fleet makeup as compared to the standard BSI ship. Q1 marks the fifth quarter in a row of significant outperformance. And I believe our consistency in being able to deliver underscores the importance of our differentiated business model and our team's ability to execute.

The TCE outperformance we achieved during the quarter, equates to approximately $19 million in incremental annualized cash flow for the business based on our current fleet count. Adjusted EBITDA totaled $18.8 million, up over 9% quarter-on-quarter and more than fourfold year-over-year. Since the first quarter of 2016, when the dry bulk market hit an all-time low, our adjusted EBITDA had increased by approximately $133 million on an annualized basis based on our first quarter results. Looking ahead, I'm pleased to report continued improvement in the TCE rates achieved by Eagle thus far in the second quarter. With 70% of our quarterly available days fixed, we generated a net TCE of $11,224.

Continuing on the theme of relative performance, while a higher headline TCE is what we strive for every day, a more important metric for us, and we believe all companies is the relative earnings of a ship to the benchmark index within our case to BSI. As we've discussed previously, another way to look at our TCE results is by converting them to an Ultramax-equivalent rate, meaning if we operated a fleet of only modern Ultramax's with specification similar to those of our recently acquired vessels, our first quarter TCE of $11,052 would equate to almost $13,000 per ship per day. While this is a theoretical figure, I believe it clearly demonstrates the value inherent in the Eagle commercial platform.

Please now turn to Slide 6 for a discussion on the makeup of Eagle's TCE performance. As we have explained in previous calls, our active management approach encompasses the execution of a number of different strategies, which allow us to maximize TCE performance. These strategies include trading our own fleet, voyage, chartering with end users, vessel and cargo arbitrage, opportunistic chartering and a dynamic hedging strategy utilizing both FFAs and bunker swaps.

The chart on Slide 6 depicts our historical third-party time charter-in business as measured in vessel base. During the first quarter, we had a total of 944 third-party vessel days. Although the number of charter-in days decreased slightly quarter-on-quarter, it's worth noting that the numbers made up of the charter of 25 distinct vessels we took in, an increase of 3 as compared with the last quarter. While the graph clearly shows the significant increase in our third-party charter-in activity since implementing our strategy, we can't emphasize enough that volume itself is not a goal and this activity is only beneficial if it drives overall higher fleet net income. As we've indicated previously, we charter-in third-party ships in order to support and supplement our own fleet in covering of cargo commitments, which we operate on voyage basis and the profiting from arbitrage opportunities and in taking advantage of market dislocations.

Although we expect our charter-in activity to continue to grow over time as we expand our commercial breadth, it's important to note that the number of vessels we take in, in any given quarter, will vary based on opportunities. In this vein, subsequent to the end of the first quarter, we entered into an agreement to charter in a modern high-spec Japanese Ultramax vessel for a base period of about 35 to 38 months at a rate of $12,225 per day net, with the option to extend the charter-in for 2 additional 1-year periods. We expect to take delivery of the vessel during the third quarter of this year. We've taken the vessel with a positive view to the market over the course of the charter period. However, in line with our business methodology and in order to reduce market exposure, we've hedged a portion of the initial fixed period commitment through the sale of FFAs or forward freight agreements. The objective of this hedging strategy is to create asymmetrical optionality, essentially mitigating the downside risk of the commitment, while maintaining full upside in the form of the optional charter periods. In addition, by hedging via FFAs, we maintain control of the vessel, where it can be used as part of our fleet in order to create additional arbitrage opportunities and outperformance. We believe this charter, which represents our second long-term commitment, is a good example of the opportunistic approach to our operating methodology and fleet risk management.

Please turn to Slide 7 for a brief update on our fleet profile and makeup. On the left-hand side of the slide, we depict our own fleet development since we started implementing a strategic fleet renewal growth plan. In March, we reached an agreement to sell the motor vessel Thrush, a 2011-built Diamond 53 Supramax. We expect to deliver the vessel to her new owners, sometime during the third quarter. With this sale, we've now divested of 10 of the smallest, oldest and least-efficient ships averaging 52,000 deadweight in size and over 12 years of age. Against this, we've acquired a total of 12 modern Ultramax's over the past 18 months averaging over 63,000 deadweight tons and just 3 years in age at purchase.

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

Our current fleet totals 47 ships, with an average age of just over 8 years. On the right-hand side of Slide 7, we depict our peer group fleet profile composition by company. As you will note, Eagle remains uniquely focused on the versatile Supramax/Ultramax asset class and owns one of the largest fleets in the world. Owning and operating a large-scale homogeneous fleet is a necessity in our business model as it provides operational efficiencies, which simply don't exist across mixed fleets. Subject to market developments, we intend to continue executing on our fleet growth and renewal strategy, selling off older and less-efficient ships, while purchasing newer and more efficient ones. In this regard, I believe the steps we've taken and the results we've achieved to date position Eagle to continue to grow and act on consolidation opportunities.

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

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

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Thank you, Gary. Please turn to Slide 9 for a summary of our first quarter 2018 financial results. Revenue, net of commissions, for the first quarter was $79.4 million, an increase of 6.4% from the prior quarter. As compared to the same quarter in 2017, we saw an increase of 73%. Revenue, net of both voyage and charter hire expenses came in at $46.6 million in Q1, 63% above the same quarter in 2017. This improvement is due to the additional owned available days and improvement in the BSI, and the commercial outperformance generated by our active management model. Total operating expenses for the first quarter of 2018 were $73.1 million, an increase of 7.4% from the prior quarter. The increase in Q1 versus prior quarter was driven by higher voyage and noncash compensation costs. Operating expenses, as compared to the same quarter in 2017, increased 45%. The increase resulted from higher depreciation and amortization and OpEx numbers, which were all driven by the net increase in our fleet size. Noncash compensation also impacted the comparison versus the same quarter and prior year. The increase in Q1 noncash compensation was caused by the annual company-wide equity awards issued early in the quarter, along with accelerated amortization as a result of graded vesting schedules for various grants. We expect this number to normalize going forward to circa $2 million for both Q2 and 3, then falling to circa $1 million in Q4. The company reported net income of $53,000 for the first quarter as compared to a net loss of $16.5 million in the prior quarter. As compared to the same quarter in 2017, we saw an improvement in the bottom line of approximately $11.1 million. As a reminder, Q4 2017 net loss was $1.6 million when we excluded the noncash expense from the extinguishment of debt. It is noteworthy that Q1 2018 was the first profitable quarter at the net profit level since 2010.

Basic and diluted earnings per share in the first quarter were 0, versus a basic loss of $0.24 in Q4 '17 and a basic loss of $0.17 in Q1 '17. Adjusted EBITDA came in at positive $18.8 million in the first quarter, an increase of $1.6 million or 9.4% from prior quarter. As compared to the same quarter in 2017, we saw an increase of 313%. In the appendix of our presentation, you'll find a walk from net income of $53,000 to adjusted EBITDA of positive $18.8 million. Both EBITDA and adjusted EBITDA are non-GAAP measurements. You can find additional information on non-GAAP measurements in the appendix.

Let's now turn to Slide 10 for an overview of our balance sheet and liquidity. The company had total cash of $57.9 million as of March 31, 2018, down roughly $3 million from the end of Q4. It is important to note that we paid down $5 million on our Eagle Shipping LLC revolving credit facility during the quarter. The company's total liquidity as of March 31, 2018, was $77.9 million. It is made up of cash of $57.9 million and undrawn revolving credit facilities totaling $20 million.

Total debt as of March 31, 2018, was $329.8 million and is comprised of $200 million Shipco Norwegian bond, the $60 million Shipping LLC Bank facility and the $69.8 million Ultraco Bank Facility.

Please turn to Slide 11 for a review of cash flow.

In 2018, net cash provided by operating activities came in at positive $14.9 million, the third consecutive positive quarter in cash from operations, up from positive $5.9 million in Q4 '17 and negative $2 million in Q1 '17. As the chart on the top of the slide shows, the positive trend in cash flow from operations continues, with cash from ops significantly improved from the negative cash flow of $19.5 million in Q1 of 2016. The chart also shows timing-driven variability that working capital introduces to cash from operations, as demonstrated by the difference between the blue and gray bars. This volatility evens out over time as denoted by the significant positive cash from operations number in Q1, essentially making up for timing issues in Q3 and 4.

We received $7.1 million in cash in the first 10 days of January, driving the strong Q1.

Now moving to the chart at the bottom of the slide. Let's look at changes in the company's cash balances in Q1. I like this chart because it clearly lays out the large themes driving our results and strategy. The 2 large bars on the left, revenue and operating expenditures, are a simple look at the operations. The net of these 2 bars is positive $18 million, which comes in close to our Q1 adjusted EBITDA number. The net of the 4 bars in the middle right of the lower chart, which cover vessel sales and purchase, debt financing and debt repayment, gives a good feel for our fleet renewal program and the financing supporting the process.

Let's now look at Slide 12 for our cash breakeven per vessel per day. Cash breakeven per ship per day in Q1 2018 was $7,946, $642 higher than Q4 2017 and $647 higher than the full year 2017 cash breakeven. The increase versus prior quarter was largely driven by the $315 increase in cash interest and a $257 increase in drydock expenditures. You will note that there were no drydock expenditures in Q4.

Q1 OpEx came in at $4,888, $44 higher than Q4 and $63 higher than full year 2017 results. As we have conveyed before, our OpEx numbers include certain expenses related to upgrading the fleet such as items as performance monitoring systems and advanced hull coatings, which benefit the fleets reliability and performance. Given the lumpy nature of payments related to both stores and annual expenses, we think it is appropriate to look at OpEx under a multi-quarter average. Q1 cash G&A came in at $1,485 per ship per day, up $26 from Q4. For full year 2017, G&A came in at $1,497. It is worth noting that in Q1, we chartered in 25 different vessels. If we included the chartered-in days in our calculation, Q1 G&A would have been $1,218 per ship per day, $267 lower.

Q1 cash interest expense is $1,316 per ship per day, $315 higher from the prior quarter. The expense is higher as a result of the additional Ultraco debt, higher LIBOR, the fixed coupon bond, along with the pay down of the second lien noncash PIK note. It is worth noting that 60% of our debt was fixed in Q4 as part of the refinancing, which significantly shields the company from increases in short-term interest rates. This concludes my review of the financials. I will now turn the call back to Gary, who will continue his discussion of the business and provide context around industry fundamentals.

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

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Thank you, Frank. Please turn to Slide 14 for a review of the rate environment. Although there was volatility across the first quarter, the gross BSI averaged $10,625 per day for the first 3 months of the year, essentially flat as compared to the prior period. And despite the lack of change, Eagle's TC increased by almost $700 per day. First quarter market was negatively impacted by the typical seasonal factors, such as decreased trade from the ending of the North American grain harvest, decreased activity due to holiday seasons in both the West and the East, and increased newbuilding deliveries, which occurs every January. It's interesting to note that when looking back over 10 years of data, the first quarter tends to trade at roughly 10% discount to the annual average. Evaluating the first quarter in more detail, it was really a tale of 2 halves. Starting in mid-February, post-Chinese New Year, the Pacific market came back to life on the back of significant pickup in intra-Asian trade, particularly coal. For the second half of the quarter, Pacific Supramax market averaged approximately $10,200 per day gross, representing an increase of over 30% as compared to the first half of the quarter.

It's important to note that this improvement was primarily attributable to a pickup in demand within the region versus a general lack of tonnage. At the same time, the Atlantic Supramax market weakened somewhat during the second half of the quarter due to both the seasonal wind down in North American grain exports and the impact of announcements surrounding trade tariffs. The results of an improved Pacific market and a lackluster Atlantic on a relative basis led to a significant decrease in the Atlantic Pacific premium from over 60% in the first half for the quarter to approximately 20% in the second. As an active owner-operator, we see these dislocations as opportunities to rebalance our fleet for higher long-term value.

While the first quarter was essentially flat for the Supramax/Ultramax segment, averaging $10,625 per day, it's interesting to note that the Cape market came of significantly and hit a low of $7,051 in early April. As we have discussed before, Supramax/Ultramax vessels carry a much broader array of cargoes as compared to the larger asset classes, and because of this tends to yield more stable earnings, which is an important and valuable characteristic of this segment. For the second quarter, rates have been somewhat muted thus far, with the gross BSI averaging approximately $10,900 per day quarter-to-date and with spot rates hovering around $11,125. We believe the overall market and sentiment has been negatively affected by both aforementioned volatility in the Capesize segment and by the potential imposition of import tariffs by the U.S. and retaliatory actions.

Strength in the Pacific Supramax has continued into the second quarter, while relative weakness in the Atlantic has remained as well. The U.S. decision to enact import tariffs on certain Chinese-made products has led to retaliatory declarations by China, whose announcing imposition of import tariffs on a number of U.S. products, including soybeans.

As the world's largest importer of soybeans, China is expected to purchase over 100 million metric tons in 2018 from the International market. Approximately 35% or 35 million metric tons was expected to come from the U.S., but given the imposition of tariffs, Chinese buyers will most likely look to ship purchases to other producers. To date, we've already seen a slowdown of Chinese purchases of the U.S. soybeans, with sales at their lowest level in 5 years. In addition, while a much smaller trade than the soybean trade, U.S. sorghum exports to China have already been affected from an import deposit being enacted equal to 179%. Although not characterized as a tariff, the deposit enacted acts very much the same way. As this was implemented with immediate effect, certain cargoes originally destined for China and on the water have now been diverted to other countries for discharge. Although import tariffs can disrupt typical trading patterns, we do not believe global demand will be impacted overall and expect new different trade patterns to emerge as a result of any tariffs imposed.

We believe the effect will be negligible on ton miles and overall impacts to demand may actually be positive as changes in trades can face new inefficiencies, such as congestion and delays. For example, China will likely substitute U.S. soybean imports with additional Brazilian product, while the U.S. would then focus on selling more to Europe and other buyers. Last week's data shows sales of U.S. soybeans to Vietnam and Netherlands and Argentina, cargoes which likely would have otherwise come from Brazil.

Please turn to Slide 15 for a brief update on supply fundamentals.

Newbuilding deliveries totaled roughly 8.7 million deadweight tons or approximately 96 vessels during the first quarter, representing an increase of 139% quarter-on-quarter basis deadweight. The pickup was expected due to the typical seasonal nature of deliveries. As year-end approaches owners are incentivized to hold off from taking delivery of the newbuildings until after the first of the year as it yields a ship, which is 1-year younger on paper. Seasonality aside, the long-term trends for supply growth has been downward. Looking at the last 12 months, ending March 31, deliveries totaled roughly 29 million deadweight tons, a decrease of approximately 40% from the same period 1 year prior. Demolishing of older tonnage amounted to just 1.6 million deadweight tons during the quarter or 21 vessels, representing a decrease of 27% over the prior period based on deadweight. Looking at the last 12 months, ending March 31, scrapping is down over 40%, which is not unexpected given the improvement in the overall rate environment. Given the current and expected environment and scrap price levels, we now believe demolition will probably amount to around 10 million deadweight tons in 2018, equating to about 1.2% of the on-the-water fleet.

As we've indicated previously, notwithstanding our expectation for a continued market improvement, we believe both the implementation of ballast water treatment regulations as well as the mandated reduction in sulfur emissions coming into force in January 2020, will act as a catalyst for the scrapping of older tonnage in the coming years. In terms of newbuilding orders, there's been an uptick during the last 12 months. But it's important to note that levels still remain close to historic lows and Supramax/Ultramax tonnage has accounted for just 12% of the tonnage order. As we've indicated previously, given a number of factors, we remain cautiously optimistic that we will not see a material increase in ordering unless we see both rates and secondhand values significantly improve from here. The order book, as a percentage of the on-the-water fleet, remains at a historically low level of just 10% overall for dry bulk. The Capesize segment has the highest order book at over 15%, while the Supramax/Ultramax order book is at just 6% of the on-the-water fleet.

Looking ahead, we believe supply side fundamentals remain favorable, with the decreasing number of newbuildings getting delivered and potentially a large number of older vessels becoming less commercially viable due to regulations coming into force.

Please turn to Slide 16 for a summary of demand growth.

Global GDP growth as projected by the IMF is expected to reach 3.9% for 2019, implying the world's growing at the fastest pace since 2011. This is due to ongoing improvement in macro fundamentals, including financial conditions, especially as witnessed with the advanced economies. Tax reform and fiscal stimulus measures enacted in the U.S. are expected to boost domestic growth to 2.9% for 2018, up from 2.3% the year prior, and we believe this should have positive spillover effects to other economies as well. While many signs point to the positive, there's always uncertainty in demand. For example, the enactment of trade tariffs discussed earlier on the call, can create challenges to global growth. While we believe a trade war is unlikely, it's too early to tell whether there will be any real impacts to global GDP growth and trade.

As we've discussed in previous calls, historically there has been a strong relationship between global GDP growth and dry bulk trade growth. Looking back at the last 15 years, dry bulk has averaged about a 1.2x multiple to GDP growth. Although this relationship has broken at times, it reverted to its historical norm in 2017 when dry bulk trade growth came in at around 4%. Looking ahead, dry bulk demand is calculated from a bottom-up fundamental perspective is expected to be about 2.6% in 2018, representing over 130 million metric tons in incremental trade. Major bulks, which are comprised of iron ore, coal and grains are expected to grow by 2% in 2018. Coal, which represented over 20% of the cargoes we carry during the first quarter is expected to increase by about 20 million metric tons to over 1.2 billion tons. China, who are the largest consumer of coal in the world, with an estimated usage of approximately 3.8 billion tons is projected to import only around 230 million metric tons, representing just 6% of total consumption. As has been the case in the past, any swing in Chinese demand or change in domestic production could meaningfully impact seaborne trade. For example, in 2016, Chinese coal imports increased by 20%, almost 40 million metric tons. Grains, which represent almost 20% of Eagle's cargoes during the first quarter are expected to increase by about 1% and total 500 million metric tons for the year. As we discussed earlier, potential changes to trade patterns due to actual or potential tariffs imposed could increase ton miles overall. It's simply too early to tell. As denoted in the table, minor bulks, which lag total dry bulk trade last year, are expected to grow by 3%, outpacing the major bulks and overall dry bulk demand for the period. This is an important distinction as Eagle's cargo mix for the first quarter was split 60% in the minor bulks and 40% in the major bulks, basically in line with our historic trading pattern.

Looking at minor bulks in more detail. 2018 growth is estimated almost 60 million metric tons, representing approximately 1,100 Supramax/Ultramax incremental voyages. Growth is expected to be driven by improvements in the fertilizer trades, scrap metal, cement, forest products and bauxite, which tend to be long distance leading to increased ton miles.

In summary, a demand picture, which is favored towards the minor bulks combined with the Supramax/Ultramax having a very attractive order book as a percentage of the existing fleet create a dynamic that is particularly favorable for Eagle.

Please turn to Slide 18 for our final recap. We believe Eagle remains uniquely positioned to capitalize on improving dry bulk market for a number of reasons. Firstly, we focus on the most versatile and relatively stable vessel segment. Since Supramax/Ultramax vessels are able to carry essentially all types of dry bulk commodities, their earnings tend to be highest from a risk-adjusted perspective. In addition, operating in just one asset class provides for operational efficiencies both on the revenue and cost side, which simply don't exist across different vessel types.

Secondly, we successfully employ an active management approach, which gives us the ability to drive higher TCE revenue. And we continue to demonstrate an ability to record meaningful commercial results quarter-on-quarter. We maintain an optimal management structure, where all services strategic, commercial, operational, technical and administrative are done in-house. This ensures full alignment between company, management and shareholders.

We have one of the best board representations within the industry, which is majority independent, and we've been recognized for our industry-leading corporate governance. We have a strong balance sheet with ample liquidity and dry powder for growth. And we have one of the most experienced management teams in the industry, one which has a proven track record of successfully running an active owner-operator business that delivers value.

Finally, as we've illustrated on Slide 18, Eagle has considerable operating leverage with 47 owned ships, with over 17,000 owned vessel days. As such, we have the ability to generate significant cash flow as rates improve, given our low fixed cost structure and exposure to the spot market. The graph depicts our net cash flow generation ability in different historical rate environments, from the low market experienced in 2016 to the 2010 average, with a net BSI equated to $21,000 per day.

On these various rate environments, we calculated our net cash flow basis our own fleet of 47 ships and our 2018 forecasted cash breakeven rate. In order to be conservative, we have not assumed any market outperformance. As shown, basis 2018 Jan through April actual and May through December's FFA curve, the net adjusted BSI for the year is currently at $10,800 per day. Given this rate scenario, Eagle could generate cash flow of over $40 million on an annualized basis. Assuming a 2011 environment of approximately $13,500, net cash flow increases by over $45 million. The purpose of this slide is to simply demonstrate the inherent operating leverage that Eagle maintains. And based on our expectations on the market in the near term, I believe we're well positioned to capitalize on improving fundamentals. I would now like to turn the call over to the operator and answer any questions you may have. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from the line of Amit Mehrotra with Deutsche Bank.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [2]

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This is Chris Snyder on for Amit. So my first question was on the acquisition front. You guys are clearly in a strong position to acquire vessels, but you have not yet announced anything. Does this speak to lack of available modern tonnage in the market, or are you just waiting for a particular deal, perhaps a larger multivessel transaction?

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

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Yes. Thanks for the question. I mean, I think first of all, while we didn't announce any new acquisition this quarter, we took delivery of a new Ultramax in January. And so we've been -- we've continued to execute, and it's not going to be a steady flow. Having said that, we clearly look towards something a bit larger. Obviously, it's easier to change the fleet dynamic if you can acquire a number of ships at the same time. And as we've done in the past with the Greenship Bulk acquisition, we believe acquiring sister vessels has advantages both commercially as well as technically, when we acquired the 9 ships. But then the last Ultramax we took on was the same design and came from the same yard. So I wouldn't exclude us doing other one-off vessels. But having said that, we clearly look towards doing a larger transaction as we continue to renew and grow the fleet.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [4]

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Okay. And as you kind of look at a potential multivessel acquisition, would that only be targeting Ultramax's and Supramax's or would you potentially looking at larger-vessel classes, perhaps Capesize, just kind of taking on additional risk given your strong balance sheet and liquidity runway? Or do you think that, that kind of just hinders the active management approach that you guys had a lot of success with?

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

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

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [6]

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

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

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

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [8]

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

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

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Yes. I think from a modeling standpoint, I would use the middle of the third quarter. The window is within our option. So -- but I would use the middle of the quarter.

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Operator [10]

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And our next question will come from the line of Magnus Fyhr with Seaport Global.

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

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Just kind of follow-up question on the capital allocation. Sounds like you -- I mean, you guys have come a long way in the last 2 year from restructuring the balance sheet and now turning profitable. It sounds like the main focus here going forward is going to be on fleet renewal and perhaps fleet growth. But based on current rate environment, it looks like you're going to generate some free cash flow here pretty nicely in 2018 and 2019. Beyond the fleet renewal and fleet growth, how do you look at debt reduction versus buying back stock given that the stock is still trading at a discount to NAV?

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

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

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

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

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

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Yes. So there's no magic number for us. I mean, each acquisition needs to stand on its own in terms of being beneficial, accretive for the shareholders. But having said that, if we can demonstrate the ability to outperform the market and, I believe, we have, then scale is beneficial. I mentioned in answering Chris' question, right, operational efficiencies. I've also talked about the fact that previously if we have a larger fleet, then we're able to potentially open another 1 or 2 small regional offices, getting closer to decision makers in place, for instance, Latin America, grain exports very important for us and what have you. So it's incremental, but I'm not going to put a target out there because I don't -- I think that's putting the cart before the horse. I think it's about finding the right acquisitions and then that will give us opportunities and better information. So I think, all in all, you'll see -- I think you'll see Eagle grow, but that's not the goal in and of itself from an operation standpoint.

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

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All right. And just there's been a lot of volatility in the larger ships, whereas the smaller ships have been more pretty steady here as of late. How do you see the seasonality developing over the next 2 quarters for your segment?

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

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

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

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

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

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

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Operator [19]

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And our next question will come from the line of Fotis Giannakoulis with Morgan Stanley.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [20]

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Gary, I want to ask you about your plan to grow further and buy more ships. Asset values have increased significantly, especially for secondhand vessels, since you made your first acquisition. At what point do you think that you will abstain from buying more ships and focus more on either delivering more aggressively or paying back dividend to shareholders given you're leveraged already quite low? The 10% increase in asset values, 20% increase, trying to ask how long do you think that this dry bulk cycle can last and how long can this market continue to move higher?

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

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

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [22]

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And can you give us your view over how long do you think this cycle is going to be? I mean, we had a very long period over weak markets. The market seems to -- it has turned profitable just very recently. Is this a 2-year cycle, 3-year cycle? How shall we think your outlook over the next few years?

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

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Yes. I mean, it's very hard. I mean, if we look to put a number on that. If we look from a supply standpoint, I think things are really encouraging for the next 2 years. And I think a lot will depend on what the supply side does in terms of people ordering more ships. They're always going to be orders. We've seen orders much less in the first 3 months of this year than the annual rate from last year. Overall, it's down about 20%. And in the Ultramax side, it's down 70%. The other thing is, what we see here on the demand side is, a global economy that's growing and that's positive. So the question is how long do you think that will be on there. And then you have things like ballast order and sulfur, which I think are really positive. And what happens in January 2020, as -- with potentially much higher fuel cost and vessels likely to slow down in that environment, rates much higher. So I think there's a lot of things out there that will ultimately determine how long. But if we look over -- out over the next 18 to 24 months, things look extremely positive and that gets us to January 1, 2020, and then there's some other interesting things on the horizon. So we're very positive about where we are right now and I think I'll leave it at that.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [24]

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

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

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Yes. I think, I would look to what we're doing because we are growing our business, right? Our growth has been pretty significant over the last 2 years. We're taking ships in. Having said that, our view is to do it on a risk-managed basis and do so in support of our own fleet. So I think what you'll see is a step up in continued increase of the overall operating side of the business. But again, in support and as our own fleet gets larger, we'll be able to increase the operating side. But operating by itself, not in support, let's say, of the fleet and where it gets so large, that it's bigger say than our own fleet. I don't think that's likely. We are an Ultramax/Supramax owner, and I think our model is very helpful in driving outperformance there and that's how we see ourselves.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [26]

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If you allow me one final question, I'm trying to understand the impact of the disruption from this talk about tariffs and about the sanctions on Russia. If you have seen a pullback in the Atlantic market? I know that you attributed it to this events and what kind of impact have you seen in the market if that's the case that can be reversed and strengthen the second half of the year or even later, next year after trade normalize and the cargoes, they find different routes to be delivered to their destination?

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

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

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Operator [28]

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

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [29]

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

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Operator [30]

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