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Edited Transcript of EGLE earnings conference call or presentation 7-Nov-18 1:00pm GMT

Q3 2018 Eagle Bulk Shipping Inc Earnings Call

New York Nov 12, 2018 (Thomson StreetEvents) -- Edited Transcript of Eagle Bulk Shipping Inc earnings conference call or presentation Wednesday, November 7, 2018 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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* Fotis Giannakoulis

Morgan Stanley, Research Division - VP, Research

* James Jang

* Jonathan B. Chappell

Evercore ISI Institutional Equities, Research Division - Senior MD

* Liam Dalton Burke

B. Riley FBR, Inc., Research Division - Analyst

* 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 Third 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'd like to welcome everyone to Eagle Bulk's third 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. When there, you will note that we relaunched the Eagle Bulk website. In addition to general updates, we strive to include valuable information for all of our stakeholders, including industry data as well as company-specific information. We welcome your feedback as we will plan to continue to append and update the site. Please note that part of our discussions 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 reference throughout the presentation is basis to BSI 52 Index.

Please now turn to Slide 3 for the agenda for today's call. We will first provide you with a brief update on our business performance followed by a detailed review of our third quarter financials. We will then provide you with an update on our fleet scrubber initiative before wrapping up the call with a brief review of the rate environment and industry fundamentals. We'll conclude our presentation with a question-and-answer session. Please now turn to Slide 5. Eagle's TCE for the third quarter equated to $11,281 per day representing a beat of $261 as compared to the adjusted net Baltic Supramax Index or BSI. As we indicated on our last call, we elected to fix a number of ships on backhaul voyages during the third quarter, essentially re-positioning them into the Atlantic in order to capitalize on the historically strong Q4 Atlantic market.

This strategy impacted our TCE and relative performance for the quarter somewhat, but we believe it's well positioned the company heading into the fourth quarter and Q1 of 2019. 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 Ultramaxes with specification similar to those of our recently acquired vessels, then our third quarter TCE of $11,281 would equate to approximately $13,000 per day. We believe this is instructive as it's important for investors to be able to evaluate TCE results and compare for performance on a like-for-like basis. With these results, I'm very pleased to report that the third quarter marks the seventh consecutive period, which we've been able to outperform the BSI. When looking at the last 12-month period as a whole, we've generated a TCE outperformance of $722 per day equating to approximately $12.4 million in value creation.

As I've indicated previously, I believe the consistency in being able to deliver outperformance underscores the value of our differentiated business model and our team's ability to execute on it. On the cost side, vessel OpEx and cash G&A equated to $6,123 per vessel per day in the third quarter, down from the prior period and flat year-on-year. Since Q1 2017, operating margins and EBITDA have dramatically increased over the period due to both the higher rate environment and our ability to generate added value through our unique active management model. This is clearly evidenced by the widening spread trend between the TCE and OpEx plus G&A line. EBITDA adjusted for certain non-cash items totaled $20.2 million for the third quarter, up more than 140% year-on-year. Since the first quarter of 2016 when the drybulk market hit an all-time low, Eagle's adjusted EBITDA has increased by approximately $140 million on an annualized basis.

Looking ahead, our TCE for the fourth quarter is averaging $12,407 per day with approximately 70% of the available days fixed for the period. Based on the actual BSI for October and FFA curves for November and December, this quarter-to-date figure equates to an outperformance of over $1,000 per day. Please turn to Slide 6 for a brief update on our fleet make up. On the left hand side of the slide, we depict our own fleet development since we started to implement a strategic fleet renewal and growth plan. During the third quarter, we executed 2 S&P transactions. We closed on the sale of the Thrush, a 2011-built Diamond 53 Supramax and closed on the purchase of a 2014-built SDARI-64 Ultramax, which has been renamed the Hamburg Eagle. Over the past 24 months, we've bought and sold a total of 23 vessels divesting 10 of our smallest, oldest and least efficient Supramaxes which average more than 12 years of age and we acquired a total of 13 modern Ultramaxes.

Each time we acquire a newer, larger, more efficient vessel or sell a smaller, older and less efficient ship; we upgrade our overall fleet makeup and improve our ability to generate higher TCEs. Our fleet currently totals 47 ships averaging 8.8 years in age. It's important to note that our fleet age has remained relatively unchanged over the past couple of years due to the implementation of our fleet renewal program. On the right hand side of Slide 6, we depict our US-listed peer group fleet profiles. You will note Eagle remains uniquely focused on the versatile Supramax/Ultramax asset class and owns 1 of the largest fleets in the world. Owning and operating a large scale homogeneous fleet is vital ingredient in our business model as it provides operational efficiencies, which simply don't exist across mixed fleets. Subject to market developments, we intend to continue executing on our fleet growth and renewal strategy.

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 8 for a summary of our third quarter 2018 financial results. Revenue net of commissions for the third quarter was $69.1 million, a decrease of 8% from the prior quarter. The decrease is a result of a slightly lower TCE and less available days due in part to the previously disclosed Westport Eagle crankshaft replacement. 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 $46.5 million, a decrease of 2% from the prior quarter. Revenue net of both voyage and charter hire expenses was 31% higher than the same quarter in 2017. The year-on-year increase was primarily driven by an increase in the BSI combined with our platform driven TCE performance.

Turning to expenses. Total operating expenses for the third quarter of 2018 were $60.3 million, a decrease of 9% from the prior quarter. The decrease in Q3 versus prior quarter was driven by lower charter hire, voyage and vessel expenses. Operating expenses as compared to the same quarter in 2017 decreased by 7%. The decrease in Q3 versus prior quarter was driven by lower charter hire, voyage and vessel expenses in part offset by increases in depreciation and amortization and general and administrative expenses. The company reported net income of $2.6 million for the third quarter versus $3.5 million in the prior quarter. As compared to the same quarter in 2017, we saw an improvement in the bottom line of approximately $12.8 million. Basic and diluted earnings per share or EPS in the third quarter of 2018 were both $0.04 versus $0.05 in Q2 of 2018 and up significantly from a basic loss of $0.15 in the third quarter of 2017.

Adjusted EBITDA came in at $20.2 million for the third quarter as compared to $21.1 million for the prior quarter. As compared to the same quarter in 2017, adjusted EBITDA has increased by more than 140%. In the appendix of our presentation, you will find a walk from net income of $2.6 million to adjusted EBITDA of $20.2 million. Both EBITDA and adjusted EBITDA are non-GAAP measurements. You could also find additional information on non-GAAP measurements in the appendix. Let's now turn to Slide 9 for an overview of our balance sheet and liquidity. I would like to report that our wholly owned subsidiary, Eagle Bulk Shipco LLC, received approval yesterday from bondholders to amend bond terms in connection with the financing of scrubbers.

This amendment to the bond terms, which was approved by 85% of the attending holders at a meeting at which a quorum was present, will allow us to utilize up to $25 million from vessel sale proceeds towards the cost of installing scrubbers on vessels within the Eagle Bulk Shipco entity. In addition to this action and as we have mentioned previously, we are evaluating financing solutions to partially fund the remainder of our scrubber fleet initiative program outside of the bond silo. We will keep you abreast of any updates. The company had total cash of $91.6 million as of September 30, 2018, an increase of approximately $15 million from the end of the second quarter. Total cash includes $10.9 million of restricted cash from the Thrush sales proceeds. The increase from Q2 was a result of cash flow generated by operations and proceeds from the sale of the vessel Thrush in part offset by the down payment on the Hamburg Eagle and CapEx spending.

The company's total liquidity as of September 30, 2018 was $111.6 million and is made up of cash and restricted cash along with the undrawn revolving credit facilities totaling $20 million. Total debt as of September 30 was $329.8 million, which is unchanged from the prior quarter. Total debt is comprised of the $200 million Shipco Norwegian bond, the $60 million Shipping LLC Bank Facility and the $69.8 million Ultraco Bank Facility. Please note that subsequent to the quarter, we have drawn $12.8 million on the Ultraco debt facility utilizing the accordion feature for the acquisition of the Hamburg Eagle. The Ultraco facility debt outstanding now stands at $82.6 million. Please turn to Slide 10 for a review of cash flow. During the third quarter, net cash provided from operating activities came in at a positive $13.7 million, a $3.8 million increase from Q2 and up $7 million from Q3 2017.

The third quarter results was the fifth consecutive positive quarter for cash from operations. As the chart at the top of the slide shows, the positive trend in cash flow from operations continues with cash from operations significantly improved from a negative cash flow of $20 million in Q1 of 2016. The chart also shows timing driven variability that working capital introduces to cash from operations as demonstrated by the differences between the gray bars, which are the reported cash from ops numbers and the blue bars, which strip out changes in operating assets and liabilities essentially working capital. As this chart demonstrates, the volatility caused by working capital evens out over time. Now moving to the chart at the bottom of the slide, let's look at the changes in the company's cash balance in Q3 2018. I like this chart because it clearly lays out the large themes driving our results for the quarter.

The two large bars on the left, revenue and operating expenditures, are a simple look at the operations. The net of the two bars is positive $19 million, which comes in close to our Q3 adjusted EBITDA number. To the right, you will find a bar covering the $2 million cost for drydocking 3 ships in the quarter and a vessel bar totaling $3 million covering the net of the $10.8 million we received for the sale of the Thrush, partially offset by the deposit we paid for the Hamburg Eagle along with payments for both scrubbers and ballast water treatment systems.

Let's now review Slide 11 for our cash breakeven per vessel per day. Cash breakeven per ship per day in Q3 2018 was $7,955, $518 lower than Q2 2018 and $215 lower than full year 2017 breakeven.

The decrease of $518 versus prior quarter was largely driven by the $379 decrease in drydock expenditures as we drydocked 3 ships in this quarter as compared to 5 in Q2. Q3 OpEx came in at $4,547, $245 lower than Q2 and $270 lower than the full year 2017 results. As we have conveyed in the past, 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. Q3 cash G&A came in at $1,576 per ship per day, up $65 from Q2. For the first nine months of 2018, cash G&A came in marginally higher than the full year 2017 number. It is worth noting that if we were to include the chartered-in days in our calculation, Q3 G&A per ship per day would have been $202 lower.

Q3 cash interest expense is $1,390 per ship per day, $40 higher when compared to Q2. For the first nine months of 2018, interest expense is $648 higher than the full year 2017 number. The increase in cash interest versus prior year is primarily a result of the higher LIBOR along with the elimination of non-cash second lien PIK note. It is worth noting that the floating interest rate exposure on 60% of our debt was fixed in Q4 of 2017 as part of the refinancing. The fixing of a meaningful portion of our debt 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. We would now like to provide you with an update on our recently announced fleet scrubber initiative and IMO 2020 regulations. Please turn to Slide 13. As discussed during an earlier call, the International Maritime Organization's Marine Environmental Protection Committee or MEPC met in London last month on a wide range of topics including the 2020 sulfur cap. The committee overwhelmingly reaffirmed the January 1, 2020 implementation date for the 0.5% sulfur emissions limit. One of the most significant uncertainties surrounding the IMO 2020 regulation has been enforcement, particularly at sea when a vessel is out of sight of Port and Flag State control. During the meeting, the IMO formally adopted a high sulfur fuel carriage ban that will enter force on March 1, 2020, 2 months after the 0.5% sulfur limit comes into effect.

The carriage ban will prohibit all ships without scrubbers installed from carrying any high sulfur fuel on board. Under this regulation, a Flag or Port State will only have to observe non-compliant fuel on board a non-scrubber fitted ship to prove a violation and detain and/or fine a vessel as compared with having to prove the vessel actually burned the high sulfur fuel. This will provide a robust enforcement mechanism that will help maintain a level playing field. The somewhat controversial Experience Building Phase or EBP proposal submitted by certain flag states and industry groups and later endorsed by the U.S. administration has an opportunity to delay or phase implementation of IMO 2020 was rejected by the MEPC. As what has been seen as a conciliatory gesture, the MEPC did leave the door open to consider targeted proposals for Experience Building Phase at the next MEPC meeting in May 2019, but with scope limited specifically to data collection on fuel quality and fuel availability only.

The limitation in scope indicates that any proposals at the next MEPC meeting will not be able to directly impact the implementation or enforcement of the new global sulfur cap. Please turn to Slide 14 for a review of Eagle's scrubber initiative. Since our announcement in early September, Eagle scrubber initiative is now well underway. The 19 scrubbers we have on order remain on schedule. We expect to take delivery of our first scrubber within the next month with the remainder delivering throughout the first half of next year. We still hold options for an additional 18 scrubbers. Given our view on IMO 2020 implementation as well as fuel spreads, we expect to exercise these options in the near future in order to ensure timely installation. Having all of our scrubbers installed by January 2020 is critically important to Eagle scrubber initiative as we believe the fuel price spread is likely to be widest during the first months following implementation of the new regulations.

To illustrate this, if the fuel price spread were to average $300 in the first half of 2020, then we calculate that the difference between having 37 ships ready on July 1, 2020 instead of January 1st would mean foregoing approximately $27 million of incremental cash flow or more than 1/3 of the scrubber investment. With significant scrubber announcements and uptake over the past 3 months, well-known experienced scrubber manufacturers are now essentially booked for 2019 deliveries. There are also rapidly growing lead times for various scrubber components, particularly for the specialized metal alloy required to manufacture the scrubber tower, and significant bottlenecks are also beginning to form for class approval and other required services. Ultimately, all this means that the ship has most likely [sailed] for owners wishing to install well-built reliable scrubbers prior to the enforcement date.

As such, we believe there is a first-mover advantage and that Eagle is sufficiently ahead of the curve with installation of our scrubbers for both our firm orders and options occurring in time to take advantage of the widest projected fuel spreads in 2020. On the bottom right hand corner of the slide, we've depicted the current order book for scrubbers by asset class as assessed by B&B. Looking at drybulk as a whole, approximately 9% of the fleet is expected to be fitted with scrubbers by 2020. As you'll note, most of the scrubbers ordered to-date are for Capesize with approximately 35% of the sub-segment being fitted. Within the mid-size geared segment, only 3% of the Supramax/Ultramax fleet is projected to be fitted by 2020. Although we understand why many owners have opted to retrofit larger vessels, we view our position as optimal due to the low penetration within the Supramax/Ultramax segment as this will ensure pricing for freight will be set by the non-scrubber fitted fleet representing about 97 of every 100 ships.

In addition, we believe the lack of uptake in the mid-size geared fleet will lead to a net slowdown of the Supra/Ultra fleet given that almost the entire fleet will be burning more expensive low sulfur fuel. This would lead to lowering effective supply thereby leading to better utilization and ultimately higher rates. Please turn to Slide 15. On this slide, we've attempted to illustrate the potential benefits and returns the scrubber investment basis various fuel spread environments. Assuming we exercise all 18 options, we estimate we can generate almost $40 million of incremental cash flow or approximately $0.56 per share basis a $200 per metric ton fuel spread environment. This implies an incremental TCE of roughly $2,750 per day. As a reminder, a good part of the scrubber retrofitting work will be performed while the vessels are operating at sea with riding crews while the ships are trading in order to minimize off-hire. In the appendix, you'll find a detailed CapEx table depicting our expected timing and cash outlays for scrubber retrofits in addition to statutory drydocks and ballast water treatment system installations.

As a result of our hybrid installation program, we're projecting just 10 days of off-hire time per ship related to the scrubber install work at dock plus some time for repositioning of the vessels. Please turn to Slide 17 for a review of industry fundamentals. The gross BSI averaged $11,560 per day for the third quarter, up 5% over the prior period and 25% year-on-year. After an uneventful second quarter, which saw spot rates remain range bound, BSI started to gain traction again in early August. The index gained approximately 6% in August and a further 9% in September. The pickup in rates was driven by the Atlantic market, which posted a 20% increase in the third quarter to average $13,504 per day while the Pacific market actually fell by 7% to average $10,718 per day over the same period. As you'll note from the chart, the Atlantic market tends to significantly outperform the Pacific during Q4 as the Northern hemisphere harvest season gets in full swing.

It's interesting to note that this year though the Atlantic market started to outperform the Pacific market much earlier. We believe this is due to increased grain cargoes coming out of the Black Sea and strong continued exports of Brazilian soybeans. Looking at Q4, the BSI continued to move higher through the first half of October peaking at $13,138 per day on October 11. Since then weakness in the Pacific has put pressure on the index, which is now trading in the mid $11,000s. Pacific rates are off approximately 20% in the last month averaging mid-$9,000s on the back of disruptions in Chinese coal imports. These disruptions are due to a few reasons including certain Chinese ports reaching their import quotas and due to actions by the Chinese authorities to lengthen times to grant customs approvals. There's a sense that the Chinese are trying to encourage domestic purchasing versus imports for the time being.

As we've discussed before, coal is a very important commodity in the Pacific and any changes in this trade can cause large swings in the regional index. The Atlantic market remains firm, but weakness in the Pacific has spilled over slightly with rates down approximately 5% since mid-October. The Atlantic-to-Pacific spread premium has now widened to almost 50%, which is not unexpected given seasonal dynamics. While the delta between the basins fluctuates, historically the Atlantic market generally trades at a premium. This phenomenon is due to a number of reasons, including the general overhang of ships sailing into the Pacific with cargo and front-haul voyages, a little return business as well as the fact that all newbuildings get delivered in Asia. Due to the structural imbalance and the impact on rates, repositioning a ship from the Pacific to the Atlantic requires an investment or cash outlay by the owner.

As I mentioned early on in the call, our decision to reposition a net gain of 7 ships back into the Atlantic affected our to-sea performance for the quarter as these trips averaged approximately $4,000 per day, but position us well heading into the fourth quarter and beyond where outbound rates currently stand at over $20,000 per day. Please turn to Slide 18 for a brief update on supply fundamentals. Drybulk newbuilding deliveries totaled roughly 7 million deadweight tons or approximately 74 vessels during the third quarter representing a decrease of 18% quarter-on-quarter and 24% year-on-year basis vessel count. Demolition of older tonnage amounted to just 800,000 deadweight tons during the quarter or 9 vessels representing a significant decrease of 25% over the prior quarter and 84% year-on-year basis vessel count.

Looking at the last 12 months ending September 30, scrapping totaled just 70 vessels or 5 million tons, down approximately 70% basis vessel count and deadweight. It's interesting to note that this low demolition is occurring in an elevated scrap rate environment with prices hovering around $465 per lightweight ton, close to the 3-year high. As we've indicated previously, we believe the decreasing trend in scrapping simply reflects the ongoing improvement in spot rates and forward expectation of further positive rate developments as well. Given year-to-date demolition figures, scrapping is now forecasted to come in lower for the year at just around 5 million deadweight tons equating to below 1% of the on-the-water fleet. As we've indicated previously, we believe that both the implementation of ballast water treatment regulation as well as the mandated reduction in sulfur emissions coming into force in Jan 2020 will act as a catalyst for some increased scrapping.

As you will note from the dark blue dotted line on the graph, net fleet growth is low for drybulk overall with expected growth of 2.8% in '18 and this looks even more favorable when drilling down to the Supramax/Ultramax segment where the net fleet growth as depicted by the lighter blue dotted line is expected to be just 2.2% of the on-the-water fleet. These figures have been revised up slightly due to the scrapping coming in less than originally expected. Please turn to Slide 19 for a look at newbuilding ordering. In terms of forward supply growth, newbuilding orders totaled approximately 5.2 million deadweight tons or 51 ships in the third quarter, up almost 4% over the prior quarter. This increase was primarily driven by a tick-up in Capesize orders, which amounted to 2.4 million tons or about half of all orders placed. Looking at just the Supramax/ Ultramax segment, only 11 vessels were ordered in the period, a decrease of almost 20% quarter-on-quarter.

For the full year 2018, we're projecting drybulk contracting to total anywhere between 25 million deadweight tons to 28 million deadweight tons, a decrease of over 25% as compared with 2017. We're estimating a similar percentage decrease for Supramax/Ultramax orders, which we expect to total between 3.5 million deadweight tons and 4 million deadweight tons representing just 7% of orders placed and approximately 1.9% of the on-the-water fleet. As we've indicated previously, given a number of factors, we remain cautiously optimistic that we will not see a material increase in ordering unless we also see both rates and second-hand values increase significantly from current levels. The order book, as a percent of the on-the-water fleet, stands close to its 16-year low at around 10% basis deadweight tons. The Capesize segment has the highest order book at over 14% while the Supramax/Ultramax segment stands at just 6% of the on-the-water fleet.

Looking ahead, we believe supply side fundamentals remain favorable given the low order book and increasing number of older vessels, which are becoming less commercially viable due to regulations coming into effect. Please turn to Slide 20 for a summary on demand. From a macro perspective, our views have not changed since last quarter. Global growth expectations remain firm, but have been revised down slightly by the IMF due to the impact of the US-Chinese trade spat and weakness with certain developing economies, including Argentina, Brazil and Turkey. Global GDP growth is now forecasted at 3.7% for both 2018 and 2019, down 20 basis points since July. Downside risk to global growth remained due to a number of factors including higher oil prices, stronger U.S. dollar, higher U.S. yields and ongoing concern over an escalation in trade tensions and tariffs.

As we've indicated previously, while we believe actions to date have not been too impactful to drybulk overall and a full scale trade war is unlikely, it remains to be seen whether there will be any real impact to global GDP growth to which drybulk demand is inextricably linked. Drybulk demand growth as calculated from a bottom-up fundamental perspective has been revised down slightly to 2.5% for 2018 representing an increase of about 125 million metric tons in incremental trade for the year. However, when taking into consideration expected ton-mile expansion, 2018 forecasted demand growth should come in at about 2.9%. Within the 2.5% real demand growth, major bulks which are comprised of iron ore, coal and grains are expected to grow by 2.2%. Coal, which represented almost 30% of the cargoes we carried during the quarter, is expected to increase by about 49 million metric tons this year to almost 1.25 billion tons. Grains, which represented about 10% of Eagle's cargoes during the quarter, are expected to total around 484 million tons for the year.

As denoted in the table on the bottom left hand corner, minor bulks which lagged total drybulk trade last year are expected to grow by almost 3% in 2018, outpacing the major bulks and overall drybulk demand for the period. This growth represents roughly 60 million metric tons of incremental demand or approximately 1,200 Supramax/Ultramax voyages. This growth is being driven by improvement in trade such as scrap, cement, forest products and bauxite. It's noteworthy that as depicted in the pie chart on the right hand side of the slide, roughly 60% of the cargoes Eagle carried during the third quarter were comprised of minor bulks. In summary, we believe a demand picture which is favored towards the minor bulks combined with the Supramax/Ultramax having the lowest order book as a percentage of the existing fleet creates a dynamic that's particularly favorable for Eagle given our fleet makeup.

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

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Questions and Answers

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Operator [1]

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With the prepared remarks completed, we will now open the line for questions. (Operator Instructions) Our first question comes from Jon Chappell with Evercore.

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

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Just three hopefully pretty quick ones for you. So first on the scrubber CapEx schedule, seems pretty incredibly front-end loaded with the first 19. Should we be thinking about the same type of payment schedule for the options once they're exercised as well meaning most of the CapEx for those would most likely fall in the first half of next year as opposed to the second?

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

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Yes. I think clearly we'll provide specific guidance when time's appropriate, but there's definitely -- it's more front-end loaded in the sense of procuring material and building the scrubber is a significant portion of it. And then as you know, we're doing work onboard the ship and that's been more intensive in terms of labor [putting rate increase] on board. So, it is, definitely more front loaded. Having said that, the optional vessels will skew towards the back half of the year so it's definitely not going to be an overlay of what you see here, but those ships will tend to be completed in Q3 -- in Q4 of 2019.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [4]

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Second, and I know this is going to vary from quarter-to-quarter, but it was a bit noticeable the year-over-year decline in the charter-in vessels. Was that just a function of there was very little opportunity for you to take advantage of your chartering strategy there? Was it that the rates were kind of counter-seasonally high mid-third quarter or was it just kind of quota volatility?

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

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Yes. It really is -- it's opportunity based. As I said before, we're not volume driven. Having said that, the days were down slightly, but last quarter Q2 we had 22 distinct vessels we chartered in, Q3 was 21. So, we still were doing a fair amount of operating that has tended to be shorter term. We have a couple ships we've taken now in short period during the quarter so I think you'll see that number tick up again. But really the way I would look at it is when we see an opportunity on a risk-adjusted basis that we think makes sense, we'll execute because again there's no benefit to us in any regard in terms of volume. So, I think you'll just see volatility around that.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [6]

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Okay. Finally, just an industry question. Obviously your strategy to shift a lot of your tonnage to the Atlantic Basin has paid off given the disconnect in the Pacific and obviously the capacity side set up really well too as you kind of walked through on your slides. But I think I certainly am and I think a lot of investors probably as well are a little bit surprised by the directional move in overall drybulk rates at this point of the fourth quarter, which should have been seasonally stronger. You mentioned the coal issues in China. But is there a broader issue associated with the demand side tariffs notwithstanding, I think that's more sentiment, but a real true demand issue that may be made the third quarter -- mid-third quarter better than we thought, but now is kind of robbing from Peter to pay Paul and taking a little bit away from the fourth quarter?

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

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Yes. I mean I think volatility is simply part of the landscape we live in. So third quarter, coal demand was extremely high in China this year and then now we're seeing where we have probably reached quotas and so now they're turning off the spigot. So, that's a perfect example of where we benefited in Q3 and now it's weaker in Q4 and that happens to be at the same time also that for instance nickel ore shipments drop dramatically in this season because of the rain in the Philippines and Indonesia. So, that happens to be happening at the same time as we're seeing coal coming off. And then intra-Asia, Australia had a drought where wheat production's about -- down about a third this year. So, those all are overlaying and that's one of the things that we see is that drybulk benefits from the fact that it's -- there's so many factors that go into it, but also the same thing happens when they pull back. I would just -- what I would do is pull back and look at the overall landscape and I think it's really positive, right. As we spoke to that, minor bulk demand this year is almost 3% and expected to grow next year. So this volatility, of course we like a stronger Q4 market. Having said that, we see the volatility as an opportunity to trade around, to take in ships, to capture value and trade around. So, it's good for our model notwithstanding as I said of course we prefer a higher Q4 rate, but we just see it as part of a normal course.

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Operator [8]

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And our next question comes from Fotis Giannakoulis with Morgan Stanley.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [9]

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Gary, I want to ask a few questions about the scrubbers. It seems that there is a lot of confusion about the availability of fuel and the quality of fuel especially at the smaller ports, which minor commodities are trading. Can you give us an overview of the routes that your vessels trade and how confident you are that there is going to be availability of high sulfur fuel after 2020?

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

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Well, first of all, thank you for that question because I'm going to point you towards our new website where on the industry page if you scroll down to the bottom, there's actually a global map and if you move your -- the cursor of your mouse over the various cargoes, it shows you all the trade routes dynamically, they'll get highlighted globally of all the major -- and when I say major not major bulks, but all the significant cargoes that we carry. So, it would take too long for me to do them all now. But thank you for that because hopefully everyone will go and take a look at Eagle's new website and I think that that page there is unique and worth looking at. In terms of fuel, I think people are conflating a few things around fuel and fuel quality. I mean fuel availability, we were confident when we declared our scrubber initiative about 2 months ago and that's only increased given that we now expect there's been significant uptake in scrubbers now circa 2,000 ships and because of that, some of the majors have already come out and affirmed where they'll have heavy fuel available. So, that's really not an issue in our mind. We do believe that heavy fuel won't be available in all the small ports. But what we said and this was part of how we got comfortable with going forward is that we can amend our trading pattern and in a wide fuel spread environment, our ships will be more competitive and therefore will focus on long haul trades where we go by major bunkering ports. As an example out of the U.S. Gulf to Japan let's say, then going out of the U.S. Gulf through China down past Singapore, places like that. And if the fuel spread is $200 or $300 and freight is paid at $25, $30 a ton, if we need to cut out some cargo to carry fuel in order to get to pass the next major bunker port, that's a price worth paying. So we don't think we'll have to amend our cargo list significantly, but even if we did, it's part of the calculus that we're very comfortable with.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [11]

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And can you tell us which type of vessels, which ages of ships are you planning to install scrubbers and what is the fuel consumption at today's rates? You have Ultramaxes, Supramaxes, Chinese, Japanese. At which segment it makes more sense and just to give us some guidance on the fuel consumptions?

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

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I mean, in general, the ships with more consumption that have a large -- high lift, that combination is the most potent. Having said that, there's other considerations that go into it. As an example, we have 17 sister vessels CROWN-58. I can tell you we're going to install scrubbers on those vessels first. You get to the engineering cost, whether you do 1 ship or 17 ships, is almost the same so there's a significant cost benefit of installing scrubbers across sister vessels. In broad terms, we would say to use 25 tons a day for a Supra/Ultra as a blend without getting too specific. We're not installing scrubbers on the oldest vessels not that they wouldn't benefit from it, but as you know we sold 10 of our older smaller vessels and we'll continue to do so as part of our fleet renewal. So, we're focusing on the sister vessels and the larger ones at that.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [13]

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And in regards to the chartering activity, I understand that in other segments charterers are willing to provide period contracts in exchange for scrubber installation. Is this something that you would consider or have you seen even without the scrubbers, chartering activity becoming -- any pickup in the chartering activity for period contracts either for 1 year or longer?

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

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Yes. I mean there's definitely we've had inquiry and frankly, we've even had some discussions about potentially chartering out a vessel with a scrubber. We haven't done so yet, but we wouldn't be averse on a small percentage of the fleet locking in that fuel spread but we haven't done so. In general, our markets have tended to be not as long period markets, but it's out there if we wanted to do so. We're constructive on the market. We're positive on supply/demand and then on top of it overlaying our view on 2020 and the fleet slowdown that we think is inevitable if fuel prices are where we expect them to be. So we simply decided not to, but there is a market out there. So, I think it's unlikely we would be wholesale -- or we won't be reletting significant portion of our fleet, but if there's an opportunity to lock in significant fuel spread and a payback on a few of the scrubber vessels, we may entertain that.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [15]

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One last question about the bauxite trade. There is a lot of discussion about significant pickup in flows from Guinea to China. Is this a real driver for the overall drybulk market? Have you seen any volumes in -- any changes in volumes in the commodities? I see that you transport a little bit more iron ore than the previous quarter in 3Q. Is there anything that we can -- any conclusion that we can draw from your trading partners?

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

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Bauxite is a minor bulk, but as we show -- it wasn't on today's, but we talk about it in some of our investor decks that it's carried by Panamaxes and it's dominated by Panamax/Kamsarmax platform. We do a small amount of bauxite, primarily it's West Africa Black Sea, and again I'll point you back to our website page on the industry page. But the benefit for us in terms of that growth and it's significant growth, about 9%, is that it takes up Panamax tonnage which we compete with our Ultramaxes in particular. So while we're not doing a lot of bauxite directly, it definitely is a positive in that it takes a draw from the tonnage pool that we compete directly with.

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Operator [17]

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And our next question comes from Magnus Fyhr with Seaport Global.

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Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [18]

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Just a question on the recent weakness in the market. I guess the silver lining could be that you've seen somewhat little bit of softness in the asset values. Have your -- what's your thought there? I mean you've been acquiring vessels here over the last 12 months. Has your fleet renewal strategy changed at all with the changes here with kind of divergence between rates and asset values?

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

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We haven't changed our view that we think that there is good value -- good upside in ship values and we just took delivery of the Hamburg Eagle a few weeks ago and I think that we still are interested. Having said that, we've been focused on the scrubber financing not that they're completely mutually exclusive, but that's a significant capital spend and yesterday was an important day with the bond amendment with the approval for installation of up to 18 scrubbers in terms of paying for that. So we continue to look and inspect vessels and as I said, we think there's good upside. At the moment, there seems to be -- there's definitely less transactions going on. I think buyers waiting for a move up and then I think on the sell side, owners are fairly relaxed given supply coming on is low and 2020 is only a year away so -- and of course ships are generating cash flow. So at the moment, we continue to look to acquire vessels and as I said now that we've gotten some of the scrubber financing out of the way, then we'll probably focus a bit more on that like we did in the last quarter.

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Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [20]

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Your stock is down about 15% since June and trading at a pretty significant discount to NAV. Any thoughts there on buying back stock versus buying steel?

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

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Yes. I mean I'll stay away from opining on share price. Having said that, it's something that we discuss internally at the board level, but haven't made a determination. We think there's significant upside in vessel values and we continue to look to do that. But at the moment, there's no news to report on share buyback except for the fact that we do discuss it internally and if the company decides, obviously we'll communicate that at the time.

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Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [22]

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And just one last question. I mean in your owner chartering strategy, you've been pretty active in using the paper market. Any thoughts about locking in spreads on the fuel spreads going forward if that spread blows out or you stay away from that?

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

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Yes. We've definitely been looking at and evaluating. At the moment, there's no 0.5 product out there so you need to create one and you can, but there's basis risk in that. There's also a number of considerations around basis risk, around margin requirements, cash cost, things like that. So, we're very comfortable using derivatives to hedge risk and are looking at it proactively. But at the moment, we haven't done so and again we would need to get quite comfortable with the things that I mentioned before doing so because we need to be sure that our -- the product that we're hedging is actually it's an effective hedge.

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Operator [24]

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And our next question comes from James Jang with Maxim Group.

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James Jang, [25]

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So, most of my questions have been answered. Just on the macro side, so it seems wheat forecast and harvest look weak on Baltic and winter wheat plantings in the U.S. Are there -- do you foresee enough substitution cargoes for I guess a lower wheat harvest moving into 2019?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [26]

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Yes. I think -- I mean the U.S. has definitely lowered its wheat plantings in general. It's been supplanted by Russian wheat exports in particular, very significant this year or a very significant market this year to summer even if it's still moving at this time. So for us, obviously our vessels will pick up cargo anywhere so the volume is still moving and we see wheat is a significant now long-haul trade where Indonesia has become the largest wheat importer passing Egypt last year. So it's not so much -- where it comes from is important in terms of ton-mile, but Russian wheat is definitely a growing market and one that we participate in.

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James Jang, [27]

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Okay. And one final one on the fleet makeup. So, there is about 8 vessels 15 years and older. Would you feel comfortable operating a smaller fleet without the added replacement of those vessels if they're sold.

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [28]

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I mean the simple answer is yes, we're not managing fleet size per se. Having said that, we've been able to I think affect a fleet renewal strategy where we've acquired 13 vessels and sold 10 and last quarter is a perfect example where 1 ship came in and 1 left. So, I think I'm a big believer actions speak louder than words and I would look at that as being instructive as going forward as well. Having said that, if an opportunity came along where we were able to monetize those assets at above what we think is par value, we'd feel comfortable dropping the fleet size down. Also having said that, being an active owner-operator, we have the ability to supplement our own fleet through charter-in and then hedge some of that risk through derivatives and other means. So the answer is yes, we're comfortable with it, but I wouldn't foresee us doing that unless something changes significantly.

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Operator [29]

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And our next question comes from Liam Burke with B. Riley FBR.

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Liam Dalton Burke, B. Riley FBR, Inc., Research Division - Analyst [30]

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Gary, when we're looking at China, there has been increased focus in that market for a higher grade iron ore. Is that affecting your trade routes or is there any particular change in how you see the -- either the long term or the fourth quarter rolling out?

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Gary S. Vogel, Eagle Bulk Shipping Inc. - CEO & Director [31]

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Yes. I mean we are probably the from -- given that we're only Supramax and Ultramax, iron ore really is a very small part of our trade and so I'm probably of all the peer group the one that it's least effective. So, I mean I think in general terms that substitution trade seems to be robust and see no reason why that will change. Also as significant supply continues to come on in Brazil. But I defer to my colleagues in the Capesize segment to give you better color on that.

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Operator [32]

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Thank you. Ladies and gentlemen, that concludes our question-and-answer session for today's call. I would now like to turn the call back over to Gary Vogel for any further remarks.

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

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Thank you, operator. I have nothing further. So, I'd like to thank everyone for joining us today and wish everyone a good day.

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Operator [34]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day.