Eagle Bulk Shipping Inc (EGLE) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Eagle Bulk Third Quarter 2017 Results Conference Call. (Operator Instructions) As a reminder, today's conference may be recorded. Joining us on the call today are Mr. Gary Vogel the Chief Executive Officer; and Mr. Frank De Costanzo, Chief Financial Officer at Eagle Bulk.

Mr. Vogel, please go ahead.

Thank you, and good morning. I'd like to welcome everyone to Eagle Bulk's Third Quarter 2017 Earnings Call. To supplement our remarks today, I encourage participants to access the slide presentation that's 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 you 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 in 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 is also worth noting that the Baltic Supramax Index or BSI that we will reference throughout the presentation is the BSI 52 index.

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

Please turn to Slide 5. During the third quarter, Eagle continued to successfully execute on its business strategy achieving superior TCE performance while actively renewing the own fleet and strengthening the balance sheet. Notwithstanding some delays and negative impact from recent hurricanes, Eagle generated a TCE of $8,660 for the third quarter outperforming the Baltic Supramax Index or BSI by $238 per day when adjusted for the fleet makeup.

This brings our outperformance year-to-date to $948 per day. EBITDA as adjusted for certain noncash items totaled $8.4 million for the quarter while operating cash flow came in at $7.3 million. It's important to note that this is the third consecutive quarter of positive EBITDA and the first quarter we've generated positive operating cash flow in over 3 years.

This is a reflection of both improving market fundamentals and the implementation of Eagle's active management approach. In terms of sale and purchase and as has been reported previously, we successfully completed the acquisition of the Greenship Bulk fleet after taking delivery of the last 3 Ultramaxes during the quarter.

Separately, and as part of our continued objective to renew and optimize the existing fleet, we sold one of our 2010-built DIAMOND-53 Supramax vessels.

Lastly, I'm pleased to report that we repaid $5 million, our revolving credit facility. This action is indicative of the company's improved financial standing as well as our positive view of the market going forward.

Please now turn to Slide 6 for a discussion on our operating business. As compared to many of our peer group which tend to act as tonnage providers, essentially outsourcing their commercial business to third parties via time charters or pools, Eagle actively manages its business with the goal of achieving superior TCE performance.

We seek to outperform the Baltic benchmark and also maximize the long term earnings potential of our assets. To speak in colloquial terms, our active management model allows us to punch above our weight. The journey for Eagle to transition from tonnage provider to active owner-operator began in Q4 of 2015.

And as depicted in the chart on Slide 6, it's taken time since management began this strategic initiative to build out the new team, the operating infrastructure, restructure the balance sheet and improve the fleet composition to its current level. In the first 12 months of this transition over 2016, we underperformed the market partly due to a significant investment made to reposition our fleet to an optimal geographic balance.

Fast-forwarding to today. And as mentioned previously, for the 9 months ended September 30th, Eagle achieved a TCE outperformance of $948 per day equating to roughly $16 million of incremental cash flow for the company on an annualized basis given our current fleet size.

This is a dramatic turnaround from 2016. As mentioned earlier on the call, Eagle realized a TCE of $8,660 for the third quarter. This result incorporates the performance of both our owned and chartered-in fleet as well as the realized P&L from any FFA and bunker hedging. When comparing our TCE performance to the BSI net of commissions and adjusted for the design profile of our own fleet makeup, we calculate Eagle outperformed the market by $238 per vessel per day during the third quarter.

I think it's important to note that earnings are more dynamic in an owner-operator model as we invest a position in both chartered and owned vessels to produce long term value. It's also noteworthy that our outperformance while lower than last quarter was and continues to be achieved in what has been a consistently rising market, which tends to be difficult to attain.

Given this inherent volatility, which may skew short term results, we believe TCE performance is best measured over a period encompassing at least several quarters. As we had discussed in our last earnings call, another way to look at TCE results is by converting it into an Ultramax equivalent rate.

Meaning, if we operated a fleet of only modern Ultramaxes, with specifications like those of our recently acquired vessels, our net TCE for the quarter would've equated to approximately $10,300 per day.

While this is a theoretical figure, it demonstrates the value creating potential inherent in our business model as compared with that of a pure tonnage provider. Looking ahead, roughly 60% of our fleet is currently positioned in the Atlantic to capitalize for the increased grain export volumes out of the U.S. Gulf and Black Sea, seasonally expected in the fourth quarter.

As of today, approximately 64$ of our available days for the fourth quarter are fixed at a TCE of $10,176 per day, representing an increase of 18% quarter-on-quarter.

Slide 7 illustrates one aspect of our business model that is particular relevant, namely, our third party time charter-in business. Our active management approach encompasses a number of different commercial strategies, which together can maximize TCE performance.

Our third party charter-in business do not simply represent us taking in vessels and rechartering them out in hopes of earning margin. The 22 ships chartered in during the quarter represent vessels taken to cover cargo commitment, to execute on market opportunities and vessels take advantage of arbitrage opportunities around our own fleet.

Sometimes charters may in fact may not be profitable in isolation. The ability to charter-in vessels allows us the flexibility to secure cargoes while also positioning our own fleet in front of the best revenue opportunities.

This combined with an increasing book of cargo contracts and the use of forward freight agreements to hedge market risk are all part of our integrated approach to create [alpha].

In just 24 months we've built up our third party charter-in activity to a total of 1,046 charter days in the third quarter comprised of 22 distinct vessels. This equates to a cumulative annual growth rate of 237% since the third quarter of 2015.

Our business model and the ability to execute is based on the experience of our commercial management team, which has developed and executed this owner-operator strategy for over 20 years.

A global presence with integrated offices, superior market intelligence and a structured approach that seeks to maximize revenue, it's a business model that yields tangible outcomes which are reflected in our results.

Please turn to Slide 8 for a brief update on our fleet profile and makeup. As discussed earlier on the call, we completed the acquisition of the Greenship Bulk fleet after taking delivery of the Westport Eagle, a 2015-built CROWN-63 Ultramax in September.

On the sales side, we're expecting to deliver the Wren, which was previously reported sold to our new owners by the end of November. And as previously mentioned, the recently sold Avocet, the 2010-built DIAMOND-53 is expected to deliver to her new owners by January.

On the top right-hand corner of the slide, we show a summary of our own fleet development since we began to implement our strategic plan to renew and improve the makeup of Eagle's fleet. As you'll note we have acquired a total of 11 Ultramaxes over the past 12 months averaging over 63,000 deadweight tons in just 3 years in age at purchase.

At the same time, we sold a total of 9 Supramaxes averaging approximately 52,000 deadweight tons in over 12 years in age. Each time we acquire a new, larger, and more efficient vessel; or sell a smaller, older and less efficient ship; we upgrade our overall fleet makeup and improve our ability to generate incremental TCE performance. In this regard, Eagle's pro forma own fleet taking into consideration the sale of both the Avocet and Wren totals 46 ships equating to almost 17,000 annual vessel days with an average age of roughly 8 years.

On the bottom right-hand corner of Slide 8, we depict our peer group fleet profile composition by company. Eagle is uniquely focused on the versatile Supramax, Ultramax asset class and owns one of the largest fleets in this class in the world.

Owning and operating a large scale homogeneous fleet is a necessary ingredient in our business model as it provides operational efficiencies which simply don't exist across mixed fleets. Subject to market developments we intend to continue executing on our fleet growth and renewal strategy, selling off some older, less efficient ships, while purchasing newer and more efficient ones.

In this regard, I believe, we're well positioned to continue to take advantage of opportunities as they arise. With that I'd like now to turn the call over to Frank who will review our financial performance.

Thank you, Gary. Please turn to Slide 10 for a summary of our third quarter 2017 financial results. Revenue, net of commissions, for the third quarter was $62.7 million an increase of $9.1 million or 17% from $53.6 million in the prior quarter in an increase of $26.9 million or 75% from $35.8 million in the same period in 2016.

Total operating expenses for the third quarter of 2017 were $64.6 million, an increase of $10.7 million from the prior quarter, and an increase of $17.1 million for the same period in 2016. The company reported a net loss of $10.3 million for the third quarter as compared to a net loss of $5.9 million in the prior quarter and a net loss of $19.4 million in the same period in 2016.

Net loss per share in the third quarter of 2017 was $0.15 versus a net loss of $0.08 in Q2 2017. Net loss per share was $0.65 cents in the same period in 2016. Adjusted EBITDA came in at a positive $8.4 million for the third quarter, a decrease $900,000 from $9.3 million in the prior quarter, and an increase of $11.8 million from negative $3.4 million in the same period in 2016.

Now please turn to Slide 11 for a walk from net loss to adjusted EBITDA. In this slide you will find a walk for net loss of $10.3 million to adjusted EBITDA of positive $8.4 million. You will note that the business is profitable in the quarter as measured by both EBITDA and adjusted EBITDA.

Both EBITDA and adjusted EBITDA are non-GAAP measurements. You can find additional information on non-GAAP measurements on Slide 30 of our presentation.

Please turn to Slide 12 for review of the changes in cash flows. In Q3 2017, cash flows from operating activities came in a positive $7.3 million. The first positive quarter in cash from operations in 3 years.

Cash from operations year-to-date 2017 is now a positive $1.5 million. As the chart at the top of the slide shows the positive trend in cash flow continues with cash flow from operations significantly improved from the negative cash flow of $19.5 million recorded in Q1 of 2016.

The chart also highlights the timing driven variability that working capital introduces to cash from operations. This variability evens out over time as demonstrated by the significant positive cash from operations number in Q3 which is essentially making up for timing issues in Q1 and 2.

Let's now turn to Slide 13 for an overview of our balance sheet and liquidity. The company had total cash and cash equivalents of $64.3 million as of September 30, 2017 down from $68.7 million at the end of Q2. The cash balance decrease resulted from the $5 million paydown of the revolving credit facility.

The company's total liquidity as of September 30, 2017 was $94.3 million, and is comprised of total cash of $64.3 million plus undrawn revolving credit facility availability of $30 million. Total liquidity is essentially unchanged from prior quarter.

Total debt which is net of debt issuance in discount costs stood at $313.8 million as of September 30, 2017. The outstanding debt under the first lien facility as of September 30, 2017 was $194.9 million, down $8.9 million from the end of Q2.

The term loan balance was $174.9 million and the revolver $20 million. As noted, we paid down $5 million on the revolver in the quarter. Since the company's refinancing in Q1 of 2016 we have repaid $14.8 million of the term [loan], which includes $2.4 million paid in Q2 on the sale and delivery of the Sparrow and $4 million paid in Q3 on the sale and delivery of the WOODSTAR.

The outstanding balance for the second lien facility as of September 30, 2017 was $75.1 million, which includes the accrued PIK interest of $15.1 million. The outstanding balance for the Ultraco debt facility as of September 30, 2017 was $61.2 million. The Ultraco debt facility was closed on June 28 with a draw of $40 million on 6 of the 9 Greenship vessels financed.

A draw of $21.2 million on the final 3 ships took place in early Q3. Let's now review Slide 14 for our cash breakeven per vessel per day. Cash breakeven per ship per day in Q3 2017 is $7,356, $50 higher than Q2 2017 and $433 higher than full year 2016 cash breakeven of $6,923.

Q3 OpEx came in at $4,627 per day, $352 lower than Q2. The decrease in OpEx in Q3 more than offset the increases of the prior 2 quarters. Q3 drydocks per ship per day came in at $535. There were 3 drydocks completed in Q3, which resulted in the increase of $224 versus prior quarter.

The 3 drydocks completed in the quarter were third special surveys which are more expensive than a normal drydock. No additional drydocks are planned for 2017.

Q3 G&A came in at $1,443 per ship per day. Down $132 from Q2 on the delivery of the last 3 Greenship Ultramaxes bringing the fleet to 48 ships.

Also keep in mind that we had 22 chartered-in ships which also add to cost. As a point of reference the corresponding cash G&A cost per day when including these chartered-in vessels equates to $1,163 per day. Q3 interest expense is $67 higher from prior quarter at $751 per ship per day. Cash interest expense is higher as a result of the additional Ultraco debt.

Turning to Slide 15 you'll find an overview of OpEx. As mentioned during our previous earnings call we continue to focus on creating cost efficiencies while investing in our existing fleet in order to upgrade our vessels and improve technical performance.

The decrease in OpEx in Q3 versus Q2 was the result of reduced crew changeovers along with savings in stores and spares. While Q3 OpEx came in just below our full year 2017 budget given the lumpy nature of payments related to both stores and annual expenses we think it's appropriate to look at OpEx under a multi-quarter average.

If you exclude extraordinary items relating to certain upgrades as well as the 3 vessels that were sold OpEx for the third quarter of 2017 was $4,458 per ship per day, down about 5% from prior quarter. Turning to Slide 16 you will find an overview of our drydock schedule.

The chart on Slide 16 depicts forecasted drydocks. Looking ahead we have 11 vessels scheduled for drydock in 2018. The breakdown is as follows: 7 are due for their first special survey; 1 is due for its second special survey; 1 is due for its third special survey; and 2 are due for their fourth intermediate survey. It is important to note that first special surveys are typically less intensive.

In terms of Ballast water treatment, we don't expect to need to install systems until at least 2019 based on extensions received from the U.S. Coast Guard.

This concludes my review of the financials, I will now turn the call back to Gary who'll continue this discussion of the business and provide context around industry fundamentals.

Thank you Frank. Please turn to Slide 18. On the back of the ongoing improvement in both supply and demand fundamentals which we will discuss shortly the BSI continues to post higher highs. For the third quarter, the gross BSI averaged approximately $9,200 per day. This is up 7% quarter-on-quarter and 30% year-on-year.

And as compared to the historical low reached during the first quarter of 2016 the BSI is up an impressive 142%. Today, we're more than 1/3 of the way into the fourth quarter, and the BSI is approximately 10% where it began the quarter.

It's notable that this is the first time the BSI has traded above $11,000 since the third quarter of 2014. As we have indicated previously, although rates have been showing significant improvement it's important to note that they remain at relatively low levels from a historical perspective.

Excluding the extreme high markets of 2007 and 2008 the 10 and 15-year historical averages are around $12,000 and $15,000 respectively.

Please turn to Slide 19 for a brief update on supply fundamentals. Gross supply growth continues its downward trend; newbuilding deliveries totaled roughly 6.1 million deadweight tons during the quarter or approximately 75 vessels, a decrease of 38% quarter-on-quarter and 46% year-on-year.

Comparing the first 9 months of 2017 with the year prior deliveries are down roughly 15%. Demolition of older tonnage amounted to 3.6 million deadweight tons during the quarter or roughly 52 vessels representing a decrease of 9% over the prior period, but an increase of 25% year-on-year based on deadweight tons.

Comparing the first 9 months of '17 with our year prior, scrapping is down approximately 52% something to be expected given the general improvement in the rate environment.

Although newbuilding deliveries for the full year 2017 are expected to be lower than '16 by approximately 5 million deadweight tons the year-on-year reduction in scrapping has actually led to expected increase in net supply growth in 2017 as compared to the prior year. Scrap rates remain at elevated levels and are currently hovering around $380 per lightweight ton. Given the current and expected rate environment and scrap price levels, we believe demolition will continue around its current pace implying roughly 15 million deadweight tons being scrapped in '17 and equating to 2% of the on-the-water fleet.

In terms of new building orders, there's been an uptick since last year but it's important to note that levels remain close to 20 year lows. As we've indicated previously given a number of factors including high steel prices and a general lack of cheap capital, we remain cautiously optimistic they will not see a material increase in ordering unless rates improved dramatically.

The order book as a percentage of the on-the-water fleet remains at historically low level of just 8%. The Ultramax order book is just 5% of the overall on-the-water fleet. Looking ahead, we believe supply side fundamentals will continue to improve over the next couple of years with less and less ships being delivered. We believe this bodes well for the market and rates overall.

Please turn to Slide 20 for discussion on the grain market. Global grain seaborne trade has been revised higher for the full year 2017, and it is now expected to reach over 510 million metric tons representing a year-on-year increase of 6.25%.

This is an important trade for Eagle with agricultural related products representing approximately 1/3 of the total cargos carried during the third quarter. As indicated in our previous call, a major contributor to the increase in grain trade has been China's continued increased demand for soybeans which is expected to total approximately 95 million metric tons for 2017 an increase of over 13%.

The primary sources for Chinese imports is the U.S. and Brazil which are long distance high ton mile routes. Drought conditions in North America and Australia are expected to negatively affect wheat crops and hence exports from these markets with Russia who has been experiencing a record wheat crop taking market share. Russia's wheat exports are expected to increase by 16% to 32 million metric tons.

Please turn to Slide 21 for a look at the minor bulks. Minor bulk trade which represents almost 40% of total drybulk trade is expected to grow by approximately 2% in 2017 as compared to '16 when it was flat on the year prior. The rebound in trade growth can be attributed to the improvement in the overall macro environment but as you will note it still lags overall drybulk demand growth.

The specific minor bulks which have primarily driven growth this past year include agro bulks, fertilizer, scrap metal and bauxite. Trade in these commodities will collectively grow by 8% in 2017 to reach almost 540 million metric tons representing roughly 30% of total minor bulk trade.

Please turn to Slide 22 for review of Chinese demand drivers. Chinese GDP growth is expected to reach 6.8% for the full year of 2017 thanks to both strong consumption and production which in part has been supported by government policies. Iron ore imports remain firm. The third quarter totaled almost 275 million metric tons or slightly up quarter-on-quarter. For the full year '17 imports are expected to total almost 1.1 billion metric tons up 7% year-on-year.

On the top right-hand corner, we depict monthly coal imports which remain around their 5-year average level of 18 million metric tons. As we'd spoken about previously imported coal is displacing lower quality domestic production, and coal imports for the year are expected to reach 235 million metric tons; an increase of approximately 3% year-on-year. Lastly, on the bottom left-hand corner chart, we depict Chinese minor bulk imports. For the 8-month period ending in August, imports totaled almost 210 million metric tons an increase of 19% year-on-year.

For full year 2017, projected imports have been revised higher to 316 million metric tons an increase of 16% year-on-year. Contributing to this is increased imports of bauxite, manganese ore and forest products. Please turn to Slide 23 for a summary on short term expectations and medium term projections.

For 2017, drybulk growth has been revised further and is now expected to grow by almost 4% as compared to just 1 percent growth in 2016. This positive revision follows continued strong demand from China as well as improvement in the overall global economy with global GDP growth now expected to come in at 3.6% for 2017.

We believe drybulk demand could now reach close to 5% growth in the medium to long term as and if it continues to revert towards its historical mean correlation with global GDP growth. This concludes our market discussion. And I'd now like to end the call with a few takeaway points. Please turn to Slide 25.

We believe Eagle is uniquely positioned to capitalize on improving drybulk market fundamentals for a number of reasons. Firstly, our focus is on the most versatile vessel segment. Since Supramax Ultramax vessels are able to carry essentially all types of drybulk commodities their earnings tend to be highest from a risk-adjusted perspective. In addition, operating in just one asset class provides for operational efficiencies which don't exist across asset classes.

We have considerable operating leverage with 46 owned ships worth 17,000 vessel days and this number's complemented by a steadily growing third party charter-in fleet. Our strategy of active management gives us the ability to drive higher TCE performance and results.

Our management structure of maintaining all services strategic, commercial, operational, tactical and administrative in-house ensures full alignment between company, management and shareholders. Our board representation, which is majority independent provides for strong corporate governance, our balance sheet provides dry powder for growth and we have an experienced team with a proven track record.

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

(Operator Instructions) Our first question comes from the line of Espen Landmark with Fearnley.

Thank you for taking my questions, I wanted to start with the rates that has improved throughout the third quarter whilst your differential compared to the industry is -- it looks narrower -- the bit [versus] 2Q and 1Q. It's still a positive number, but is it anything concrete you would put that on beyond the I guess the rising market you mentioned in your prepared remarks?

As you may recall, we provided guidance on our last call that we had fixed 68% of Q3 at [$8,150] and that was in early August. So by that measure it means we fixed -- the balance of our fixtures were done at $9,700 to come out with the TCE that we did. So you can see there's an inherent lag in earnings and the majority of the fixtures done that got us to that $8,150 number by early August were done in late June and in July when the market took a dip. Also as we mentioned, active operating is subject to more volatility than a tonnage provider model. By example as you fix a ship out for 1 year at -- pick a number $9,000 a day then you have $9,000 every day over 12 months. But we may fix a vessel from the Pacific back into the Gulf at just $3,000 a day over 60 days, and that'll impact a quarter significantly, and then we follow up with over $20,000 going back out to Asia, but it could show up in a different quarter. So it has a profound effect when you measure things in quarterly increments. That's why we believe and we've consistently stated that we think it's important to look at earnings relative to index over a multi-quarter period, and as you mention, and not to belabor the point, beating an index in a rising market is not an easy feat. Any time you contract a ship for a voyage that revenue is flat for the trip, but every day the index goes up your -- theoretically, you relative performance goes down even though revenue is flat. Of course, it works in reverse on a declining market and makes you look better, but as we all know 2016 it's been rising quarter-on-quarter since the beginning of the year.

Yes, that makes sense. And I guess on the fleets that you lined up I think 2 more ships for sale, those prices, it seems to be I guess somewhat below our reference values. Would you describe that to kind of -- it's typically very hard to assign the discounts on the Chinese built assets; is that the main reason, or is it more vessel pacific?

Sorry, can you repeat that, it broke up a bit? Sorry about that.

Yes, sorry, I was just wondering, you have a couple of more ships lined up for sale and the prices for those they are a bit below, at least, our reference values. It's typically hard to judge the Chinese vessels by the discounts that you should have to the Koreans and the Japanese, but is it -- would you say that those are fair market values for the ships today? Or is it more vessel specific driving the -- we call it the delta and prices?

Yes, I think it's very vessel specific. We look at -- when we look to sell an asset we look at not just the age the special survey drydock position, but also the effectiveness of the vessel relative to its value and we've been really on a mission of improving our ships, our fleet overall. In terms of discount, we're actually -- at the moment we're not looking to sell any vessels right now. We're positive on the market development as well. And so we've temporized in that regard. But we will continue to sell older and less efficient ships at what we believe is par value or above relative to each specific ship. So we're not focused on what let's say the marketing is. We run pretty detailed analysis of what we think a ship can deliver in terms of value relative to its price and that's how we make that decision.

Right. And then are you going to -- additional proceeds from those sales, I saw there was a $9 million, written down payment in 3Q, should we assume that all the cash proceeds should go for debt repayment?

Yes. So actually under our first lien facility, it's -- there's an agreement in it that 50% of proceeds go to pay down debt and 50% stay on the balance sheet.

Our next question comes from the line of Magnus Fyhr with Seaport Global. Your line is now open.

Yes, thank you. Good morning. Just first question on the balance sheet and -- you guys have made the right things commercially, you made acquisitions timely ahead of asset value increases and with the balance sheet improving, why do you still have the second lien facility on the balance sheet and what are the plans to retire that?

Yes. Magnus, thanks for the question. I'm actually glad you asked it, because I wanted to be sure to address this before we end the call. So it's an opportune time. While we feel strongly the second lien was structure ideal just 18 months ago when we restructured the balance sheet really at the depths of the drybulk market, we as a company are keenly aware of the cost, and importantly the optics of the high PIK interest element. And it suffices to say we are, as always, focused on improving and lowering our cost of capital, improving the cap structure and evaluating all possible paths to do so. So in this regard I can mention that we will be issuing a press release this morning that we're exploring a potential private placement of bonds in the Norwegian market. Unfortunately, I can't speak more specifically than that at this stage, but I trust that's helpful to you.

Okay, very good, because I think part of the reason why the stock has been lagging is, it's still having that [facile] balance sheet so that's good news. Second question, just on the market in general, I was curious to see -- you do a good job in laying out the different commodities and on one commodity, specifically, in the coal market, can you -- that kind of remains a wildcard going forward. Can you -- you're involved (inaudible) trade in -- India trade, can you kind of give us a little bit flavor on what you're seeing there both in India and in China as far as incremental growth on the coal trade?

Yes. So I think the biggest headline on demand if you were to look at the one trade I think that's really interesting and that's what we refer to as "the substitution trade" of coal into China. While domestic production is up as they call certain lower quality mines and unsafe mines in China and they replace it with imported coal and only 7% of coal going into China is imported. So the lever arm of a 1% -- either a 1% let's say reduction of coal production, domestic production in China or 1% incremental demand increase is demonstrative on seaborne coal. So that's what we're seeing. India, stockpiles are low, which bodes well for incremental coal demand there; that's not a big trade for us. We're definitely more heavily weighted towards the Indonesian, Chinese coal out there. But we see it as a continuing positive and really don't see that substitution trade ending anytime soon.

Okay, great, and just one last question on the newbuilding. I know you guys are hopefully not looking at new builds, but what's the earliest -- I'm sure the shipyards are getting a little more aggressive. What's the earliest delivery you can get on a ship now in Korea versus China?

Yes, I'm happy to report, we're not in discussion with any yards in terms of ordering ships. We've been pretty clear our view is that the world has enough drybulk ships, and actions speak louder than words, and we have focused our efforts on acquiring 11 very modern, including resale, Ultramaxes. I think if you're looking at Korea you're likely looking at 2020. China, you definitely can find yards that'll give you a few ships within '19. But ultimately you need to get a refund guarantee in place before that happens and then many of the yards in China who are out there marketing haven't taken orders for quite some time. So whether or not you actually get the ship delivered then is a real question mark. So I think we feel confident that ['18-'19] is, really positive in terms of that, more of a focus on what happens as we go out into 2020 in China as well as Korea and Japan.

Our next question comes from the line of Fotis Giannakoulis with Morgan Stanley.

Thank you, we have seen a tremendous improvement in the charter-in market in [4Q] asset prices, they went up earlier this year, but they seem to have lagged the last 2 months the improvement in charter rates. And at the same time we haven't seen any activity in the period market. Can you please explain that and give us your view if charterers are looking to secure tonnage for longer periods that will allow also asset prices to move higher?

Yes, sure. So a couple things, we -- I think if you look at asset prices relative to the current charter market you're right the charter market from [call it] Q2 has moved up dramatically. Having said that relative to the forward curve, I think that you would say asset prices have definitely stayed in step and maybe even our -- have gone ahead. The forward curve for next year on the Supramax is quite muted. So I think they're kind of in line and where we would expect them to be given market developments. In terms of period, we see period activity. I don't know what length you're talking about, but as a company we re-let 1 ship for a year and a half at a rate we felt was above market. In general, we don't like re-letting our tonnage, but when we see it at a level that we think is demonstrably better, then we'll do that, we're always looking to create value relative to the curve. So it is coming back. I think what you see also is significant charters particularly on the grain side, looking to lock in tonnage now. So I think for the first time what we've seen is with volatility being back, right, that for the first time in really years, getting on the wrong side of a cargo commitment can be expensive, right. It can cost you $250,000 to $300,000 if you book a gulf China cargo something like that and get on the wrong side of it. We didn't have that for years, so people were happy to kind of run spot, but we are -- on our market, we're seeing people taking more coverage for 1 year, 2 years, so we're encouraged that that will continue.

Thank you, Gary, this discrepancy that you just mentioned between the spot market and the forward curve, what kind of opportunities can it create for a company like yours that is able to take advantage also of the FFA market, are you thinking of chartering also more tonnage and do some hedging strategies that can enhance your returns?

Yes, absolutely, it's a daily occurrence for us, evaluating, taking in ship let's say on period and hedging the fixed period by selling paper. Recently, the physical market's been ahead of the FFA market, so we haven't had the opportunity to do that very much, but we've demonstrated that we do that, and as I said we evaluate it all the time. Also we never take a what we call a "naked" position to the market with a derivative, so we -- even though we think the FFA market might be undervalued for next year, we won't buy it, we're a long -- we have a long position to the market given that we're an owner. And so therefore we will only use the derivatives to hedge a ship and/or potentially hedge a cargo position. Having said that, we'll do it dynamically. So we may hedge a ship position, and then if we feel that the FFA market has backed off too much, we could buy it back and unwind that hedge and put it back on. So these are all strategies on a conservative basis, a risk managed basis that can add incremental value and those strategies are all part of what you see in our mission to and our ability to outperform the market.

Can you clarify how long are usually these positions, are we talking about a few months or they can extend up to a year or longer?

Yes, they can be longer, but Eagle -- we have only chartered vessels since I've gotten here for up to what we call 1 year, which would typically be, let's say, a 9 to 12-month charter with a fixed period being the 9 months and then we will go and hedge that period. So we haven't done any FFAs beyond that type of period and again only against a fixed chartering commitment.

Thank you, Gary, can you also discuss about how the environmental effort in China is impacting the drybulk market both on the coal side that there are plenty of concerns about weakening coal demand, but also on the iron ore side and the need for higher quality iron ore from Chinese buyers?

Yes, absolutely -- addressed, I think, the coal substitution, right, that the requirement for higher quality and shutting inefficient and dangerous mines in China is positive. And again, I don't think you can overemphasize the lever arm effect that only 7% of Chinese coal is imported, right. So it's quite a powerful lever there. In terms of iron ore, as you know, we don't carry much iron ore, clearly it's an important market overall for drybulk and steel production as well, and -- we're less dependent on it. I don't want to imply it's unimportant, but our ships don't carry a significant amount of iron ore. And the coal we transport in Asia is mostly steam coal, as I mentioned earlier, Indonesian steam coal. Our biggest cargo is related to steel, is moving finished and semi-finished steel. In fact we have regular sailings from Asia back into the Atlantic, what we call backhaul cargo, and frankly we haven't seen a slowdown in forward cargoes today.

(Operator Instructions) Our next question comes from the line of James Jang with Maxim Group.

Good morning, gentleman, I had 2 quick ones. So with the drybulk sector looking strong, what are the inquiries you get from charter, are they looking for more long term fixtures or are they happy with the 6 to 12-month kind of fixtures right now?

Yes, there's definitely more appetite for longer term and not only from -- call it charters, I'd say from the operators which play a vital role in between. We as a company don't do a lot of re-letting of our ships, but the operators have come back looking for opportunistic positions to come in and take advantage of what they deem to be a rising market. So there's definitely a lot more inquiry if we go compare it to a year ago; it's night and day, right. So I think we're getting back to a more normal market. As I mentioned, it's the volatility that brings operators back to the market and it's volatility that brings charters back, that for the first time in a long time can get on the wrong side of a cargo sale or a trade. So it's definitely there, we're not back to where we'd like to be and where ultimately I think we will be, but it's definitely improving.

Okay, great, and at what level would you guys look to do more long term charters to kind of protect some of the downside?

Yes, so I think the way to look at it is not necessarily just long term charters, but as we look to lock in cash flows, right, and as an owner operator, we have a number of levers we can pull to do that, we can contract cargoes which gives us the opportunity not only to use Eagle Ships, but charter in other ships and increase our fleet, which we talked about doing that. We also can sell FFAs. And the benefit of an FFA is we maintain our ship, and if we believe that we can achieve a say a $1,000 a day incremental value over the par, then by giving someone else the ship we lose that ability, by selling an FFA we maintain the asset and it's part of our fleet and our ability to generate that outperformance. So as I said, we do re-let ships when we feel we're being paid above par value, but all things being equal we prefer to book cargo and sell FFAs to lock in revenue streams, and it's not a static discussion that we want, let's say $11,000 or $12,000, it has to do with where we believe the market's going and as well as what our risk appetite is based on the supply demand fundamentals, and at the moment; and we have been for quite some time, we believe that the fundamentals in drybulk are improving quarter-on-quarter.

Thank you guys, oh actually just 1 last quick one. It seems like there's been a uptick in Chinese bulk side imports, how active are you in that trade?

We do some, but I think the majority of what we're seeing, a lot of it's going on Panamax stems, so -- it's an important trade. The other thing, a lot of bauxite out of [Camstar] used to go in to the U.S. Gulf, and that trade has stopped due to closing of a smelter and that's now going out to China, which is more long haul, much more ton miles, so that's positive. I think the -- as I said, we don't -- we're not heavily involved in the trade, we do some, but really ultimately we benefit from incremental ton miles across the board for Ultramax Panamax because there's a crossover between them. So even if we're not actively in a market, incremental demand of course it helps all and to use a nautical term, rising tide raises all ships.

I'm showing no further questions at this time. I'd like to turn the call back to Mr. Vogel for any closing remarks.

Thank you, operator. We have no further remarks. I'd like to thank everyone for their time today and wish everyone a good day.

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