Genco Shipping & Trading Ltd (GNK) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Second Quarter 2008 Earnings Conference Call and Presentation. Before we begin, please note that there will be a slide presentation accompanying today's conference call. That presentation can be obtained from Genco's website at www.gencoshipping.com.

To inform everyone, today's conference is being recorded and is now being webcast at the Company's website, www.gencoshipping.com. We will conduct a question-and-answer session after the opening remarks. Instructions will follow at that time. A replay of the conference will be accessible any time during the next two weeks through August 14, 2008, by dialing 888-203-1112 or 719-457-0820 and entering the passcode 1470749. At this time, I would like to turn the conference over to the Company. Please go ahead.

Good morning. Before we begin our presentation, I note that in this conference call we will be making certain forward-looking statements that discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements. For a discussion of factors that could cause results to differ, please see the Company's press release that was issued yesterday, the materials relating to this call posted on the Company's website, and the Company's filings with the Securities and Exchange Commission including, without limitation, the Company's annual report on Form 10-K for the year ended December 31, 2007, and the Company's subsequent reports filed with the SEC.

At this time, I would like to introduce Mr. Gerry Buchanan, the President of Genco Shipping and Trading.

Thank you and good morning. Welcome to Genco's Second Quarter 2008 Conference Call. With me today is Peter Georgiopoulos, our Chairman; and John Wobensmith, our Chief Financial Officer.

I will begin today's call by discussing our second quarter and year-to-date highlights as outlined on slide 5 of the presentation. I will then turn the call over to John to review our financial results for the three- and six-month period ended June 30, 2008. Following this, I will discuss the industry's current fundamentals. John, Peter, and I will then be happy to take your questions.

The second quarter of 2008 was an important one for Genco Shipping. The Company followed its position as an industry bellwether by making notable progress in three key areas. First, we posted strong financial results driven by management's past success walking in their expanded fleet on favorable charters as well as our foresight in securing profit-sharing agreements on a number of vessels.

Second, we continued to further our consolidation leadership by entering into two additional transactions to expand our fleet by nine modern vessels.

And, third, we declared our second dividend under our most recently announced increased target dividend of $1 per share for the quarter.

The strong financial results we achieved for both the quarter and six months 2008 period demonstrated the sizable earnings power of our fleet. For the second quarter, excluding the $2.6 million of dividends we received from our investment in Jinhui Shipping and Transportation shares net income was $58.3 million, or $1.96 basic and $1.95 diluted earnings per share.

Net income was $134.9 million, or $4.61 basic and $4.58 diluted earnings per share for the six months ended June 30, 2008. John will discuss the quarter results in more detail later in the call.

Genco's strong financial results enabled the Company to once again declare a sizable quarterly dividend during a time in which we further differentiated the Company through its disciplined consolidation of the industry. As I mentioned a moment ago, we declared the $1 per share dividend for the second quarter. Underscoring the ongoing support management's disciplined growth strategy has received from the capital and banking markets, we completed a $204 million follow-on offering accompanied by a second re-offering.

During the quarter, we also continued to expand the fleet and are pleased to have entered into two transactions we believe will considerably strengthen our future commercial prospects to capitalize on the strong demand for essential commodities, enhance our fleet profile as we continue to achieve the highest operational standards for our leading customers and further increase our earnings for the benefit of shareholders.

First, on May 12th, we agreed upon the acquisition of two Panamax vessels and one Supramax vessel for $257 million. Building upon this success, we further enhanced our fleet by agreeing to acquire six newbuilds, three Capesize vessels and three Handysize vessels for an aggregate price of $530 million. With the addition of these nine vessels, we have expanded our fleet approximately 345% on a net tonnage basis since going public in 2005.

We are pleased to have already received delivery of the Genco Raptor and the Genco Cavalier, two of the three vessels from the Bocimar acquisition.

Finally, during the quarter, we reached favorable time charter agreements for six vessels, including one from the Bocimar acquisition and one from the nine-vessel Metrostar acquisition signed in July of 2007.

Moving to slide 6, I will now discuss our continued success in the execution of our chartering strategy in greater detail.

During the second quarter, we continued to focus on maximizing our return on capital by signing contracts with staggered durations. This portfolio approach serves the Company well by providing shareholders with a sizable secured revenue stream and maintaining the ability to benefit from future rate increases.

Consistent with this strategy during the quarter we reached time charter agreements at attractive rates for six vessels.

Before moving on to discuss our fleet delivery schedule, I note that our significant success in signing attractive charters has resulted in 94% of our fleet's operating days being secured on contracts for 2008 and 60% in 2009.

On slide 8, we detail the remaining vessels to take delivery from our acquisitions in 2007 and 2008. As noted on the slide, we expect to take delivery of 11 vessels -- seven Capesize, one Panamax, and three Handysize vessels from the fourth quarter of 2008 through the fourth quarter of 2009.

Upon completing these acquisitions, our fleet will consist of 41 drybulk vessels consisting of 12 Capesize, eight Panamax, four Supramax, six Handymax, and 11 Handsize vessels with an average age of approximately six years, well below the industry average of approximately 16 years.

At this time, I would like to turn the call over to John.

Thank you, Gerry. I will begin my remarks by directing you to slide 10, which presents our financial results for the second quarter and six months ended June 30, 2008.

For the three-month and six-month period ended June 30, 2008, we recorded revenues of $104.6 million and $196.2 million, respectively. This compares with revenues for the second quarter of 2007 and six months ended June 30, 2007, of $36.8 million and $74.1 million, respectively. The year-over-year increases were due to the operation of a larger fleet, higher charter rates for 13 of our vessels and the contribution from our Capesize vessels, two of which have profit-sharing agreements.

Operating income for the second quarter and six-month period ended June 30, 2008, was $70.8 million, and $156.1 million, respectively. This compares with operating income for the second quarter and six-month period ended June 30, 2007, of $18.5 million and $40.8 million, respectively.

The second quarter and first half of 2008 increases in operating income are attributable to higher revenues partially offset by increased vessel operating expenses, general administrative expenses, and depreciation and amortization associated with the operation of a larger fleet.

Interest expense for the second quarter of 2008 was $11.6 million and $23.4 million for the six-month period ended June 30, 2008. This compares to interest expense of $4.1 million for the second quarter of 2007 and $7.6 million for the first half of last year.

Excluding the $2.6 million of dividends received from our investment in Jinhui Shipping and Transportation shares, net income was $58.3 million, or $1.96 basic and $1.95 diluted earnings per share for the second quarter of 2008. Net income was $134.9 million, or $4.61 basic and $4.58 diluted earnings per share for the six months ended June 30, 2008. This compares to net income of $13.7 million, or $0.54 basic and $0.54 diluted earnings per share for the second quarter of 2007 and net income of $33.6 million, or $1.33 basic and $1.32 diluted earnings per share for the six months of 2007.

Moving to slide 11, you will see that we have maintained a strong balance sheet during the time in which we both expanded our fleet and distributed sizable dividends to shareholders. Key balance sheet items include the following -- our cash position was $96 million as of June 30, 2008, and our debt-to-capital ratio was 53%. Our total assets as of June 30, 2008, were $1.95 billion consisting primarily of our current fleet, deposits on vessels to be acquired, Jinhui common stock, and cash.

Our EBITDA for the three-month period ended June 30, 2008, was $85.7 million, and our EBITDA margin now represents 82% of revenues.

Moving to slide 12, our utilization rate was 99.3% for the second quarter of 2008 compared to 98% in the year-earlier period. Our time charter equivalent rate for the second quarter of 2008 increased 95% to $40,945 per day from $21,046 per day recorded in the second quarter of 2007. The increase in time charter equivalent rates was due to higher charter rates achieved in the second quarter of 2008 versus the second quarter of 2007 for two of the Panamax vessels, six of the Handymax vessels, and five of the Handysize vessels in our current fleet.

Further, higher TCE rates were achieved in the second quarter of 2008 versus the same period last year due to the operation of the five Capesize vessels that were part of the Metrostar acquisition, two of which have profit-sharing agreements.

By acting opportunistically to capitalize on strong market demand in creating the profit-sharing agreements with these vessels, we have been able to earn an average of approximately $110,000 a day representing 125% over the vessels' average basic base rate.

In the first six months of 2008, TCE rates obtained by the Company increased 84% to $38,419 per day from $20,863 in the same period a year ago.

For the second quarter of 2008, our daily vessel operating expenses were $4,378 per day versus $3,727 per day for the second quarter of 2007. Daily vessel operating expenses for the first six months of 2007 were $4,328 per day versus $3,677 per day for the year-earlier period.

These quarterly and year-over-year increases are due to higher crew and lube expenses and the operation of a larger class of vessels; namely, the Capesize vessels.

I would like to note that daily vessel operating expenses for the second quarter and first six months of 2008 were once again below our budget number. That said, it remains important to note that we believe daily vessel operating expenses are best measured for comparative purposes over a 12-month period in order to take into account all of the expenses that each vessel in our fleet will incur over a full year of operations.

Based on the estimates provided by our technical managers and management's expectations, our 2008 daily vessel operating expense budget is $4,700 per vessel per day on a weighted basis. As previously announced, the increased budget reflects the anticipated increased costs for crewing and lubes as well as the operation of our Capesize vessels.

On slide 13, we present a pro forma balance sheet that reflects the Company's declaration of its second quarter 2008 dividend of $1 per share, and its effect on our cash position and shareholders' equity; the effect of the drawdown of the $62.9 million under our credit facility for the payment of the 85% on the Genco Cavalier.

As you will see, our pro forma cash position for the quarter is $64.2 million. As of June 30, 2008, our pro forma liquidity totaled $389 million, and our pro forma net debt-to-total-capital ratio was 55%.

It should be noted that while the pro forma balance sheet includes $77 million in debt associated with the purchases of Jinhui common stock, it does not include the market value of the position.

On slide 14 of the presentation, we outline our payment schedule for 11 of our newly acquired vessels to be delivered. I would like to note that deposit payments have already been made in the amount of $163.1 million. The remaining balance will be made upon the delivery of each vessel scheduled between the fourth quarter of 2008 and the first quarter of 2009. To finance the remainder of the vessels, we intend to draw upon our $1.4 billion revolving credit facility. In addition, we are in the process of negotiating an additional credit facility to meet our longer-term requirements for these vessels.

Before moving on to our dividend policy, I will review our anticipated breakeven levels detailed on slide 15.

As we mentioned a moment ago, we expect our Q3 2008 daily vessel operating expense budget to be $4,700 per vessel per day on a weighted basis, on an average number of vessels of 29.98 for the third quarter of 2008.

Furthermore, we expect our daily free cash flow breakeven to be $12,422, and our daily net income breakeven rate to be $18,257.

Next I will discuss our dividend policy, which is highlighted on slide 16. During the quarter, we declared our second dividend under our most recently announced quarterly dividend target rate of $1 per share. The $1 per share quarterly dividend for the quarter represents approximate 51.5% increase over our second quarter 2007 dividend, and a 67.7% increase over our 2006 second quarter dividend.

Based on our closing price yesterday of $66.33, plus the cumulative dividends of $7.49 per share that we have paid to date, we have provided shareholders who invested in our IPO in July of 2005 a total return of approximately 252%. The Board of Directors determines our dividend policy based on the calculation of free cash flow less cash reserves for fleet maintenance, renewal, and growth and debt amortization.

In seeking to provide our shareholders with sizable and growing dividends we have consistently increased our quarterly payout while expanding our fleet since our IPO in 2005. Our ability to consistently generate sizable cash flows while seeking industry consolidation demonstrates the earnings power of our modern, high-quality fleet.

Going forward, we will continue to take advantage of our significant financial flexibility and seek growth opportunities that meet our strict earnings and cash flow accretion criteria as well as return-on-capital hurdles. Complementing this focus, we intend to continue to draw upon our significant time charter coverage, to continue to distribute sizable dividends to shareholders.

I will now turn the call back to Gerry.

Thank you, John. I'd like to take this opportunity to spend a few moments discussing the industry fundamentals. I'll start with slide 18, which points to the drybulk indices.

Represented on the slide are the overall Baltic Dry Index, the Baltic Capesize Index, and the Baltic Panamax Index. As can be seen, when looking at the first half of 2008, the rate environment has displayed continued strength as compared to the same time last year. It is important to note the volatility displayed over the past six months, which we believe stems from a very tightly balanced market in terms of supply and demand characteristics. Moreover, the index is up approximately 20% over the corresponding level last year.

On slide 19, we will discuss the drivers behind the overall strong rate environment. As indicated on the graph at the bottom right, Chinese steel production grew to 263 million tons, showing a 10% year-over-year increase for the six months ending June 30, 2008, while 139 million tons of iron ore were imported into China showing a 22% year-over-year increase for the same period.

It's important to note that this increase was observed during a period of uncertainty over the recently concluded iron ore price negotiations. It was only on July 4, 2008, that the final negotiations between BHP and Baosteel were completed at an 80% to 96.5% increase for the contract year commencing April 2008.

Moreover, the significant increases in the price of steel through 2008 not only indicate the continuous underlying demand for the commodity but also reinforce the need for incremental iron ore, going forward.

Coupled with the fact that the International Iron and Steel Institute projects China's steel use to grow by 11.5% in 2008 and 10% in 2009, these conditions bode well for the drybulk market.

During the first half of 2008, Chinese iron ore import figures indicate that increased volumes of ore have been imported from India as compared to Australia or Brazil. Indicatively, on a year-on-year basis, Chinese iron ore imports from Australia increased by 19%, from Brazil by 14%, and from India by 25%. We believe that the settlement of the iron ore price negotiations will temper spot buying from India and divert more activity to longer trade routes like Brazil and Australia.

At the same time, we expect further growth in the long-term demand for coal. As can be seen on the graph at the bottom left, Australian coal exports have rebounded since the recent flooding disruptions with total coal exports reaching 103 million tons through the first half of 2008.

Moreover, increased domestic demand for Chinese coal is forcing the country to become a net importer of the commodity while, at the same time, India's economic growth is also adding further pressure to the coal trade in two ways. Firstly, its increased steel production is forcing the country to become a major importer of coke and coal and, secondly, its increased energy demand is expected to result in higher thermal coal imports.

Furthermore, the fact that Australian coal mines are running at capacity, and weather disruptions have proven to stress the existing infrastructure and create bottlenecks, has created increased demand for coal exports coming out of the U.S.

On the grains front, the South American grain season, which is usually concluded during the first half of the year has been extended towards the second half due to the intermittent shipment disruptions as a result of the Argentinean farmer strike. Coupled with the commencement of the North American grain season at the beginning of September, it should bode well for the drybulk market during the third and fourth quarter.

Coming to slide 20, we note that Chinese fixed asset investment has been showing consistent growth both through the end of 2007 and into the first half of 2008 pointing to the country's efforts to improve their infrastructure platform, going forward. Indicatively, Chinese fixed asset investment rose 26.3% through the first half of 2008, and industrial production grew by 16.3%.

Combined with the fact that Chinese companies have been actively investing in Brazilian and Australian mining companies in order to access mining rights to iron ore is a good indication of the bullish demand expectations for the commodity.

Looking at the graph on the bottom of the page, one can see the planned production increases by the major miners to meet the anticipated demand. Indicatively, production quantities are forecasted to almost double from approximately 600 million tons in 2007 to 1,110 million tons in 2012.

And, finally, on slide 21, we present our view for the supply side of the equation. Looking at the graph on the bottom of the slide, we can see the drybulk order book by quarter through 2012. A fairly defined order book over the next two years provides good visibility over the medium turn charter market. Although the drybulk order book has increased to 64% of the existing fleet, it is questionable whether it will be delivered in its entirety.

It is important to note that 23% of the Capesize orders scheduled to deliver in 2009 at 33% of the Capesize orders for 2010 are contracted at greenfield yards. The increased price of steel could place constraints on some of these startup yards. Anecdotal evidence of constraints such as financing for shipyards and smaller owners as well as machinery and equipment shortages could pose additional difficulties in delivering the current order book in its entirety.

Furthermore, we do not believe that the impact of the much-discussed VLOC conversions are certain. The potential of additional capacity for this year is approximately 10 million deadweight tons, however, the reliability of the converted vessels is questionable. Rumors of some issues with the first units have arisen, and better tanker market prospects are dampening interest from the side of the owners.

Lastly, over 30% of the world fleet is 20 years or older. As we have indicated on past calls, unlike tankers, bulk carrier scrapping is not mandated. It is more of an economical equation and the cost of repair to comply with the requirements of a fifth or a sixth special survey. However, charterers do become more selective in less robust markets, and many of them will not take vessels, which are in excess of 20 years old for long-term tank charters. Therefore, we believe that scrapping will become an increasing factor in the future.

This concludes our presentation, and we'll be happy now to take your questions.

(Operator Instructions) Doug Mavrinac, Jefferies & Company.

Congratulations once again on another great quarter.

Thanks, Doug.

I just have a few questions for you all. First, while we have seen weaker spot charter rates in recent weeks when compared to rates back in May, how would you guys describe the interest on the part of charters in recent weeks for long-term charters? Have we seen increased demand as measured by the longer-term rates charters are willing to pay?

Doug, we haven't seen any drop-off in that at all. There is still a very, very strong interest in charters, in long-term chartering, and I don't see any change in that at the moment.

Okay, okay, thanks Gerry. And then what about intermediate-term charters? You know, we've seen an increase in the number of charters like BHP willing to take on vessels for six months at quite attractive rates. Would you say that it would be unreasonable that charters are starting to make preparations for needs in the late September timeframe, i.e., post-Olympics, at this point?

Well, first of all, to talk about the Olympics, I'm not sure that the Olympics are really going to change that equation too much. I mean, it's a short-term thing, what's going on with the Olympics.

The interest in shorter-period charters like six months or five to seven months or whatever has always been there, and I don't see that changing, Doug.

Okay, great. And then also, Gerry, a lot of talk has been made about the Chinese destocking and everything else. You have the negotiations beginning once again on November 1st. Would you say while they are destocking today or maybe have destocked over the last several weeks that it's not too unreasonable to think they couldn't turn right around and start restocking so that way, they're not too short going into those negotiations in November?

We were busy talking there, sorry. We were talking over your question, Doug, and I missed the whole point of it because I couldn't understand what you said at the beginning.

No worries, no worries. I was just talking about, you know, a lot of talk has been made about the destocking of iron ore inventories since maybe late May. Our thoughts are that destocking may be followed up by some restocking in anticipation of building inventories before the November 1st negotiations begin with the global iron ore producers once again. Do you think that's potentially in the cards?

Yes, I do, actually. And we see very strong stocking piles in the Chinese yards at the moment. So, John, do you have anything to add?

Yes, I mean, Doug, keep in mind the inventory numbers are up, and part of the problem is that different people are using different numbers, whether it's 19 ports that they're counting, or 25 ports.

But I think the standard number right now is somewhere around 63 million tons, and it does compare to 45 million tons towards the beginning of the year. But what's been happening there is that, one, steel productions continue to grow at 11%, 12% year-on-year, so you expect just from that higher inventory levels.

And, two, a lot of the coal shipments have been given some priority in moving it around the country on the rail system. So I think that as that starts to get itself worked out, you'll see more iron ore inventory moved and destocking occurring pretty quickly. We actually believe that the ore levels at the actual steel mills are relatively low so we expect the destocking and restocking to go on.

Okay. And then also, I guess, to that point, we really haven't seen what July inventory figures are going to be because we've seen a decrease in (inaudible) activity in June, so presumably that would show up in the inventory figures that haven't come out yet.

That's exactly right.

Okay. And then one final question, guys, before I turn it back over, and that has to do with shipyard deliveries. We've already noticed a 30% shortfall in terms of scheduled shipyard deliveries for the first half of '08. Can you provide some color as far as why that may be happening? And then, clearly, what the implications may be for '09 and beyond given that most of those '08 deliveries were supposed to be coming from established yards.

If you (inaudible) to the greenfield sites, first of all, Doug, the reported figures are around about 30%, 23% for 2008, all of our Capesize that will be delivered are going to come from greenfield yards. To be honest, if these yards are still greenfield yards, it's difficult to see how these deliveries are actually going to be made.

Right, right. I just didn't know if some of the current shortfall was maybe due to the inability to get steel plate or other logistical issues, which, clearly, those greenfield yards would have as well.

Doug, I think a lot of it is logistical issues with some of the other yards. The world is using a lot more steel than it did a few years ago, and a lot more engines are need, and pipes and wires, and so you're just seeing slowdowns in delivering all of these supplies, all these component parts to the shipyards, and that's slowing everything down.

Jon Chappell, J.P. Morgan.

John, you mentioned having to go out to banks to get new financing for all the new ships that are coming online. Can you talk about the reception you've had from some of the banks? We've heard about shipping banks closing their doors at the end of last year. Does it matter who you are, as an owner? And is the availability there that you think -- at good pricing -- to get the financing for these ships?

Yes, I think it absolutely matters who you are. I think the larger owners are not having problems. I think some of the smaller owners are definitely having problems.

Genco, specifically, we're right in the middle of negotiating our credit facility; expect to be able to have an announcement definitely by the end of August. And we've received a pretty good reception, and I don't think much has changed since the last conference call. We do expect our pricing to go up slightly, maybe 30, 40 basis points. But, again, we're negotiating an additional credit facility. The existing $1.4 billion will stay in place as is.

And do you think if the smaller owners can't get the financing from the banks that there will be opportunities for companies like Genco to get assets that may not be able to be delivered otherwise?

Yes.

Yes, we do believe that.

All right. And the final thing, Gerry, you mentioned the VLOC conversions, and if I remember correctly, you were one of the first to point out potential technical problems with those. Can you talk a little bit about the technical problems that have happened with the first conversions and what you think that may mean for the schedule for the other deliveries? Is it impacting costs? Is it impacting the time that the ships need to be out of the water and make the owners second guess whether they want to do these conversions or not?

Sure, well, it's definitely impacting the cost, because when you take a ship out of service to do the repairs that are required, she's not earning, and the repair costs are going up.

I think I mentioned briefly at the last quarter call, the differences between a VLCC and what you have to do to convert it to a VLOC. The loading sequence for both vessels are completely different, and so therefore the stresses are set up in an ore carrier or a large Capesize carrier are a lot higher and more concentrated than those in a VLCC.

When you do these conversions, the conversions have done a float, and they're not done in a dock in a stationary position. The ship may be stationary alongside the dock, but the ship is still moving, it's still dynamic. And so when you stop to put in all the strengthening members that are required to turn this into a -- a VLCC into a VLOC misalignment takes place and depending on the level of misalignment, depending there has been enough stress that you build into the new structure. And that becomes apparent when the vessel is in operation, you start getting fractures and cracks.

Now, the exact nature of what the fractures and cracks are on the vessels that have been delivered so far, I don't know. I mean, we don't have detailed information, but we hear the rumors that are going around and they indicate that there is cracking taking place, and that these vessels have to be taken out of service to repair them. It all adds to the cost. And if you're an owner who is looking at a VLCC conversion, you've got to take all that into consideration.

Greg Lewis, Credit Suisse.

Thank you and good morning and congratulations on a great quarter. I guess I have a follow-up question to John's call regarding the debt that you're looking to fix potentially by the end of the summer.

Given the fact you've all those newbuildings coming on in 2009, have you thought about potentially fixing forward some of those vessels on long-term contracts and, if so, do you think we could see any of those fixed on multi-year deals over the next, say, month, before the financing is in place?

We certainly have thought about fixing forward. We've looked at it. We still think that the curve -- you know, there's a little too much of a discount in our mind to fix forward. We believe we're going to be coming into a stronger market towards the end of the year, and so we're just holding back a little bit.

Okay, but so the banks haven't really indicated a desire for you to lock up any of that tonnage on long-term contracts?

No, no.

Okay, and then this is more like a general industry question related to -- I guess yesterday China and India walked away from the WTO in order to defend their domestic grain farmers. Do you think that has any sort of negative impact on the grain trade?

I didn't see that, but I don't think so, to be honest with you.

Okay, great. Well, thank you and congratulations on a great quarter.

Thanks, Greg.

(Operator Instructions) Natasha Boyden, Cantor Fitzgerald.

I want to ask you with steel prices being so high, what you're seeing in terms of scrapping? If you've seen any increase -- is it more attractive now for owners to potentially put their older vessels out for scrap?

We are not seeing any increase in scrapping of bulk carriers, Natasha.

That's interesting. So even though with the fleet being -- some of it -- being pretty old, and the steel prices being pretty high, you've not seen that at all?

Yes. I think charterers are going to become more selective, to be honest.

That's pretty interesting. You'd think there would be some incentive there to do that.

Keep in mind, Natasha, in bulkers, it's a pure economic equation with where freight rates are today.

Yes, I guess the rates are still high enough for them to keep operating those vessels.

Indeed.

Okay. And then just [to move back], you mentioned, obviously, that you are in the middle of negotiations to find out the assets you acquired. I know you went back to market in May to raise some funds there. Do you have any or see any need to go back to the market this year or anytime perhaps next year to raise any more equity?

No. Again, as we said last quarter, we plan on financing this acquisition, the remaining of it, with bank debt.

Okay, great. That's helpful. And, lastly, again, this is just a lot more general question. There have been a lot of factories shut down for the Olympics around Beijing and all that, yet, Capes have held up remarkable well around the $150,000 mark. Indicative of demand to hold out very steadily? You know, there was a lot of chatter about rates collapsing there. I guess the question is do we really think there's going to be a solid rebound or is the market move sideways here because the rates have been holding up so well? I just wanted to kind of get your feel on what -- the way you think the market's going to move kind of off the Olympics?

I don't really see the Olympics having a great impact, Natasha, to be honest. I mean, the Olympics is a two-week period, and, yes, they're shutting certain plants there around the cities where the main events are taking place to try and clean up the air but, again, it's a very short period, and a lot of the contracts of many ships are in the water, ships are on the way. I really don't see it impacting tremendously.

Okay, so you think it's just really people just making excuses?

I don't know.

I mean, look, I mean, Natasha, rates are pretty firm, but if you look at what's -- at least what is anticipated towards the end of the year, you're coming into the U.S. grain season starting mid to late September. The steel industry usually picks up towards the end of the year in China, and coal shipments also pick up at the end of the year. So that's why we're positive, going into the fourth quarter.

Chris Wetherbee, Merrill Lynch.

I wonder if you could just touch on demand for the longer-term tonnage. It seems like there's been pretty strong demand for Capes going out about 10 years or so. Any thought of doing that, or is that something you want to kind of keep a little bit more current, sticking to the three to five-year numbers?

We'll definitely look at 10-year transactions but I think if you look at what we've done in the past, it's been three to five. We think that's the sweet spot for earnings, but we look at all these deals, and it really is on a week-by-week basis and what the market can offer.

And then as far as progress on the vessels -- you have a couple of vessels coming in in the fourth quarter there, and I'm assuming you guys are obviously working toward signing up charter agreements there. How important is profit sharing? Is there any sense of going on profit sharing on some of the smaller vessels? I know you have a few of the Capes that have profit sharing, and one coming in the fourth quarter that has it as well. Any sense for the smaller vessels to add that on there? Does that make sense to you guys?

I think the profit-sharing agreements, in general, make sense. It's just a matter of finding the right charter. Cargill has been a great partner for us in putting these profit-sharing agreements on the Capes, and we definitely look at the smaller vessels if it's available.

And just touching on something you mentioned earlier, a previous question asked about the potential for acquisitions. I guess when you think about the market, is the best option or best opportunities coming from the potential of under-capitalized owners not being able to take delivery of vessels that are already in the order book? Does that make sense to you? Is that the best spot for you to hit for acquisitions or are there other places to look for secondhand tonnage?

I think it's across the board. I think there is secondhand tonnage in the true sense that's available on the market, and we look at those transactions, and I also think there will be some transactions to look at on the newbuilding front, where owners are having problems raising cash from banks.

Just finally, I know you guys have talked about conversions. It seems that the order book or at least the orders for conversions have moved up a bit in the last quarter or so. It sounds like, from your perspective, at least, just the success of these conversions has been somewhat limited, but is there anything else driving the conversions other than where rates are now? Is there any sense that some of the recent deliveries have had a little bit more success as far as operating or just no real color on that at this point?

I think it's a function of where the rates are at the present time, which is driving the -- fueling the interest in the conversions. There is no doubt that there are operational issues with respect to these. There are very few of these units actually in the water trading at the moment. I can make an educated guess as to the long-term success, but there are certainly questions there.

(Operator Instructions) Michael Pak, Banc of America Securities.

A question for the team -- the capital structure, given the 11-vessel delivery; your fleet, 41 vessels; and the cash flow from that asset base, what kind of optimal capital structure do you guys envision, going forward?

Well, as far as a debt-to-cap, again, we've been pretty consistent in that our target rate is 40% to 60% though, clearly, we have no problem going above that for the right acquisition and then delevering pretty quickly. Again, we plan on putting a new debt facility in place. That's going to cover our existing commitments that we have going through the fourth quarter of next year.

A follow-up question -- so how much more do you think you could stretch the balance sheet? You've indicated that 60-40 kind of an optimal -- you know, I look at your cash flow generative ability, and it seems like it could be -- the balance sheet could be levered more. I'd just like to get your thoughts on that.

Look, I don't think the balance sheet is stretched by any point. You're right, the cash flow generation that's anticipated over the next few years is significant. Just taking a look at our dividend for a second, that only represented about 45% of our free cash flow payout. So there's room on the dividend side. I think there's room for additional acquisitions at this point. It's just a matter of finding the right one.

Natasha Boyden, Cantor Fitzgerald.

I just have a quick follow-up question in terms of costs increasing. Obviously, you mentioned they are increasing pretty dramatically, and we've seen that across the board. I wonder if you can give us sort of an idea of what we can expect to see year-over-year in terms of cost increases?

Well, we're actually in discussions at the moment with our crew suppliers and ship managers as to where the costs are going to go for 2009, Natasha, and it is a bit early to try and -- to forecast to you what that is at this time.

Okay. You can't give us some kind of idea of a percentage increases? Are we looking at 10% to 15%, 15% to 20%, 10% to 20%?

We've just done a deal with our major crew supplier in China for 2009 wages and overall manning costs, and it looks like they're going to increase somewhere on the lines of 15% or so.

But that's only on the crew portion and (inaudible) operating costs.

Only on the crew portion, yes.

At this time, there are no further questions. This concludes the Genco Shipping and Trading Limited conference call. We thank you for your participation. Have a nice day.