Genco Shipping & Trading Ltd (GNK) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited's Third Quarter 2010 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 at www.gencoshipping.com. We will conduct a question-and-answer session after opening remarks. Instructions will follow at that time. A replay of the conference will be accessible at any time during the next two weeks by dialing 888-203-1112 or 719-457-0820 and entering the passcode 9554841.

At this time, I'd 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 risk and uncertainties that could cause actual results to differ from 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, 2009 and the Company's subsequent reports filed with the SEC.

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

Good morning, and welcome to Genco's third quarter 2010 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 third quarter and year-to-date highlights, as outlined on slide three of the presentation. I will then turn the call over to John to review our financial results for the three months period ended September 30, 2010. Following this, I will discuss the industry's current fundamentals. John, Peter and I will then be happy to take your questions.

During the third quarter, Genco made significant strides in the execution of the Company's growth strategy. As we continue to capitalize on an attractive acquisition environment and expand our high-quality fleet, we also took advantage of the Company's considerable time charter coverage enabling Genco to once again post strong quarterly results for shareholders.

Turning to slide five, net income attributable to Genco for the three months ended September 30, 2010 was $36.2 million or $1.07 basic and $0.99 diluted earnings per share. Genco's cash position, excluding Baltic Trading Limited, was $225.8 million, which reflects the strong cash flow generated by our modern fleet. On a consolidated basis, Genco's cash position was $285.9 million, which includes Baltic Trading cash position of $60.1 million.

During the third quarter, we further strengthened our industry leadership with the delivery of 14 drybulk vessels that we agreed to acquire in June. Specifically, we took delivery of 12 Supramax vessels under our agreement to acquire 13 Supramax vessels from Setaf SAS, a wholly owned subsidiary of Bourbon SA. We also took delivery of two Handysize vessels pursuant to our agreement to acquire five Handysize vessels from companies within the Metrostar group of companies.

In support of our ongoing success actively consolidating the drybulk industry, we entered into a $253 million senior secured credit facility and a $100 million senior secured credit facility, which John will discuss in more detail later in the call.

Additionally, we further enhanced our financial flexibility during the third quarter by completing a concurrent $125 million convertible notes offering and a $57.5 million follow-on common stock offering in the quarter underscoring our future growth prospects.

Moving to slide six, we provide a summary of our fleet pro forma for the vessels remaining to be delivered. The 18 vessels that we agreed to acquire combined to expand our fleet by 31% on a deadweight tonnage basis, excluding Baltic Trading vessels. Importantly, each of the 14 newly acquired vessels that we received during the third quarter commenced time charters upon delivery. Moreover, six of the 12 Supramax vessels were locked away on one to two-year time charters at rates ranging from $18,500 per day and $20,250 per day, as management has capitalized those improving market conditions.

Going forward, we will maintain our focus on providing shareholders with sizable contracted revenue streams, while maintaining the ability to take advantage of a rising freight environment. In seeking opportunities to increase our significant time charter coverage, we remain committed to seeking contracts with high-quality counterparties as we have in the past.

Our longstanding relationships with top international charters such as Cargill International, Lauritzen Bulkers A/S, Louis Dreyfus Corporation and others serves as a core differentiator for our Company and bodes for Genco's future performance. Upon delivery of the three remaining Handysize vessels and one remaining Supramax vessel that we agreed to acquire and excluding Baltic Trading Limited fleet, we will own a fleet of 53 drybulk vessels, consisting of nine Capesize, eight Panamax, 17 Supramax, six Handymax and 13 Handysize vessels, with a total carrying capacity of approximately 3,812,000 deadweight.

At the time, the average age of our fleet will be 6.4 years, well below the industry average of approximately 15 years. With a modern and versatile fleet that adheres to the highest industry standards, we remain well positioned to provide quality tonnage and top-rate service for our leading customers.

I will now turn the call over to John.

Thank you, Gerry. Turning to slide eight, I will begin by providing an overview of our financial results for the third quarter and nine months ended September 30, 2010. Please note that we are reporting our financials on a consolidated basis as a result of the Baltic Trading IPO in March 2010 and our 25.4% equity ownership in the company.

For the three and nine-month period ended September 30, 2010, we recorded voyage revenues of $117.6 million and $317.6 million respectively. This compares with revenues for the third quarter of 2009 and nine months ended September 30, 2009 of $92.9 million and $283.3 million respectively. The year-over-year increase was mainly due to the increase in the size of our fleet.

Operating income for the third quarter and nine-month period ended September 30, 2010 was $57.8 million and $161.2 million respectively. This compares with operating income for the third quarter and nine-month period ended September 30, 2009 of $50.2 million and $158.6 million respectively. The increase in operating income for the three and nine-month period ended September 30, 2010 compared to the corresponding year-earlier period is attributable to higher revenues, offset by higher expenses, both of which are associated with the operation of a larger fleet.

Interest expense for the third quarter of 2010 was $19.4 million and $50.6 million for the nine-month period ended September 30, 2010. This compares to interest expense of $16 million for the third quarter of 2009 and $45.4 million for the nine-month period ended September 30, 2009.

The Company recorded net income attributable to Genco for the third quarter of 2010 of $36.2 million or $1.07 basic and $0.99 diluted earnings per share. Net income attributable to Genco for the nine months ended September 30, 2010 was $106.4 million or $3.30 basic and $3.19 diluted earnings per share. This compares to net income attributable to Genco of $34.3 million or $1.10 basic and $1.09 diluted earnings per share for the third quarter of 2009, and net income attributable to Genco of $113.1 million or $3.62 basic and $3.60 diluted earnings per share for the nine-month period ended September 30, 2009.

For the three and nine-month period ended September 30, 2010, Genco also recorded income tax expense of $467,000 and $1.2 million respectively. This income tax expense includes federal, state and local income taxes on net income earned by Genco Management USA Limited, one of our wholly-owned subsidiaries, and relates to income generated from the technical and commercial management of vessels for Baltic Trading Limited, sale and purchase fees payable to us by Baltic Trading Limited and the technical management of vessels for Maritime Equity Partners.

Next on slide nine, you will see the income statement effects of Baltic Trading's consolidation with Genco Shipping & Trading Limited. This will provide you with a more detailed breakdown of the financial performance of the two separate companies.

Key consolidated balance sheet and other items as presented in slide 10 include the following. Our cash position was $285.9 million as of September 30, 2010. Excluding the consolidation of Baltic Trading, Genco's cash position was $225.8 million. Our total assets as of September 30, 2010 were $3.1 billion, consisting primarily of our current fleet, cash and cash equivalents, deposits on vessels and our investment in Jinhui Shipping and Transportation. Our EBITDA for the three months ended September 30, 2010 was $85.9 million, which represents an EBITDA margin of 72.8% of revenues.

Moving to slide 11, our utilization rate was 98.4% for the third quarter of 2010 compared to 99.5% in the year-earlier period. Our time charter equivalent rate for the third quarter of 2010 was $26,819. This compares to $30,743 recorded in the third quarter of 2009. The decrease in time charter equivalent rates resulted from lower charter rates in the third quarter of 2010 versus the third quarter of 2009 for 17 of the vessels in our fleet, as well as the addition of sub-Capesize vessels from the Metrostar and Bourbon acquisitions and the consolidation of Baltic Trading's fleet, which also consists predominantly of sub-Capesize vessels. This was partially offset by higher charter rates for 17 of the vessels in our fleet.

For the third quarter of 2010, our daily vessel operating expenses were $4,918 per day versus $4,878 per day for the third quarter of 2009. Daily vessel operating expenses for the nine months ended September 30, 2010 were $4,785 per day versus $4,789 per day for the nine months ended September 30, 2009. The increase in daily vessel operating expenses for the third quarter of 2010 compared to the prior-year period is primarily due to higher crude cost.

While daily vessel operating expenses year-to-date have been below budget due to the timing of purchases of spare parts, as well as lower-than-anticipated crew, lubricants and insurance costs, we believe daily vessel operating expenses are best measured for comparative purposes over a 12-month period in order to take into account all the expenses that each vessel in our fleet will incur over a full year of operation. Based on estimates provided by our technical managers and management's expectations, we expect our daily vessel operating expenses to be $5,100 per vessel per day for the fourth quarter of 2010 on a weighted average basis.

On slide 12 we present our pro forma balance sheet, which shows our pro forma cash position of $203.1 million, which includes $4.69 million in sale and purchase fees payable under the Bourbon acquisition and $17.96 million of estimated debt amortization under our three credit facilities for the fourth quarter of 2010. Pro forma cash excludes Baltic Trading Limited's cash balance of $60.1 million. Our pro forma debt-to-total capital ratio was 60% as of September 30, 2010.

As mentioned earlier on the call, Genco solidified its position as an industry bellwether with the acquisition of five Handysize vessels and 13 Supramax vessels at attractive prices near historic lows. With these transactions, which meet our strict return criteria related to earnings and cash flow creation, as well as return on capital hurdles, we have further strengthened our future commercial prospects to capitalize on the positive long-term demand for essential drybulk commodities, and increase the Company's earnings power for the benefit of shareholders.

We are pleased of already taken delivery of 14 vessels, which have been seamlessly integrated into our existing infrastructure. Of note, a detailed payment and delivery schedule of the four remaining vessels to be delivered to Genco is included in the appendix of our presentation.

In support of our significant growth, we executed the $253 million senior secured term loan facility to fund or refund to us a portion of the purchase price of vessels acquired from Bourbon. We also executed the $100 million senior secured term loan facility to fund or refund to us a portion of vessels acquired from Metrostar.

Under the terms of the five-year $253 million senior secured credit facility led by BNP Paribas, Credit Agricole, DVB Bank, and Deutsche Bank, amounts borrowed bear interest at LIBOR plus a margin of 3%. Borrowings are to be repaid quarterly with the outstanding principal amortized on a 14-year profile depending on the age of the vessel. And under the terms of the seven-year $100 million senior secured credit facility led by Credit Agricole, CIC and SEB, amounts borrowed bear interest at LIBOR plus a margin of 3%. Borrowings are to be repaid quarterly with the outstanding principal amortized on a 13-year profile.

In addition to expanding our relationships with global lending institutions in securing new bank debt during a challenging credit market, we completed concurrent public offerings of $125 million in senior unsecured convertible notes and $57.5 million in newly issued common stock, which includes full exercise of the over-allotment options exercised by the underwriters. Gross proceeds of approximately $182.5 million from these offerings were used to fund a portion of both the Bourbon acquisition and the Metrostar acquisition, as well as for general corporate purposes.

On slide 13, we present our anticipated expense levels for the fourth quarter. We expect our Q4 2010 daily vessel operating expense budget to be $5,100 per vessel per day on a weighted basis of an average number of 49 vessels. We expect our daily free cash flow expense rate to be $14,702 per day and our daily net income expense rate for Genco consolidated to be $17,165 per day per ship.

On slide 14, we provide the convertible debt terms and guidance on the accounting treatment of the securities. The convertible securities will carry an annual interest rate of 5% and will be convertible into shares of Genco common stock at a strike price of $19.60 per share, representing a 22.5% conversion premium.

Diluted earnings per shares accounted for using the if-converted method under US GAAP. The reconciling items for that treatment concern net income in the numerator and diluted shares outstanding in the denominator. Total interest expense associated with the convertible notes, which already flows through the income statement, gets added back to net income, while the number of shares that the convertible notes could convert into get added to the denominator under the weighted average common shares outstanding. This is detailed in full on slide 14.

I will now turn the call back to Gerry to discuss the industry fundamentals.

Thanks, John. I'd like to take this opportunity to spend a few moments discussing the industry fundamentals. I'll start with slide 16, which points to the drybulk indices. Represented on the slide is the overall Dry Baltic Index. As can be seen when looking at the graph, the BDI showed relative weakness in July and August of 2010 where signs of strength displayed following the summer low, as the iron ore shipments sent to China increased following the completion of price negotiations.

The concurrent return of grain cargos for the North American grain season also pushed freight rates up during the second half of the quarter. We note that the Capesize sector was affected the most during the summer low, mainly due to the vessel's dependence on iron ore and coal cargos. Supramax and Panamax vessels on the contrary maintained a more stable earnings profile through the cycle, as a result of the broader cargo versatility of the vessels and demand strength of the minor bulks and coal.

Moving on slide 17, we summarize the current demand side fundamentals. As indicated on the graph at the bottom right, Chinese steel production reached 474 million tons for the first nine months of 2010, showing a 12.7% increase over last year's production figures. Over 457 million tons of iron ore were imported into China for the same period.

We believe that the long-term fundamentals of the iron ore trade remain in tact, as displayed by the return of Chinese buyers in the market during September 2010. In the bottom left of the slide, we can see that moderate increases of iron ore imports from the traditional importers such as Japan, South Korea and Europe are beginning to reestablish a base line amount of seaborne trade.

We also know that in the short term we expect to a see a spike in iron ore buying ahead of the Chinese New Year followed by potential temporary volatility immediately after. Evidence of the immediate need of iron ore imports also comes from the relatively low iron ore inventories at Chinese ports, which currently stands at approximately 69 million tons as compared to a high of 75 million tons during 2010.

On the coal front, a cold Chinese winter coupled with robust electricity demand led to a thermal coal import surge during the last two months. We also expect coal inventory building ahead of the Northern winters combined with increasing demand for electricity and steel production to positively affect freight rates through the fourth quarter of 2010. Although the effect of inventory restocking might not be of a great extent in China, stockpiles at over 20 of India's power plants are estimated at less than seven days, a figure identified by India's Central Electricity Agency as critical.

The country's coal imports have already experienced significant increases through 2010 and we expect to see the same trend going forward. 2010 Indian coal imports are currently expected to grow by 25% on a year-on-year basis. Lastly and to a lesser extent, the beginning of the northern hemisphere grain season has led to increased demand for our sub-Capesize vessels. We believe the effects of grains will be amplified through the end of the year due to Russian grain export restrictions increasing overall ton-mile demand.

Moving to slide 18, we show the expansion plans of key iron ore producers, as recently revised by the respective companies. On the left side of the slide you can see the combined iron ore expansion plans for BHP, Fortescue, Rio Tinto, Vale, and MMX through 2014, which accumulate to 524 million tons or 57% of 2009's seaborne iron ore trade.

Of note here is Vale's recent approval of a revised $24 billion investment budget for 2011, allowing the company to reach iron ore production of 522 million tons by 2015. India's steel demand is also indirectly influencing the iron ore trade and should support iron ore production increase around the rest of the world. As the country's iron ore production gets absorbed by domestic demand for the commodity, the government is taking measures to reduce exports thereby increasing the need for China to source from Brazil and Australia.

The federal government has already imposed a 5% duty on exports and is considering raising it to 20%. Local governments such as out of Karnataka Region have gone as far as placing a ban on iron ore exports altogether. India's growth profile will also positively affect the coal trade, as increased demand for coal to fuel domestic electricity consumption and steel demand will be needed in the medium to long term. Plans to build large coal-powered electricity plants are already in place and their coastal locations imply dependence on imported coal.

Furthermore, we believe that recently revised forecast for 2010 [apparent] steel usage give an indication that additional demand for iron ore will come not only from increased steel production in China, but also rebounding steel production in the rest of the world, namely forecasts for overall steel demand were revised upwards for a second consecutive time to 15% from 11%, while growth in China steel usage remains at 7%.

On slide 19, we present our view for the supply side of the equation. Looking at the graph on the bottom left of the slide, we can see the drybulk order book through 2013. Although the project drybulk order book still represents approximately 54% of the existing fleet, it is questionable whether it will be delivered in its entirety. The main factors behind potential delays or cancellations of new building deliveries are scarcity of capital and depressed vessel values. Although commercial banks have increased availability of debt capital in the shipping sector, it is still limited. Furthermore, depressed vessels' values imply loan covenant renegotiations for existing new building orders and higher equity installments from illiquid owners.

Slippage also continues to be a major factor on the supply side and is estimated that slippage continued at approximately 40% for the first nine months of 2010. Approximately 33% of the world's fleet is 20 years or older. As we have indicated in past calls, bulk carrier scrapping is not mandated, it is more of an economical equation.

As illustrated on the graph at the bottom right of the page, 82 vessels have been scrapped year-to-date in 2010, showing a slight increase in sight of our lower freight rate environment through the first half of 2010, while 260 vessels were scrapped in 2009.

This concludes our presentation and we're now happy to take your questions.

Thank you. (Operator Instructions) And we'll take our first question from Doug Mavrinac with Jefferies & Co.

Very thank you, operator. Good morning guys.

Good morning.

Good morning, Doug.

Just had a few follow-up questions. And the first is on Gerry's commentary on the order book slippage and not so much as far as what we can expect going forward, but just kind of as an observation. The order book slippage has been 30% to 40% for two years now. And while you guys kind of factored into your expectations as do we, many in the market kind of just see that number out there as the projected deliveries for the next couple of years.

Was it being wrong and grossly wrong for the last years? What do you guys think it will take to get some of the keepers of the order book to tighten that thing up, so people have a better idea as far as what real supply growth is likely to look like over the next two to three years?

It's not going to happen because they're not going to admit that they don't have the order until the date is passed. So when you look at the big order book, and to me, I think the farther I could go, the less likely ships are going to be delivered because if you can think about it, most of those ships were options or ships ordered in 2008 at prices far higher than today. So I think the farther I could go, the more slippage or cancellations there will be.

Got you. Got you. All right. Great. Thanks, Peter.

(inaudible) in those people to make an assessment and then just say, these ships aren't going to be delivered.

Right, right. Okay. Great. Thank you. And then second question, a kind of big topic in the marketplace. QE2 announced yesterday oil's pushing $87 today, commodity prices in general are strong. Everyone is kind of talking about around the corner inflation potentially coming. Historically, as it relates to shipping and shipping asset values, how do those asset values react and act in an inflationary environment just from a historical perspective?

Yes. I mean, Doug, in drybulk anyway vessel values are very highly correlated with earnings. And then secondly to the price of steel because obviously there's a large piece of the new building price that is made up of steel. And that also translates into secondhand prices. So inflationary with the price of steel, you'll see vessel values most likely go up, but there's still this very high correlation of what the cash flows are off the ships.

Got you. Got you. Got you. Okay. Great. Thank you. And then just final question, as it relates to consolidation opportunities, clearly you guys have been active in the secondhand market buying ships at attractive values. My question is more of kind of just more theoretical. Going forward, we have a lot of share prices that are trading below net asset values, do you see potentially any consolidation of and amongst the publicly traded companies just given some of those discounts or are there just too many complications involved in doing a public-on-public acquisition versus a very deep private market acquisition?

We've had discussions with some public companies and I think what you said just a minute ago, there's just too much complication. I mean there's one company we've been speaking to for over two years now.

Right.

No, there's always some new excuse to why things can't move forward whereas you see a private opportunity, look at Bourbon, I mean that's a remarkable -- the speed that that deal was done and the speed that the company's company took delivery of those ships is just amazing, and I'm not patting myself on the back, I've got nothing to do with taking delivery of those ships. But taking 14 ships in one quarter is a huge, huge thing and so we can move very fast. We're having a discussion down at Genmar, we had sent something to a big public company and when the email came back, we saw that it took a month for them to make a decision. Whereas with us it's sort of four minutes and we'll come back to you with a decision.

Got you.

Not the issue. We act like a private company here even though we're public.

Got you. Got you. All right. Excellent. Great. Thank you very much, Peter.

And next we have Jon Chappell with JPMorgan.

Thanks. Good morning, guys.

Good morning, Jon.

John, with more than $200 million of cash on the balance sheet, only $70 million of equity capital commitment is left and by our forecast you'll be very free cash flow positive in 2011 for the first time since you went public, assuming that you call the acquisitions a little bit.

What's the primary use of cash as you think about it for 2011? And then the second way of asking that, I would imagine it would be debt pay down, but how are you sitting with your covenants right now and is the reinstatement of the dividend likely in the next 12-month period?

Okay. First of all, yes, I mean, right now we've obviously done two big acquisitions, 18 ships in total this year. So we want to get all that absorbed in and then consolidate and take a look at where we go from there, but I would say that debt pay down is the priority right now. But again, we're going to still look at acquisitions and be opportunistic. We don't think vessel values are necessarily going to jump up very quickly anytime soon. So I still think there are opportunities out there.

As far as the covenants, the only covenant that we have an issue with has been waived indefinitely, which is the collateral maintenance clause and we're still not in a position to put that back into place and pay dividends and I think it'll happen, but I think it'll come from a combination of eventually rising vessel values, as well as cash flow buildup and debt pay down. But it's not something that I see happening right now over the next couple quarters.

Understood. And the second question has to do with the charter renewals. You've put a bunch of the Capes that have been rolling off contracts on one year. Deals, which is understandable given where the market is right now. But you still have a lot of ships expiring in the next, call it eight weeks across all the asset classes.

I guess there's two things you want to think about, one is timing the market and I guess you probably don't want to put things away on a long-term period, if you think that the rates are at a low point in the cycle. But at the same time you probably don't want to have re-chartering risk consolidated into one very short period of time. So as you think about the re-chartering of all those ships, are you going to try to stagger some of the re-charters, maybe not go one to three years, but maybe four to six months or five to seven months to a year or two?

Yes, I mean we've been doing that, Jon. I think it depends on where rates are at the time. I mean, if we think we can get a really good one, two or three-year rate we're obviously going to do it. But our goal for next year is to, the original strategy of Genco to get to the 70%, 75% fix, that hasn't changed, we're just picking our spots.

Keep in mind that while it may look like there are a lot of vessels rolling off in the next [eight weeks] there, there are definitely several. But as we report time charters, we report the earliest re-delivery day and a lot of times those vessels go past that date.

Right. Okay.

So I think it's probably a little more stagger than you might -- than it might look initially.

Got it. And then one last industry question for John or Gerry. There has been a lot of talk about these efficiency initiatives in China slowing down the steel production, shuttering mills. As you think about -- I think that's going to have an impact on the fourth quarter, but what's the outlook beyond, let's call the next two months on ramping up these steel mills, having China kind of ramp up their energy use again.

Yes. I don't think it's actually been that big of a factor, Jon. I mean, yes, we've seen some of the smaller, very inefficient mills close down, but you've seen some of that capacity being taken up by the large mills. I mean the large mills are not running at a 100% utilization right now. And with the margins, the price of steel versus iron ore, the steel margins are actually pretty good and the inventory numbers are definitely on the moderate side for steel. I don't see it having that much of an impact.

Okay. Thanks for you help, John.

And I don't think it has had much of an impact in fourth quarter, to be quite honest with you.

Okay. Appreciate the help.

Okay.

And next we'll have Gregory Lewis from Credit Suisse.

Thank you, and good morning. John, you touched on this -- on Jon's question, but in terms of thinking about the re-deliveries and you said it's not really going to be as concentrated as one might think. Should we sort of think about it where the charters that are significantly above rates maybe get delivered promptly and then the ones that are sort of at the market or even below the market sort of carry on for another one to two months as the agreements allow?

I think generally yes, but even the ones that are above market, you can't time these things perfectly. A lot of times there may be 15 days left or 20 days left on the charter. And somebody still has the use for the ship, so they book another 30 or 45-day voyage and that it goes past the initial period into the option period. But as a general rule I think you're correct, but there's certainly circumstances where it doesn't happen.

Okay, great. And then my other question is just regarding the Jinhui stake. I mean, clearly like you said, you've had this position and probably this was the company you're referring to or you've been talking about maybe doing something for the last two years. I mean, when I look at --

It wasn't. It wasn't.

Okay. When I look at that company's stock price, it's definitely rebounded from the lows of 2009 pretty sharply. I mean, at what point does Genco maybe look at this and just simply, so you know what, we can use this cash better elsewhere and sort of remove that position?

Look, I mean, it's not something that we really feel we need to do right now. So I think we're going to wait until particularly the Supramax market improves a little more and hopefully the Jinhui stock will trade up as well. We definitely have, as you can see, $200 million in cash. That number is obviously going to be higher at the end of the year. So we just don't see a need to really do anything right now.

Okay. Great. Thanks, guys.

(Operator Instructions) Next we'll go to Urs Dur with Lazard Capital Markets.

Good morning. My questions have been answered. Great presentation. Thanks.

Thank you.

Thanks, Urs.

All right. Next we'll go to Justin Yagerman with Deutsche Bank.

Good morning everyone. This is [Josh Katzeffan] for Justin.

Hi, Josh.

I just want to start off on kind of a market-related question. We've seen Cape rates increase last couple months, past month or so off of the iron ore and you haven't quite seen the same pickup in the Panamax and Supramax and Handy sector as well. Are you guys expecting [these costs] to increase and if so, do you see the same type of upside as the Capes?

Yes, I mean, I'm not sure what the potential upside is, but we do expect them to firm and the reason for that is we expect more coal to come into the market. We expect the Australian wheat to come more into the market. And there have been quite a few coal cargos fixed over the last couple weeks and I think you're going to see congestion winding back up again towards the end of November or early December. So yes, we expect to see some firming in Panamaxes and Supramaxes in particular.

A lot of the Supramax coal [get] into India at the moment as well. We got a lot of ships (inaudible) up there and there's a -- [just a lots] all in Supramaxes because [as they charged into barges some].

And your thoughts on the sustainability of the Cape -- of this Cape rate?

Look, I mean, I still think that overall fourth quarter is going to be good. I mean I'm not sure exactly where Cape rates are going to go on an absolute number. I don't think anybody can predict that. But we still think that it makes sense for China to continue producing steel and you look at the inventory numbers for iron ore, there are about 68 million tons, 69 million tons, which is on the lower side. And imported iron ore still cheaper than domestic. So I don't -- again I think we've had some softness this week. And I think this is part of the normal Chinese buying, they go in, they buy and then they pull back a little bit and I think that's all this is.

Got it. And --

And look, Cape rates are still $40,000 a day. I mean, I haven't seen the index this morning, but that's what they were yesterday. Those are good numbers.

Got it. And with regard to your comments on deleveraging, are you still targeting like 50% debt-to-cap that you mentioned in your Q2 call?

Yes. I think that's the right number.

Okay. And just one last question before I turn it over. Any thoughts on -- or any guidance you could provide on dry dockings in Q4?

Yes. In our press release, there is a section on dry docking, it's actually on page five. So for Q4 of this year, we've got one ship estimated cost of $600,000. And then for 2011, we're estimating $7.4 million of costs, which works out to 11 ships.

Great. Thanks.

Okay.

And next we'll go to Fotis Giannakoulis with Morgan Stanley.

Yes. Good morning, gentlemen. Congratulations for the strong quarter. I want to ask you in relation to Baltic and how do you view the growth of Baltic, and if you're envisioning a strategy that resembles the strategy of Teekay with its daughter companies. The question actually is whether now that Baltic is going to grow its dividend, you are thinking potentially of dropping down assets to the subsidiary?

As fat as we've said time and time again, we have no intention of dropping any ships from Genco down to Baltic. Baltic is a separate company. We think when you do vessel drop-downs, it creates conflicts of interest and we're just not interested in that. So that's very straightforward and that hasn't changed from day one. As far as the dividend, it's a variable dividend based on spot earnings. And all nine ships are under index-related time charters. So it's pretty easy to calculate the revenue stream at the end of the quarter.

Thank you, gentlemen.

Okay.

And we'll take our final question from Michael Webber with Wells Fargo.

Hey, good morning guys. How are you?

Good. How are you?

Good, good. And most of my questions have been answered. Just wanted to touch on a couple things on the chartering market and maybe you can just kind of lend your insights into what you're seeing now. We've heard on a couple other calls that the disconnects and I guess the discount between longer-term charters and maybe one-year charters had grown a bit. Have you guys seen any of that in the market and has that impacted your chartering strategy at all?

I don't think it's impacted our chartering strategy. I mean, there is always obviously a market rate. I mean, I think there is -- spot rates are obviously higher than one-year rates, but I don't think that's unusual. And we definitely have backwardation in the FFA curve, but again that's not something unusual. The FFA curve traditionally past three months has not really predicted the freight environment.

Fair enough. Fair enough. As far as profit-sharing agreements, has there been any change in, I guess, the availability there? Specifically from larger counterparties, are they still open to doing things with profit-sharing agreements?

Yes, I think every -- any large sophisticated charter is going to be open to the profit sharing, because at the end of the day it's just putting some sort of call spread on it, on a charter, that's all it is.

Right. Fair enough. I guess last question I think -- forgive me, I think you might have touched on this a little bit earlier and I know John mentioned that you guys are going to be selling awful lot of cash in the next year or two. When we think about the dividend, you mentioned in the second quarter, call kind of a target debt-to-cap somewhere in the 50% range. Is that kind of the benchmark we should look at before we seriously consider you guys repaying the dividend?

I'm not sure if I would tie the two together because, as I said before, I think that dividend comes back obviously when the collateral maintenance cost is put back into place. But I think that's going to be paying down debt with cash flow, as well as a firming in asset prices. So I don't think it's both.

Okay. All right. Great. Thanks a lot for the time, guys. Appreciate it.

Okay. Take care.

That concludes today's question-and-answer session and on behalf of Genco we'd like to thank you for participating in today's conference.