Genco Shipping & Trading Ltd (GNK) 2011 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Genco Shipping & Trading Limited Second Quarter 2011 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. We would like 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 assessable at anytime during the next two weeks by dialing 888-203-1112 or area code 719-457-0820 and entering the pass code 3453552.

At this time I will 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 pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Management's current expectations and observations.

For a discussion of factors that could cause results to differ, please see the Company's press release that was issued yesterday and the materials relating to this call are 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, 2010 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 Second Quarter 2011 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 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-month period ended June 30, 2011. Following this, I will discuss the industry's current fundamentals. John, Peter and I will then be happy to take your questions.

During the second quarter, Genco continued to integrate our latest acquisitions into our existing infrastructure and increased the scale and scope of our operations while maintaining an opportunistic time charter approach in an effort to capitalize on rising freight rates as the market conditions improve.

Turning to slide five, net income attributable to Genco for the three months ended June 30, 2011 was $10.1 million or $0.29 basic and diluted earnings per share. Genco's cash position excluding Baltic Trading Ltd. was $292.1 million, which reflects the cash flows generated by our sizable fleet.

During the quarter we further strengthened our industry leadership with the delivery of the GencoAvra, a 34,000 deadweight Handysize newbuilding. Building upon our consolidated success, we took delivery last week of another 34,000 deadweight Handysize newbuilding, the Genco Mare; the fourth of five vessels to be delivered to Genco under our 2010 agreement to acquire five Handysize vessels from the companies within the Metrostar group of companies. Both vessels are on long-term spot market related tank charters with Cargill International SA, a leading international producer and marketer of food and agricultural products.

Additionally, we extended a tank charter for the Genco Pyrenees, a 2010 built Supramax for six to 8.5 months at a rate of $15,250 per day.

Going forward we will continue to seek opportunities to secure our vessels on short-term or spot market related contracts with a diverse group of reputable multinational companies, a core differentiator for our company that preserve the ability to take advantage of a rising freight rate environment.

Moving to slide six, we provide a summary of our fleet pro forma for the last vessel remaining to be delivered. As I mentioned earlier, we recently took delivery of 2 Handysize newbuildings, increasing the number of newly acquired vessels delivered to Genco over the past year to 17. With the 5 Handysize vessels we agreed to acquire from Metrostar, combined with the acquisition of 13 Supramax vessels from affiliates of Bourbon SA which we completed earlier this year, Genco is poised to expand its world class fleet by 31% on a deadweight tonnage basis, excluding Baltic Trading's vessels.

By actively consolidating the drybulk industry, as we have consistently done in the past, we have further strengthened Genco's leading brand as an owner and operator of modern tonnage and enhanced the company's ability to capitalize on the positive long-term demand for essential commodities in China, India and other developing countries.

Of note, a detailed delivery and containment schedule of the remaining Handysize vessels to be delivered to Genco is included in the appendix of our presentation.

Upon completion of the Metrostar acquisition and excluding Baltic Trading's fleet, we will own a fleet of 53 drybulk vessels, consisting of 9 Capesize; 8 Panamax; 17 Supramax; 6 Handymax; and 13 Handysize vessels, with a total carrying capacity of approximately 3,811,000 deadweight tons. At that time, the average age of our fleet is expected to be 6.5 years, well below the industry average of approximately 13 years.

Our modern and versatile fleet bodes well for Genco to continue to provide top international charters for service that meets or exceeds the highest industry standards. 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 second quarter and six months ended June 30, 2011. Please note that we are reporting our financials on a consolidated basis as a result of the Baltic Trading IPO in March of 2010 and our 25.2% equity ownership in Baltic Trading.

For the three and six-month period ended June 30, 2011 we recorded total revenues of $98.5 million and $199.1 million respectively. This compares with revenues for the second quarter of 2010 and six-months ended June 30, 2010 of $105.3 million and $200 million respectively. The decrease in total revenues for the second quarter of 2011 compared to the prior year period is primarily due to lower charter rates achieved by some of our vessels, offset by the increase in the size of our fleet and consolidated revenues from Baltic Trading Ltd.

Operating income for the second quarter and six-month period ended June 30, 2011 was $31.6 million and $65.4 million respectively. This compares with operating income for the second quarter and six-month period ended June 30, 2010 of $54.9 million and $103.4 million respectively.

The decrease in operating income for the three and six-month period ended June 30, 2011 compared to the corresponding year-earlier period, is attributable to higher expenses associated with the operation of a larger fleet and lower rates achieved for our fleet in the respective periods of 2011.

Interest expense for the second quarter of 2011 was $21.5 million and $42.9 million for the six-month period ended June 30, 2011. This compares to interest expense of $15.8 million for the second quarter of 2010 and $31.2 million for the six-month period ended June 30, 2010.

The Company recorded net income attributable to Genco for the second quarter of 2011 of $10.1 million, or $0.29 basic and diluted earnings per share. Net income attributable to Genco for the six months ended June 30, 2011 was $23.5 million or $0.67 basic and diluted earnings per share. This compares to net income attributable to Genco of $36.8 million or $1.17 basic and $1.16 diluted earnings per share for the second quarter of 2010 and net income attributable to Genco of $70.2 million or $2.24 basic and $2.23 diluted earnings per share for the six-month period ended June 30, 2010.

For the three and six-month period ended June 30, 2011 Genco also recorded income tax expense of $355,000 and $714,000 respectively. This compares to income tax expense of $719,000 for both the second quarter and six-month period ended June 30, 2010. This income tax expense includes federal, state and local income taxes on net income earned by Genco Management USA Ltd, one of our wholly-owned subsidiaries, and relates to income generated from the technical and commercial management of vessels for Baltic Trading Ltd, sales and purchase fees payables to us by Baltic Trading Ltd. if any, and service revenue from the technical management of vessels owned by Maritime Equity Partners.

Next on slide nine you will see the income statement effects of Baltic Trading's consolidation with Genco Shipping and Trading Ltd. 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 on slide 10 include the following. Our cash position including restricted cash was $296 million as of June 30, 2011. Excluding the consolidation of Baltic Trading, Genco's cash position was $292.1 million. Our total assets as of June 30, 2011 were $3.2 billion, consisting primarily of our current fleet, cash and cash equivalents. Our EBITDA for the three months ended June 30, 2011 was $65.8 million, which represents an EBITDA margin of 66.3% of revenues.

Moving to slide 11, our utilization rate was 99.4% for the second quarter of 2011, which was the same rate compared to the year-earlier period. Our time charter equivalent for the second quarter of 2011 was $18,299 per day per ship. This compares to $30,405 recorded in the second quarter of 2010. The decrease in time charter equivalent rates resulted from lower charter rates achieved in the second quarter of 2011 versus the same period last year for the majority of the vessels in our fleet.

Reduced cargo availability due to weather related disruptions that occurred in the first quarter of 2011, combined with continued newbuilding vessel deliveries during the second quarter of 2011 were the main contributors of reduced rates.

For the second quarter of 2011 our daily vessel operating expenses were $4,700 per day versus $4,671 per day for the second quarter of 2010. Daily vessel operating expenses for the six months ended June 30, 2011 were $4,723 per day versus $4,697 per day for the six months ended June 30, 2010. The slight increase in daily vessel operating expenses for the second quarter of 2011 compared to the prior-year period is primarily due to slightly higher crude costs, offset by lower insurance and lube expenses.

While daily vessel operating expenses for the second quarter of 2011 were 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 of 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 daily vessel operating expenses for the second half of 2011 to be $5,000 per vessel per day on an average weighted basis.

On slide 12, we present our pro forma balance sheet which shows our pro forma cash position of $263.1 million, which includes $19.1 million of estimated debt amortization under our three credit facilities for the third quarter of 2011, as well as the remaining $9.9 million cash payments for the delivery of the Genco Mare, which delivered in the third quarter of 2011.

Pro forma cash excludes Baltic Trading Limited's cash balance of $3.9 million. Our pro forma debt to total capital ratio was 59% as of June 30, 2011.

We intend to draw upon our current liquidity position to fund the remaining Metrostar vessel, as mentioned earlier on the call and we are committed to maintaining an appropriate capital structure and strong balance sheet for the benefit of our shareholders.

On slide 13 we present our anticipated expense levels for 2011. We expect our daily vessel operating expenses for the second half of 2011 to be $5,000 per vessel per day on a weighted average basis and an average number of ships of 51.79 vessels. We expect our daily free cash flow expense rate to be $14,474 and our daily net income expense rate for Genco consolidated to be $16,788 per vessel per day.

Before I turn the call back to Gerry, I would like to reiterate that during these challenging times we continue to maintain a strong liquidity position, including $292.1 million in cash at the end of the second quarter, which enhances the company's ability to operate in a soft rate environment.

Thank you John. I will now take this opportunity to spend a few moments discussing the industry fundamentals. I will start with slide 15, which points to the Drybulk Indices.

Represented on this slide is the overall Baltic Dry Index. As can be seen when looking at the graph, the BDI showed relative weakness beginning in November 2010, which has continued so far through 2011, with freight rates under considerable pressure since the beginning of the year. The lower index was mainly driven by a deteriorating freight rate environment in the Capesize sector. Supramax and Panamax vessels maintained a more stable earning profile through the cycle as a result of broader cargo versatility of the vessels and demand strength of (inaudible) bulks.

On slide 16 we summarized the recent market developments and the catalysts as we see them for the drybulk freight market going forward. First, I direct you to the world fleet on the right side of the slide. A substantial delivery schedule since the beginning of the year is evident by 382 vessels added to the existing fleet after taking into account scrapping of older tonnage. This implies a net growth rate of 4.7% for the entire fleet. It is important to note here that the Capesize vessels were the second highest scrapped vessels, following Handysize, despite their youngest average age.

Artificially reducing vessel supply in the short-term is the fact that combined with fleet congestion in Australia, Brazilian and Indian and Chinese ports currently stands at 50.6 million deadweight or 9% of the total drybulk fleet.

As mentioned in our last conference call, substantial rainfall in Eastern Australia during December of 2010 caused the flooding of many coal producing mines in Queensland as well as related infrastructure used to transport the commodity to the shipping terminals. The effects of the flooding lasted longer than expected but Australian coal and iron ore cargos appeared to be coming back on line as of June of this year, although coal exports from Queensland ports were still reported 18% reduced for June 2011, on a month over month basis. The return of coal cargos from Queensland in the second half of 2011 will be a positive development for the larger ships.

In China, strong iron ore fixtures have pushed iron ore inventories to new highs of 94.1 million tons, nearing their capacity of approximately 115 million tons. Recent heat waves in Southern and Central China have resulted in an increase in energy consumption, recording a record 397 billion kilowatt hours produced in June 2011, due to the fact that the majority of China's electricity plants are coal powered, the domestic seaborne transportation of steaming coal has pushed an increase in the [capitized] trade by 18% during the first six months of the year, to 319 million tons.

According to ICAP Shipping, the International Grains Council has predicted a 4.5% increase in grain production this year or approximately 78 million tons of grain. Although the increased grain production should bode well for freight rates, the return of Russian exports which were banned last summer, is expected to mute its effect from the trade.

Going forward we believe that a number of catalysts will affect the drybulk market. These short and long-term catalysts are listed on the bottom left of slide 16. First, there's an expected rebound in Japanese imports in the medium term, as the country begins its rebuilding efforts. The reconstruction of infrastructure in the areas most severely hit by the earthquake will require essential commodities such as iron ore, metallurgical coal, cement and lumber. Additionally, once coal power plants come back on line we would potentially see support to imports of the commodity as several nuclear power plants remain offline or have been retired.

Second, the increased scrapping of vessels is expected to be a positive trend this year. Additional scrapping potential is probable due to the combination of low charter rates and high scrap steel prices. With 51 Capesize vessels scrapped through June, earlier analyst predictions of 100 Capesize vessels demolitions by the end of the year seem realistic and could somewhat mitigate the effects of the influx of Capesize deliveries through the year.

Third, an important catalyst from the supply side is an expected slippage of newbuilding vessel deliveries as financial concerns continue. We believe that slippage in 2011 should alleviate some of the concerns of oversupply when coupled with growth and demand.

And fourth, China's 12th five-year plan is a long-term catalyst as it stresses numerous infrastructure programs such as the construction of highways, airports, hospitals and railways, as well as the urbanization and development of Central and Western regions. Coal consumption is expected to increase significantly as China plans to build 250 gigawatt coal fired plans by 2015. This implies an increase of approximately 600 million tons per year.

In the short-term, Chinese thermal coal exports are expected to set records this summer, due in part to the continued heat wave. In response to this, the Chinese government is considering reducing the VAT on coal imports which currently stands at 17%, by 3%.

Fifth, cargo volume expansion is expected as iron ore and coal miners increase production over the next few years. On slide 17, we talk more about the demand fundamentals, which emphasize China and further detail the impacts on its 5th 12-year plan. Chinese steel production has increased by 9.2% year on year, through the first half of 2011. Supported by continuous monthly steel production records, China Iron and Steel Association recently raised its expectations for 2011 crude steel output to 700 million tons.

Appetite for crude steel production stems from continuous infrastructure projects in China. In terms of housing, China is expected to build as many as 36 million housing units within the next five years. The country's urban fixed asset investment rose 25.6% year on year through the first six months of 2011.

Apart from building affordable housing units, China is expected to build 30,000 kilometers of railway track by 2015 and also to invest $185 billion in urban subway systems by 2015.

Moving to slide 18, on the left of the page we show the expansion plans of key iron ore producers as recently revised by the respective companies. You can see the combined iron ore expansion plans through 2015, which accumulate to 501 million tons per annum or 50.5% of 2010 seaborne iron ore trade. [Vales] in iron ore production plans are to reach annual production of 469 million tons in 2015 as compared to 308 million tons in 2010. The company has invested $2.9 billion in its Ponta da Madeira terminal in Northeastern Brazil, which upon completion will be able to handle up to 150 million tons of iron ore, a 50% capacity increase.

FBR Capital Markets expects 67% increase in coal exports from Australia, which would represent 198 million ton increase through 2015. Additional demand for iron ore will come not only from increased steel production in China, but also from rebounding steel production in the rest of the world. The World Steel Association forecasts growth in the overall market of 5.9% this year and 6% in 2012, that is 1,359 million tons and 1,441 million tons respectively.

On slide 19 we discuss the supply side fundamentals, which remain uncertain. First we will discuss the drybulk order book through 2014, which is depicted on the graph at the bottom left of the slide. The significant drybulk order book represents approximately 45% of the existing world fleet.

In past conference calls we have suggested that although the commercial bank market has returned to a certain extent, capital is still scarce and banks only lend to select clients. Furthermore, depressed vessel values imply higher equity installments for existing newbuilding orders from illiquid owners.

Second, we believe that scrapping will continue to play a significant role in 2011, especially if the freight rate environment remains at depressed levels over a prolonged period. Approximately 24% of the world fleet is 20 years or older, and 18% is greater than 25 years old. As illustrated in the graph at the bottom right-hand of the page, 13.5 million dead weight tons have been scrapped year-to-date as compared to 5.7 million dead weight tons for the entire year of 2010.

Bangladesh demolition yards have resumed operation, allowing for the more vessels to exit the market. As we have indicated in past calls, scrapping is essentially an economical equation. It is our opinion that the current combination of high scrap steel prices and suppressed freight rates would support increased scrapping.

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

(Operator instructions) Doug Mavrinac, Jefferies & Company.

Just had a quick question and the first one is kind of on the final point that John made during his commentary. It relates to the fact that despite obviously it's a very tough market environment, you guys are doing a really good job of bolstering your balance sheet. I think you mentioned that you have almost $300 million in cash excluding Baltic. My first question is, how does that current cash position that you've been able to accumulate, how does that compare to say your debt obligations over the next 12 months?

Well, let's talk about the amortization. We're amortizing approximately $19 million a quarter through June of 2012, that's when the amortization on the DMB facility moves up to about $48 million. That's a lot of cash to go through in the next 12 months. We don't see any cash issues.

Even before including your projected operating cash, right? You're talking about nearly $300 million today, amortization so $80 million over the next 12 months?

Yes, that's about right.

So clearly you guys are covered.

We're very comfortable with our cash position. We think the liquidity will get us through this soft market.

I agree. I just wanted to put it into some perspective as far as not just saying $300 million bucks but how long it's going to last and it sounds like it's going to last a while. Second question, it does pertain to your future operating cash flow. Should we expect you guys to pursue a similar strategy over the next 12 months of continuing to fortify your balance sheet or at some point do you start thinking about maybe pursuing some acquisition opportunities? Some guys are out there talking about maybe looking for opportunities now. Do you think it's too early for that or do you just kind of intend on more or less maintaining hey, we're going to fortify things and that's the disciplined thing to do?

I don't think it's too early to necessarily look at acquisitions, but I don't think our strategy has changed since last quarter in that we are focused on delevering and that's the number one goal though. Things have sort of picked up on looking at deals but clearly we haven't found anything we like and like I said, we want to de-lever and that's the first priority.

Perfect. And then just final question before I turn it over, looking at your cash flow and kind of how you're going to navigate the next 12 months, you have a number of vessels coming off of time charter contract; how do you think about balancing the employment of those assets? Because you know, historically you guys tend to put some of your assets away on longer-term contracts but kind of given where rates are right now, how do you maintain that balance of cash flow visibility with maintaining some upsize potential in a market that can really only go up from here?

Doug again, until rates recover, you're not going to see us fixing vessels under long-term contract. We just don't see the value in doing that right now. And there aren't too many owners that I think do see the value in that, I mean, you look at the period fixtures they are very low, way down from where they were even a year ago. So we think the best strategy right now is to do these index related deals or short-term time charters with the option to lock in as rates pick up.

Justin Yagerman, Deutsche Bank.

Following up on Doug's questions earlier on liquidity, obviously you guys have a good amount of cash on the balance sheet. Are you in discussions right now with lenders about potential debt to EBITDA issues and what are the potential resolutions around that? Could we see that amortization schedule get pulled forward or potentially see a cash call that might interrupt some of that cushion that you have?

Yes Justin, we are in conversations with them. Obviously not going to go into the details, except that we've faced covenant issues with them in the past, late 2008-early 2009 and we've always achieved a satisfactory solution with them.

I have to add in, John. In the 2008-2009 period, John did a remarkable job and we have a great relationship with our bank, so we're not concerned about it. We feel very confident of our position with our banks. We've got a lot of liquidity and we're going to continue our discussions and move forward.

Has anything changed in the mood in the tenor of discussions? We've seen at least one public US company get taken into receivership and you guys are far from that kind of--.

Not at all. With us, the conversations are great and that's not even in the realm of possibility. So, I don't know about other people, but with us, it's business as usual. They know we perform, we've always performed and so I think that's paying off for us.

Switching to another topic, counterparty issues are all of the sudden in the news again. I wanted to get a sense. Cosco has been a name that's been in the headlines. Do you guys have exposure? Can you remind us what, if any -- are any issues going on there?

We have one ship on with Cos Bulk which is actually a different counterparty from at least what I've seen in the press with Cosco Qingdao. I don't know exactly what's going on in that situation, but I do know with us that we've got a good relationship with Cos Bulk and payments are up to date.

That's great to hear.

Justin, throughout all of this, we haven't had anyone walk on us. Again, it's just a testament to the credit work we do before we do charters.

Absolutely. And you guys have Baltic ownership and Baltic's trading below net asset value at this point. Does that become a natural decision at some point, if it gets low enough, given that those are probably ships you've done the due diligence on?

I guess there's a lot of rumors in the market about Genco buying Baltic right now and you know, it's not in the plan right now.

Michael Webber, Wells Fargo.

I just wanted to follow-up on Justin's question regarding Baltic and I know you can't comment on it too much, but you did mention delevering as being kind of your primary focus and that would clearly be one way where you guys could de-lever by bringing in some lowly levered assets. Can you talk about some other ways you guys are thinking about doing that and I guess maybe in terms of potential asset sales or how are you guys approaching that strategic goal?

Again, I don't want to go into any real details but we're not looking at vessel sales and as I said with Baltic, that's not in the plan right now. The company is generating cash flow and that's what we're focused on right now.

So delevering is basically you're applying kind of organic cash flows towards your debt and keeping things close to your vest at this point?

Yes.

In terms of your OpEx guidance, it might have ticked up quarter-on-quarter but the guidance actually came down from Q1. Can you talk a little bit about where you guys were able to find some cost savings from the start of the year and give us a little bit of color in terms of what's going on there?

When we make up the budgets we put assumptions which we think are pretty accurate at the time, but for example, there was an increase in lube oil but we managed to mitigate that by negotiating it down, so the increase was a lot less. We've managed to hold crew wages steady. Things like that. Just careful budget management.

One final question, with regards to chartering, you mentioned not wanting to get too long in this market and we've seen a handful of people do that, but mostly not. How long would you go? I guess the question is, what's the longest you would consider short-term? Is it six months?

Yes, I would say it's, you know, what we've been doing is sort of four to six months on a short basis and then again we've been doing these 12-month index deals linked to the BDI or the subsections of the BDI, with a conversion option.

(Operator instructions) Fotis Giannakoulis, Morgan Stanley.

Briefly, I would like to follow-up on Mike's question about operating expenses. We have seen a decline for second consecutive quarter which is quite impressive. Is this rate a run-rate that we should use going forward on a stable basis? Are these permanent reductions in expenses or it's the timing of the year?

I think some of it is timing, some of it, as Jerry said, we've been able to keep costs below budget, but Fotis, as we've said, we're giving guidance for $5,000 per day per ship on an average weighted basis for the second half of this year. We brought the guidance down by $200 for the second half.

Thank you. I want to ask you a little bit about the macro picture and you talked about the Japanese reconstruction as a short-term catalyst. Can you give us your view, what will be the impact of the reconstruction and time wise where do you place it? Do you think it's going to be in the fourth quarter or later in the year?

I think timing wise it's probably end of this year, going into early next year getting ramped up. But you know, as we've said, we think it bodes well for iron ore and steel products as well as cement and lumber products to rebuild. I think there will be some increase on the steam and coal side for power production but I think the real push will be on the steel material.

Do you have a view of what will be the impact for example, last year we saw approximately 30 million tons they imported by Japan; do you have an idea of how much this can increase because of this reconstruction?

To put definitive numbers on it, I think is tough Fotis. If you look on slide 17 in the earnings presentation, we show what iron imports have been for Japan as well as Korea and China and the EU. I certainly believe that Japan is going to get back to its highs of September of 2008 and I think it will be surpassed. But putting solid numbers on it, it gets difficult.

Thank you. My last question is on asset values. We've recently seen a few transactions at lower prices, especially for old vessels. How do you think that this will develop in the near future and do you see these three getting to more younger vessels or even newbuildings?

Look, newbuildings are really a function of the price of steel. I think that newbuilding prices have gotten to the point where the margins are very very thin for shipyards, so I don't see much downward pressure on the newbuilding prices as long as the price of steel remains firm. And I think that translates into the new tonnage as well. I think there is a floor that's created by those newbuilding prices. So I don't see a lot of downside on newer modern ships.

But is there a point in asset values that if they drop enough, that might become sufficiently attractive for you to reevaluate your growth strategy and potentially come with additional acquisitions?

Yes. Look, I think right now particularly in the larger ships, the Capesize, obviously the earnings are not matching returns for the actual price of the asset, but you've seen this many times in drybulk, you've certainly seen it on the wet side and again, I just don't see these prices coming down much more, just because of the price of steel on the modern ships.

Last question, can you give us your view about the timing of the turnaround? Right now we have a significant oversupply of [tonnage] that keeps rates at the low levels, but is there a point, is it 2012, 2013 that you see the balance being restored and moving to much higher rates?

Look, we said it at your conference we thought sort of a 12 to 18-month window and what we based that on is a slowdown of new building deliveries but even more importantly, a lot of the expansion plans from the miners coming on-stream. You obviously have at least a projected big push in 2012 and then an even larger push in 2013. I think you've got 500 million tons coming on for iron ore over the next several years, which is more than half of what was shipped in 2010. So we're really looking for volume expansion as well as obviously a slowdown in the deliveries.

And the other thing I should add Fotis, because I think scrapping is obviously very important, it's surpassed most people's expectations and we think that's going to continue as well.

Scott Malat, Goldman Sachs.

I wanted to touch on just something with the industry in terms of the route changes and then how that affects industry ton miles. I think when Australia had some of the disruptions, you actually had some shorter routes. I'm wondering if you get some reversal on that or just any thoughts about any other shifts that you think would have an impact on industry ton mile?

As far as ton mile, Australia is still not shipping fully on the coal side and by some numbers they're still off 15% or so. While the infrastructure has all been restored, some of the mines have not resumed operation. So I do think you're going to have volume increase and ton mile increase as Australia gets back up to full capacity.

The iron ore side from Brazil, again they had their own weather related issues and infrastructure problems. That's just getting back up online and obviously that will increase ton miles as well. So I think those are the two factors. On the grain side, with Russia coming back in, I think it cancels out the increase in grain production that's projected, so I think that's sort of a net zero.

That's helpful. The other thing was just on, I know you're saying that scarce capital continues but actually the Handymax and Supramax vessels, we've actually seen order book increasing in the last quarter, you've seen some pretty low scrapping rates. How do you think about the outlook for rate here? They haven't dropped as much as some of the other vessel types. Is this something maybe you'd think about locking in some rates just to have some downside protection?

No, again we're comfortable with our strategy. I think on the Supramax side and the Handymax side I actually do think you're going to see some increased scrapping, particularly with the Handymax. Obviously not the new generation that are 52,000 and above, but the older ships there are quite a few and I think you'll start to see those go to scrap as well.

The order book picking up, just Handymax and Supramax?

There have been some orders but it hasn't picked up that much and I don't know what the financing arrangements are, obviously under those ships. And what you have to do is okay, yes, maybe there is some ordering, but let's look at the slippage in that sector as well. There are a lot of those ships that were ordered at very very high prices that don't have financing in place.

Okay. It just seems like we've hit on that theme before and we've still had deliveries. Yes, they had some slippage but we still have some supply problems obviously and it's always something we kind of turn to, but when you actually see the order books picking up--.

No one is saying that ships aren't coming in the market. We're saying they're not coming in as fast. Don't say that we've hit on it before. They are coming in the market, we admit that; they're just not coming as fast and a lot of the ships that we see being built in China technically have not been up to specifications and are not being delivered. So, don't say we've said it before, as if we're making some story up.

I also think that you've had a steadily increasing demand on the minor bulks, which has also helped those smaller ships.

Michael Pak, Clarkson Capital Markets.

A lot of my questions have been answered but just had one industry related question. Are you guys surprised at all, given where spot rates are on the larger vessels that we haven't seen any hot layups or any kind of activity where owners could perhaps take a more proactive stance to tighten the supply?

No, I think right now Michael, at least from an operating cost standpoint, it's always hard to tell what debt structures people have in place, but they're cash flow positive. What we have seen obviously is a real increase on the scrapping side, you know, 51 ships for the first half of this year. I think you could easily see that number in the second half of this year and you're also seeing some of the younger Capes, meaning 18-20 year old Capes going to the scrap yard. So I think owners are being proactive.

Chris Wetherbee, Citigroup.

Maybe back on the slippage side for a second when you think about the first half of the year it looks like slippage rates were a little bit lower than they've been running in the previous year. Probably some of that has to do with some tonnage that was ready to deliver at the end of 2010 getting pushed out to 2011 to get the new model year. Do you expect it to run back towards the tonnage at that 40% level that we've been seeing from the kind of 29 or 30% we've seen in the first half of the year?

Yes, we expect it to be 35 to 40% and that's our own opinion is formed from talking to quite a few analysts on the shipbuilding side.

And that outperformance in the first half, is that probably due to some of those delays coming from year-end into the front half of the year?

Definitely and we did it ourselves a couple of years ago where we pushed a ship into January to get the newer build date. Just to say, that's a common theme that you've seen year-over-year.

Absolutely, that makes sense. And when you think conceptually about your comments on kind of a rebound and rates when you look out to 12 to 18-month type of window, I guess just given how the order book continues to grow, we potentially have at least more of a maturation out of the growth of China. How do you think about the magnitude of a rate rebound? Clearly it doesn't seem like we're going back to the good old days of 2007-2008, but the Capes trade at $25,000 a day; is that a normalized type of environment? Is that a rate rebound? I'm just trying to get a sense of what your thoughts are when you kind of do your modeling out for the next couple of years.

At $25,000 a day would clearly be a rebound off of today's numbers. But I think a more normalized rate is probably in the mid 30s. Look, as you well know there is a ton of volatility in this industry and you could see a short term spike over the next 12 to 18 months. But what we're basically saying is the next 12 to 18 months we think it's going to be a challenging environment, after that we think hopefully you get a more normalized supply and demand balance.

Okay, that's helpful. And then just one final modeling question if I could, just on the service revenue side, you've seen just under a million the last two quarters. Is that a fair run-rate for us to use going forward and then the associated taxes with that amount? That's what generating your income tax expense the last couple of quarters, right?

Yes. I think it's a fair run-rate.

That does conclude today's question and answer session and that will conclude today's conference call. We thank you for your participation.