Genco Shipping & Trading Ltd (GNK) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Third Quarter 2018 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 these opening remarks. Instructions will follow at that time. A replay of the conference will be accessible anytime during the next 2 weeks by dialing toll-free 888-203-1112 or area code 719-457-0820 and entering the passcode 8797872. 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. Such forward-looking statements use words such as participate, anticipate, budget, estimate, expects, project, intend, plan, believe and other words and terms of similar meaning in connection with the discussion of potential future events, circumstances or future operating or financial performance. 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, 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, 2017 and the company's report subsequently filed with the SEC. At this time, I would like to introduce John Wobensmith, Chief Executive Officer of Genco Shipping & Trading Limited.

Good morning, everyone. Welcome to Genco's third quarter 2018 conference call. I will begin today's call by reviewing our third quarter highlights. We will then discuss our financial results for the quarter and the industry's current fundamentals and then open the call up for questions. Turning to Slide 5, we review Genco's third quarter highlights. During the third quarter, we made significant progress implementing our growth strategy further strengthening our earnings power and position for capitalizing on the recovering dry bulk market.

Importantly, we completed the acquisition of 6 high specification fuel-efficient Capesize and Ultramax vessels at an attractive point in the cycle given the earnings environment for both sectors. Specifically in July, we took delivery of the Genco Weatherly, a 2014-built Ultramax vessel. In August, we took delivery of 2, 2015 Capesize vessels, the Genco Endeavour and the Genco Resolute and in September, we took delivery of the Genco Columbia, a 2016 Ultramax vessel as well as 2, 2016-built Capesize vessels, the Genco Defender and the Genco Liberty.

Furthermore, as part of our fleet renewal program, we have agreed to sell 5 vessels to date, of which 3 vessels have been delivered to their respective buyers. These include 2, 1990s built vessel, the Genco Surprise and the Genco Progress, which delivered to buyers during the third quarter and the Genco Cavalier, a 2007-built Supramax vessel which delivered to buyers during the fourth quarter. The 2 remaining vessels agreed to be sold to date, the Genco Explorer and the Genco Muse are expected to be delivered later in the fourth quarter. As a result of these sales, Genco expects to save anticipated drydocking and ballast water treatment system installation costs of approximately $6.1 million. As part of our previously announced fleet renewal plan, which includes an additional 7 Supramax and 3 Panamax vessels. We plan to redeploy the net sales proceeds from these transactions towards modern, fuel-efficient vessels.

During the quarter, we also continue to access capital under favorable terms in support of our growth strategy. In August, we closed a previously announced five-year senior secured credit facility for an aggregate amount of $108 million to partially finance the purchase price of the 6 modern vessels that I mentioned a moment ago. In October, we announced Genco's Comprehensive Fleet Plan ahead of IMO 2020, which was based on an extensive evaluation and analysis aimed at reducing our environmental footprint, maximizing shareholder returns, and lowering fuel costs in an evolving marine fuel environment.

Moving on to our financials for the third quarter, we continue to generate profitable results as we drew upon our sizable and leading drybulk platform to take advantage of the developing recovery in the drybulk market. For the third quarter, we recorded net income of $5.7 million or basic and diluted earnings per share of $0.14. Excluding the $1.5 million gain on the sale of vessels, we recorded adjusted net income of $4.2 million or adjusted basic and diluted earnings per share of $0.10.

On Slide 6, we highlight our progress enhancing our fleet profile, earnings power, and balance sheet strength. Following the delivery of all 6 vessels we agreed to acquire, Genco's major bulk fleet is comprised of 22 vessels transporting commodities such as iron ore and coal with its Capesize and Panamax vessels. In addition to the major bulk commodities, Genco continues to maintain direct exposure to minor bulks with 39 Ultramax to Handysize vessels transporting materials such as grain, bauxite, fertilizer, cement among other various materials. Our success growing and renewing the fleet has enabled the company to reduce its average age by more than 1 year and increased overall carrying capacity to 5.3 million deadweight tons.

On Slide 7, we discuss our Comprehensive Fleet Plan for IMO 2020 in more detail. As I mentioned earlier, we are implementing a portfolio approach ahead of the IMO 2020 regulations focused on installing scrubbers on our Capesize vessels and consuming compliant fuel in our minor bulk fleet while maintaining options of 15 minor bulk vessels to provide flexibility as the marine fuel environment evolves. We also plan to continue to execute our fleet renewal program. Lastly, we are continuing the outfit our fleet with digitalized performance monitoring systems on our vessels to obtain real-time speed and consumption data on our fleet to ensure we optimize our vessels' fuel consumption. We believe the greatest benefit of adding scrubbers will likely occur in the early stage of compliance and we anticipate scrubber installation to occur during 2019. Based on a shorter payback period and the lower risk profile, we plan to install scrubbers on 17 Capesize vessels. This is due to the long-haul nature of the Capesize trade routes and the ability to maximize sailing days and scrubber utilization as well as higher fuel consumption and the greater degree of certainty of high-sulfur fuel oil availability at major ports. In terms of the balance of the fleet, we expect it to consume compliant low-sulfur fuel beginning in 2020, which means immediate compliance when new environmental regulations come into effect and no upfront CapEx. Finally, as part of our portfolio approach, we will continue to execute our fleet renewal program aimed at replacing older, less fuel efficient vessels with modern, high specification fuel-efficient vessels to reduce emissions, consistent with our focus on improving our fleet-wide fuel efficiency.

On Slide 8, we outline the major drivers for the drybulk market for the second half of 2018 and into next year, 2019. The market continues to be led by the fundamentals of the iron ore trade and steel production on the major bulks and the strengthening global economy for the minor bulk, together with a low net fleet growth environment helping to improve the overall supply and demand balance.

On Page 9, we highlight our barbell approach to fleet composition, which provides direct exposure to both major and minor bulk commodities and enables our fleet's cargo carried to closely mirror those of global commodity trade flows. We believe that the balanced design of our fleet composition is necessary to capture the potential upside of a recovering drybulk market. While 36% of our fleet remains employed in the minor bulk trades which have historically provided relative earnings stability, an additional 64% of our fleet provides the operating leverage inherent with the major bulk trades.

Turning to Slide 10, we have outlined our leading market position. We remain well-positioned to drive revenue growth, further increase margin, and outperform benchmarks as we continue to incorporate voyage charters and direct cargo liftings into our fleet deployment mix. We expect our active approach to revenue generation and our ability to leverage our in-house relationships and commercial expertise to enable Genco to continue to enter into business directly with leading cargo customers as we continue to provide a full-service logistics solution.

With that said, during the third quarter of 2018, our time charter equivalent performance improved by 27% compared to the same period of 2017. During the third quarter, we re-positioned select Capesize and minor bulk vessels to regions which we believe will be ideal locations given our market expectations. We believe that these decisions will enhance Genco's commercial platform through a further expansion of our customer base and geographical presence. These efforts have helped lead to higher time charter equivalent rates fixed so far in the fourth quarter as we have 62% of the fleet fixed at $13,367 per day, representing a 25% increase over the third quarter of 2018. We believe that time charter equivalent rates is an important barometer of measuring a company's revenue generation capability, but also believe it is important to view TCE performance alongside G&A and operating expenses on a per vessel, per day basis to have a picture of the full company. Notably, Genco's platform provides a key differentiator in achieving these objectives and that while we register strong time charter equivalent performance, we also achieve that performance under an efficient cost structure, which has led to wider margins and a better return on capital. I will now turn the call over to Apostolos Zafolias, our Chief Financial Officer to discuss our financials.

Thank you, John. Turning to Slide 12. Our financial results for the 3 and 9 months ended September 30, 2018 and 2017 are presented. For the third quarter and 9 months ended September 30, 2018, the company generated revenues of $92.3 million and $255.3 million respectively. This compares with revenues for the third quarter of 2017 and the 9 months ended September 30, 2017 of $51.2 million and $134.8 million respectively. The increase in revenues was primarily due to the employment of vessels on spot market voyage charters and higher spot market rate achieved by the majority of our vessels. For the third quarter of 2018, the company recorded net income of $5.7 million or basic and diluted earnings per share of $0.14, marking our fourth consecutive quarter of net income or adjusted net income when excluding extraordinary items dating back to the fourth quarter of 2017. Comparatively, during the third quarter of 2017, the company recorded a net loss of $31.2 million or $0.90 basic and diluted loss per share. For the first 9 months of 2018, the company recorded a net loss of $51.2 million or $1.37 basic and diluted loss per share. Net loss for the 9 months ended September 30, 2018 includes non-cash vessel impairment charges of $56.6 million and net loss for the 9 months ended also includes a loss on debt extinguishment in the amount of $4.5 million as well as a gain from the sale of vessels totaling $1.5 million.

Turning to Slide 13. We present key balance sheet items as of September 30, 2018. Our cash position including restricted cash was $166 million. Our total assets were $1.6 billion, which consists primarily of the vessels in our fleet and cash. Our total debt outstanding, gross of $17.2 million of unamortized debt issuance costs and inclusive of the current portion of long-term debt, was $568 million as of September 30, 2018.

Moving to Slide 14, our utilization rate was 98.5% for the third quarter of 2018. Our TCE for the third quarter was $10,696 per vessel per day, which compares to $8,448 per vessel per day recorded in the same period of last year. The increase in TCE was primarily due to higher rates achieved by the majority of the vessels in our fleet during the third quarter of 2018 versus the third quarter of 2017. Daily vessel operating expenses were $4,434 per vessel per day for the third quarter of 2018, below our budget of $4,440 per day and below the prior year period of $4,553 per vessel per day. The decrease in DVOE was predominately due to lower expenses related to maintenance, drydocking, spare parts and stores and it was partially offset by higher expenses related to crewing.

Turning to Slide 15. As John briefly mentioned, we closed on the five-year $108 million senior secured credit facility with favorable terms in August following the $460 million credit facility that we closed in the second quarter of [this] year. These facilities have enabled us to simplify our capital structure while providing Genco added flexibility in regard to vessel acquisitions, additional indebtedness, and potential dividends. During the quarter, we drew down the entire $108 million to partially finance the purchase price for the 6 high specification fuel efficient Capesize and Ultramax vessels that we acquired. Importantly, the combination of these 2 facilities has also lowered our weighted average cost of debt by 100 basis points as compared to our debt structure in 2017.

Turning to Slide 16. We provide select balance sheet items reflecting our strong balance sheet and liquidity position. On Slide 17, we outlined our fourth quarter estimated cash breakeven rate which reflect the new credit facility structures. We anticipate Genco's cash breakeven rate to be approximately $10,129 per vessel per day for the fourth quarter of 2018. We note that quarterly debt amortization under both our new credit facilities is to commence on December 31, 2018. We've also provided further detail on these breakeven rates in the appendix of our presentation for your reference. We expect to incur capital expenditures for installation of ballast water treatment systems and scrubbers during 2019 as it was described in our latest 10-Q. I will now turn the call to Peter Allen, our Drybulk Market Analyst to discuss the industry fundamentals.

Thank you, Apostolos. I'll begin with Slide 19, which represents daily spot rates for the sub-indices of the Baltic Dry Index. During the third quarter, the drybulk market continued to rise adding to gains from the previous quarters. The BDI rose by 28% as compared to the second quarter and 41% on a year-over-year basis. Furthermore, the BDI through the first 9 months of 2018 recorded its highest average since 2011. This has primarily been driven by Capesize vessels which have averaged nearly $17,000 in the year-to-date and over $22,000 during Q3, the highest level for a third quarter since 2010.

Turning to Slide 20, we outline some key market developments. We note that long-term supply side fundamentals for the drybulk market remained favorable. While 2018 has been one of the strongest years in terms of BDI performance in quite some time, new building ordering has been relatively subdued in the year-to-date. As a result, this has kept the order book in check and has provided more visibility regarding vessel supply growth over the next 18 months to 24 months. Low levels of net fleet expansion in the foreseeable future provide a low hurdle for demand growth to have to exceed in order to lead to a tighter market. Specifically, during 2018, we believe that the improved supply and demand balance has been evident through the freight rate impact of a large amount of fixture volume. This has been on display most notably through Brazilian iron ore exports this year. During the first quarter, exports declined by 8% year-over-year, then subsequently, the next 2 quarters have both seen year-over-year increases of 8% to more than offset the softer Q1. The end result has been higher volatility in the Capesize sector, a sign of which we believe is an indicator of a more balanced market that reacts to demand fluctuations.

More recently, we have a seen a pullback in the Capesize market after trading in the $17,000 to $20,000 range for much over the last 2 months. We believe this recent pullback is attributable to the combination of 2 key factors: a train derailment within the supply chain of major Australian miner BHP Billiton impacting iron ore transportation to its export terminals as well as an increased [potash count] in the Atlantic market, which has absorbed a portion of the incremental iron ore that Vale is producing. Important to note is that Vale has reiterated its 2018 production guidance of 390 million tons, which implies a record 106 million tons of iron ore to be produced during the October to December period. The company also anticipates an additional 10 million tons of iron ore to be produced next year while Anglo American's Minas Rio mine is scheduled to come back online shortly, which would add another 15 million tons of high-quality iron ore to the market in 2019.

Turning to Slide 21. Strong global growth in steel production has [perked] demand for key drybulk commodities worldwide. In particular, steel output in both China and India through the first 9 months of 2018 has risen by over 6% as the latter appears poised to overtake Japan as the world's second largest steel producer. Additionally, the global coal trade has also been strong in the year-to-date. China's coal imports have risen by over 10% through September year-over-year primarily led by thermal coal shipments. With regard to India, increased coal demand has depleted coal power plant stockpiles while Coal India continues to miss production targets.

Turning to Page 22. We point out some key drivers of the minor bulk commodity trade. Led by strong South American grain season, Brazilian soybean exports to China gained significant market share during the first 9 months of the year having risen by 15% year-over-year. Commencing in September is the beginning of North American grain season. The latest data out of the US shows that through the first 8 weeks of the season, US soybean exports have totaled 7.5 million tons, a decline of 39% year-over-year. This is certainly a slow start to the season, but also highlights how the market is waiting for direction on governmental policy. As the trade dispute between the US and China persists, we anticipate one impact will be a re-direction of cargo flows of US soybeans. To that effect, we are seeing more shipments from the US to Mexico, Spain, Argentina among other countries with fewer volumes to China at this point. As we head into next year, early indications are for another record Brazilian soybean crop, exports of which could ramp up in early February. With added Brazilian soybean shipments, the trend could materialize in which the Brazilian peak season is stronger and extended over a longer period of time, helping to soften the impact of a potentially lower U.S. soybean export season. Lastly, on the minor bulks, we continue to see added shipments of bauxite from West Africa to China as Guinea is now China's largest supplier. Growth projects remain in the pipeline scheduled for a mid-to-end of 2019 ramp up, which could further boost demand for this trade.

On Slide 23, we outline current supply-side fundamentals. In terms of vessel supply, net fleet growth in the year-to-date is 2.5%. Newbuilding deliveries are down by [34%] year-over-year through the first 9 months of 2018, while scrapping has been the slowest since 2007 given improved market conditions. We continue to believe that newbuilding deliveries will slow into year-end as vessels slip into the next build year. The order book as a percentage of the fleet is approximately 10%, which compares to 7% of the current on the water dry bulk fleet that is greater than or equal to 20 years old. As a result, potential scrapping of this older tonnage could help to offset much of the scheduled order book keeping net fleet growth at the current low levels. We also point out that it remains to be seen how much of the order book will actually deliver considering that the slippage rate this year is running at [over 20%]. There generally remains good visibility on the supply side in terms of newbuilding deliveries over the next 18 months to 24 months, which could lead to fleet expansion continuing at multi-decade lows and be a positive catalyst for the drybulk market going forward. This concludes our presentation and we would now be happy to take your questions.

(Operator Instructions). We'll take our first question from Jon Chappell of Evercore ISI.

First one, John, pretty simple, done a lot on acquisition front, but there is still a pretty big swath of older ships that had kind of been pegged for sale and only 5 so far this year. Is that still a plan to kind of monetize some of the non-core or older assets or you with the thought process that at this point in the cycle maybe just hold on and generate cash in those ships.

No, the fleet renewal program is still alive and well. I think the 3 Panamax's, the [399s] we're very focused on right now. So, I expect to have those done before the end of the year and then we have the [53s] and again, we're working on that, but that's all very active right now.

Okay and then you're also pretty consistent with the commentary regarding use of those proceeds to continue to renew the fleet, which makes a lot of sense, but things have kind changed a bit out of your control one with the share price. So at a 50% discount to NAV based on our numbers, would you consider potentially using the proceeds from those to buy back stock and I understand there is going to be maybe some commentary about liquidity, but at the end of the day, I don't think there is a better ship out there than your own fleet at $0.50 on the dollar, so just any thoughts around that?

I would say we're committed to the fleet renewal program in terms of re-deploying the proceeds that from the older ships that we're selling, but I think you also have keep in mind, we have a pretty sizable cash balance and a low leverage profile. So I think that gives us flexibility to look at a lot of things. We have -- management has begun the process speaking to the Board though no decision has been made on share buybacks as well as return of capital in the form of dividends, which we start to do after December 31 under our bank facility. So as I said, no decision has been made on it, but management is actively discussing those things in the tool belt with the Board.

Okay, final one for Peter, if I may, August, much stronger than we anticipated, November, probably much weaker than we anticipated with the Cape. So maybe speak to is there a little bit of borrowing from Peter to pay Paul, maybe some accelerated shipments in the third quarter ahead of potential tariff impact and then the second part of it is with this train derailment, with all the ships that have kind of shifted the Atlantic Basin, Vale still confirming their year-end target, is this kind of like a coiled spring where when everything kind of comes back online in the next week or two, there could be a big kind of make up into year-end on the Capesize market?

Sure, so in going after your first question there. So when we look at Q3 Cape rates, they are averaging over $22,000 a day and when you look at 2017 for example, that was essentially the average of Capes and that just goes to highlight the strength of the Q3 market. When we're looking at Q4 and just putting this year in perspective, we're about $17,000 a day for the year and about that [$18,500] right now in Q4. So generally speaking, still a relatively strong market. Obviously, there has been that pullback of late. BHP is close to 20% market share of the iron ore market. So when there is a hiccup there, that's going to have an impact and that's impacting the Pacific market on a short-term basis and then also we have another short-term situation in Brazil where there's just an incremental amount of tonnage. So overall, you are kind of getting it from both ends unfortunately and we just think it's more short-term and timing than a structural shift.

Okay, does BHP have the ability to kind of make up for the lost volumes as they work through this derailment or is it you are just kind of losing those volumes in this week and then it is just back to the normal run rate going forward?

Well, at this stage, they are going to be drawing down some stocks at the port. I don't think that's necessarily going to make up for everything, but from what I've seen, they haven't changed their production guidance and their shipment guidance. So maybe you get a little bit of a spillover into early January, but like I said, they are a big part of the market. So when you take their annual production and put it in the per week basis, about 5 million tons a week, so they are a big part of what's moving the Australian trade.

Yes, John I think the CEO of BHP this morning came on and they were committed to fulfilling all their contract obligations even with the derailment.

Our next question is from Magnus Fyhr of Seaport Global.

Just a question on the volatility in the Capesize market. Does that provide any opportunities on your owner-operator model to maybe chartering ships or how do you look at the current weakness maybe to capitalize on that opportunity?

So I think that's more focused on the minor bulk side and the reason why I say that Magnus is because the arbitrage trades we're doing, we would be booking forward cargoes and now is not the time to be booking for our cargoes. What you want us doing is taking in time charter tonnage naked without a contract behind it. We just -- we don't like that that risk profile though I do agree with you were particularly where the index is today, it seems way overdone, I think that it is very driven by sentiment as you know in this Capesize market and I think as Pete said, we view this more as short-term and not a structural demand issue. I think one very important thing to keep in mind is the price of iron ore continues to move up, not just on the higher iron ore in the higher quality, but also on the 58% and the 62%. So that tells me that the underlying demand situation is there. I think as again as Pete said, I think it's a short-term phenomenon with the BHP disruption which immediately hit Australian freight rates and spilled over into the Atlantic as well as an oversupply -- short-term oversupply situation in the Atlantic.

Okay and I guess the other question kind of related to OpEx, I mean, I know you said you were in the market that should sell these 99-built Cape -- Panamax vessels, the OpEx came down quite a bit there. Is that kind of related to just keeping the expenses low in those ships or...

Yes, I think that's part of it. We also sold the Genco Cavalier, the Genco -- well, the Genco Muse [wouldn't] have entered into yet, but that is sold. So as we sell these older ships that require higher maintenance expenses and CapEx, that's been leading to that.

All right and then just one final question, may not be able to answer this, but how does a train run away from a conductor?

I think Rio who has these automated trains, they are in a better situation, right?

Our next question is from Randy Giveans of Jefferies.

Good to see the continued progress on the vessel acquisitions and sales, now looking at your scrubber orders, obviously before these orders were announced, you got to question the HSFO availability, some of the degree, duration of the spread, maybe concerns about future regulations. So are these issues no longer issues in your opinion. And then secondly, is the fuel spread the only determining factor regarding whether you do or do not install scrubbers on some of your smaller vessels?

So first of all, we made the hard and fast decision to install scrubbers on the 17 Capes, right? So that is happening. We made that announcement a little while ago. So, the question for us is do we exercise on the, on the 15 option ships for the smaller ones. We're still working through that. I still think in our mind, it's not necessarily a spread or duration issue, it has much more to do with fuel availability in the smaller ports and how much deviation may or may not occur. So I don't expect this to go on for a long period of time in the sense that I believe we will be making a firm decision very, very early next year, if not before, but it is something we're still working through. I think we're very confident on the spread for the first year and we've been modeling all of our payback periods based on only a $200 spread, which I believe is conservative particularly for the first year, but again we do want to make sure that we're comfortable with availability of smaller ports that fit our trading patterns for the smaller ships, but on the Capes that is firm, that is happening and we think it makes a lot of sense on those ships and if you think about it, you're really, you're sort of adding probably $4,000 to $5,000 a day on earnings at only a $200 spread between high-sulfur fuel and low-sulfur fuel oil. The other thing to keep in mind, which I think is important -- those 17 Capesize ships, they make up a little more than 40% of our total fuel costs. So you get quite a bit of bang for your buck on doing all the Capes.

Okay. They (inaudible) definitely makes sense. And then for your 4Q quarter-to-date update, obviously, it appears the smaller asset classes have relatively outperformed the Capes at least recently. So what has been the cause of that firm Supramax, Ultramax rates and do you see rates continuing to rise in the coming months?

Yes. So look, first of all, the minor bulks in the fourth quarter have really been performing well based on some strength in the Atlantic. We've had obviously some US soybean shipments though not a lot going to China, but there has been a lot of soybean coming out of Brazil, there has been a lot of wheat that has been and corn coming out of the Med region and then I think as Pete Allen had mentioned earlier in his comments, there has been a lot of coal that has been coming off the US East Coast and go into India. So that has been a firm market. It's something that we positioned for with the minor bulk fleet. In terms of the Capes, I think it's important to keep in mind this low volatility -- the volatility which has pushed down rates is a very short-term phenomenon and we've been having some very strong fixtures to date in the Capesize market and I think, again, I kind of look at this as short-term and I still think that there is a good possibility of this market recovering before we get to the end of the year.

We'll take our next question from Amit Mehrotra of Deutsche Bank.

Yes. This is Chris on for Amit. So it sounds like you guys are still pretty closely monitoring the S&P market. Can you kind of talk about how the prices for modern vessels have trended since your last purchase?

I would say they have trended up and what's interesting is I think you're now seeing more of a focus on modern fuel efficient ships as we get closer to IMO 2020 and as we get closer to the need to install ballast water treatment systems, which I think is, which is positive. So I think you're seeing maybe a little more of a steady movement over the last few months on older ships, but the newer modern ships have continued to tick up.

Okay, thank you for that. So then you guys, in addition also have the scrubber program plus the options. Has this kind of taken top priority in terms of use of capital compared to vessel acquisitions at least over the next maybe like 6 months?

Look, again, I think you need to isolate this. The scrubber program will have probably a pretty high level of financing behind it. So from an equity standpoint, not a huge investment. In terms of our fleet renewal program, as I said, that is moving forward. So you'll see us redeploy those -- the cash that's raised from the older vessel sale into the newer more fuel-efficient vessel. Then, we have to assess what the next move is in terms of growth. And as I said before, we have a sizable cash position, I think one of the lowest levered in the peer group. So a conservative capital structure. We still have a lot of room to do things in terms of growth, but what we want to do is execute the fleet renewal program, which in itself is S&P and obviously [buying] tonnage and our scrubber program on the Capes, which will have a high degree of financing attached to it.

And when you think about potentially putting scrubbers on vessels outside of the Capes, what kind of gives you the biggest pause? Is it just the availability of high-sulfur fuel in all the smaller ports around the world that those vessels go to or is it just kind of when you are looking at the economics it is just with the shorter voyages and fewer sailing days. What's kind of the bigger issue to you?

Look, I think there are 2 things: I think it is the availability of fuel and I think it is also how long does the spread stay in place. So to give you some numbers here, at a $200 spread and assuming that you are burning high-sulfur fuel 100% of the time, you've got about 2.4-year payback on the Ultramaxs and Supramaxes. When you are only burning 75%, you go to a little more than 3 years and then if you are only burning high-sulfur fuel half the time because of availability, you're at 5 years and that's on a $200 spread. So it's not just location of high-sulfur fuel, but it is what is your view in terms of how long that spread lasts before you get to equilibrium, which is probably somewhere around $100 to $120. We clearly know during 2020 or we believe in 2020 that, that spread will be in place, it could be higher, but the question is how quickly does the market adjust as we get into 2021 and 2022 and that's what we're working through.

Thanks for that and then just last, quick on the -- a little follow-up on the soybean trade, it feels like that trade in general has gotten pulled forward -- Brazil has taken share from the US. Do you still think we could see volumes kind of ramp here over the US, kind of as is the seasonal pattern and just those volumes going elsewhere or do you kind of think it's going to kind of bounce around at the current depressed levels for the rest of the season?

As the tariffs stay in place, I am still concerned that at least for this season, there will be some -- there will be -- maybe it is 10 million tons of soybeans that would normally be shipped than are. It is very clear that Argentina is buying soybean from the US, it is very clear that Brazil is buying soybean from the US as well as countries in the EU. I think it is very hard to tell what is going to happen with China and whether they need to actually step in to buy US soybeans. If you look at the price spread right now, it is basically -- the Chinese would be basically neutral. So they are not losing money even with the tariffs to buy US soybean. I think it is more political than anything else and I think that's a little bit of a black box. Having said that, going forward, if these tariffs stay in place and the Chinese decide they don't want to be buying from the US; Brazil has already planted more soybean. They are looking to have a record crop next year which will start to be shipped sometime in February and March and I think they'll plant less corn and I think the US will do simply the opposite, they'll plant less soybean and then plant more corn. I also think it is important to note that if these -- that you can store soybean for at least 12 months. So if these tariffs stay in place in short-term and the US, the farmers take a storage standpoint and then also maybe these trade issues get worked out, these US soybeans will ship and maybe you see it happen in the first quarter, so could just be pushing it out. So I think there's a lot of different routes here, but I think net-net you ultimately wind up with no real destruction of ton-miles, it just maybe more of a timing issue.

Thank you for the color. Really appreciate it.

You're welcome.

Our next question is from Max Yaras of Morgan Stanley.

A couple of market questions. We talked about some short-term hiccups, but what do you expect out of the pace of Chinese demand, specifically for iron ore to be in 2019 and what is the potential there for stimulus if tariffs kind of continue or trade tensions worsen?

Well, first of all, I think the stimulus has already started. You've seen a lot of programs that have been announced over the last few months that obviously takes a little bit of time to get into the system. So I -- and I think the Chinese -- my view is this is the way they boost their economy, they've been -- they've done it from time to time over the last 10 years, 15 years and I don't see that changing. They still have their One Belt, One Road program that they are very much committed to and I think they are very committed to continuing to increase their influence in the world economy. So I do think they will do everything they can to simulate if they have issues on the growth side because of the trade wars. Looking at the iron ore front, so we are actually -- we're projecting somewhere around 5% growth in 2019 on the iron ore front and that's total seaborne trade. One of the what I would call issues with iron ore this year is I actually think there is more of a shortage because of the lack of iron ore from Anglo-American which will be coming back next year, that's [17 million tons]. I think it's probably aggressive to think to Marco comes back next year, I think that maybe a 2020 event, but we'll see, but between Anglo-American coming on next year again, between continued growth from Vale and S11D and the fact that I strongly believe the Chinese are going to continue to take every piece of iron ore that is produced out of Brazil and Australia, particularly the high-quality, that's where we see the growth and I will -- I've said this many times and I think it's very important to keep in mind, the demand side seems to be moving as anticipated, but we are in a very low supply situation from a historical standpoint where we're seeing anywhere from 2% -- only 2% to 2.5% supply growth in '18 and '19 and now I think you have pretty good visibility on 2020 as well and so you only need very small incremental gains on the demand side to continue to build off of the recovery that really started late 2017.

Right. Makes sense and then you talked about bauxite trade. Just wondering if you could help quantify what that means for your fleet maybe what percentage of cargoes that is for you or how big of a factor that is going forward?

Look I think for the Capes, it's going to be more and more of a factor out of Guinea I think there's -- I think Marsoft is projecting maybe a 6% growth rate in the bauxite trade for next year, a large amount of that is coming out of Guinea and a large piece of that is on Cape. So I think everybody obviously focuses on the iron ore and coal trades and rightly so those are big numbers, but the bauxite is becoming more and more relevant out of Africa.

Okay and then just final question. I guess when is the latest that you could exercise the options for scrubbers. I mean is there yard availability. Does that have to be executed in 1Q '19?

Well, I mean look, from just a contractual standpoint, we're making sure we have the option going into 2020, but again as I've said earlier, I really expect us to make a decision at the latest in the very early part of 2019. We do have yard space, we have secured that, but I agree with you, yard space is becoming more and more of an issue. So we do want to decide on that sooner rather than later.

We have a question from Liam Burke of B. Riley FBR.

John, on the scrubbers, have you opted for open/closed systems or are you going to a hybrid?

Yes, so what we're doing is we are doing an open loop with a hybrid option.

Okay and on the low-sulfur fuel in 2020, obviously it'll step up the operating costs of the fleet is -- are you looking at your efficiency or a more efficient fleet as a competitive advantage to help offset the fact that you're going to be incurring higher fuel costs?

Yes, I think there's a couple things, I mean -- in terms of burning additional fuel it might be an additional ton a day or so in terms of operating and again this is where the newer ships that have better consumption rates, which is why we bought those 4 fuel efficient Capes, it all comes into play whether it's burning compliant fuel or high-sulfur fuel and again I'll reiterate the flow meters and the digital data gathering that we're doing on the fuel side will help us keep that extra fuel burn to a minimum so we can run the ships at not only efficient speeds, but also efficient consumption ratios.

And this does conclude our Q&A session for this morning.

Great. Thank you, everyone.

This does conclude today's Genco Shipping & Trading Limited Third Quarter 2018 Earnings Conference Call. You may now disconnect your lines, and everyone, have a great day.