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Eagle Bulk Shipping Inc. (NASDAQ:EGLE)

Q1 2008 Earnings Call

May 7, 2008 8:30 am ET

Executives

Sophocles N . Zoullas - Chairman and Chief Executive Officer

Alan S. Ginsberg - Chief Financial Officer

Analysts

Natasha Boyden - Cantor Fitzgerald

Douglas Mavrinac - Jefferies & Co

Scott Burk - Bear Stearns

Zack Quickenhouse - QuickenHouse

Justin Yagerman - Wachovia Capital Markets, LLC

Charles Rupinski - Maxim Group

Urs Dur - Lazard Capital Markets

Christian Wetherbee, Merrill Lynch.

Operator

Good day, ladies and gentlemen, and welcome to the first quarter Eagle Bulk Shipping earnings conference call. (Operator Instructions). I would now like to turn the call over to, Mr. Sophocles Zoullas, Chairman and CEO. Please proceed sir.

Sophocles Zoullas

Thank you and good morning. I would like to welcome everyone to Eagle Bulk Shipping's first quarter 2008 earnings call. To supplement our remarks today, I encourage participants to access a slide presentation that is available on our website at www.eagleships.com

Please note that part of our discussion today will include forward-looking statements. These statements are not guarantees as a future performance, and are inherently subject to risks and uncertainties. You should not place undue reliance on these forward-looking statements. We refer all of you to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties that may have a direct bearing on our operating results, our performance and our financial condition.

Please note on Slide two the agenda for the call will follow our usual format. After my opening remarks, I will discuss the first quarter 2008 Highlights, and provide an update of our fleet are 35 vessel new new-building program and the delivery schedule as we expect the first ships to deliver and start generating revenues during the third and fourth quarter this year. I will also go over our 18 vessel on-the-water fleet and we review our open vessel positions for chartering the summer.

I will also discuss current trends in demand and supply for the drybulk industry, before Alan Ginsberg reviews the company’s financial performance. I will then and the management discussion with some concluding remarks before taking questions. Please turn to slide four. We are very pleased with our first quarter, which reflects solid results for Eagle Bulk. During the quarter our net earnings from vessel operations were $16.9 million, or $0.36 per share, which represents a 44% increase from our first quarter 2007 results.

Net income increased 69%, during the same period to $14.3 million or $0.31 per share. Gross Time Charter revenues were $38.6 million up 31% year-on-year. EBITDA increased 27% to $27.5 million quarter-on-quarter. Yesterday, we declared a dividend of $0.50 for the quarter, and including this first quarter dividend, we will have paid a total of $5.60 a share to-date to our shareholders. We also continue to demonstrate continued operational excellence by achieving a fleet utilization rate of 99.7% for the quarter. In fact we have achieved an approximate utilization rate of 99.5% every quarter since 2005.

Please turn to slide six, for a review of our fleet. Eagle Bulk is currently one of the largest owners of modern Supramax vessels with 18 vessels on the water with a fleet average age of only six years. However the real value for our shareholders will be realized by our ability to deliver sustainable growth through our 35 vessel new building program that increases our own days or our ability to generate revenues by over 300%.

This new building program will start to positively impact our financial performance as the first of the three new ships the Wren, the Woodstar and the Crowned Eagle are scheduled to deliver to us starting in August this year. In fact last month, I was in China for the launching of our first new build the Wren, as pictured on this slide. Our chartering strategy offers shareholders a balanced portfolio with over $1 billion in contracted revenues to help support the dividends as well as 18 open vessels to charter starting with summer through to 2009.

Further upside potential is realized through our 19 profit sharing charters on the fleet. Lastly, till-date we have declared $5.60 a share and we intend to increase the dividend payment to our shareholders overtime as the new vessels from our new building program deliver into the fleet and we will re-charter our open vessels. Slide seven, illustrates the highly desirable characteristics of our fleet. Currently we operate 18 on the order vessels comprised of 15 Supramaxs and 3 Handymaxes with an average age of six years and a cargo carrying capacity of almost 1 million deadweight tons.

This fleet will triple in size to 53 vessels and add 2 million deadweight tons to our cargo carrying capacity as we start taking delivery of our first vessels from our new building program this summer. It is important to note that all 35 vessels are in three classes of sister vessels that give Eagle Bulk operating efficiencies on the expense side and scheduling flexibility that makes this fleet very attractive to charters and potentially further increases revenues.

The desirability of our fleet is further enhanced with cargo cranes and graphs which Panamax's and Capsize ships do not have that allows our ships to trade in high growth developing regions around the world. During the third and fourth quarter of 2008 we expect to take delivery of the three vessels with an additional nine vessels delivering to us during 2009. During this timeframe the 53,000 deadweight series, the 56,000 deadweight series, and the 58,000 deadweight series will all start to deliver into the fleet and begin generating cash flow for Eagle Bulk.

Slide eight graphically demonstrates the growth of our EBITDA and owned days since 2005 and clearly shows that we are on track to deliver sustainable growth and accretion to our shareholders. The green bars on this graph show the annual EBITDA growth of this company. The red line illustrates the growth in vessel owned days, which indicates our ability to generate revenues and the trajectory of our continued growth is 35 year ships we are delivered into the company starting this summer.

As a measure of Eagle Bulk’s future ability to generate revenues our owned days will increase 300% by adding approximately 13,000 owned days even if we don’t acquire more ships between now and 2012 which is highly unlikely as we are constantly in the market looking at potential acquisition targets. A significant increase in owned days coupled with the open vessels this summer and an additional 15 opened vessels to the balance of this year thorough 2009 will increased the potential for Eagle Bulk to generate additional free cash flow EBITDA and earnings per share.

Please turn to slide nine, for a review of our future chartering positions and strategy. You can see that we will be increasing our on-the-water fleet in a short timeframe from 18 to 30 ships from now through 2009 and then systematically further increasing the size of our fleet, cash flow and our presence in the dry-bulk markets to 2012. As part of our growth, our balance to chartering strategy, delivers stability and upside to our share holders. The stability comes from the excess $1 billion in contracted revenues that help support our dividends. This number is conservative and does not include any contribution from our 19 profit sharing charters. Any profit sharing on any of the 19 ships will only increase cash flow further.

Slide 10, illustrates the significant upside potential from now through 2010. The graph on this slide shows the significant growth of additional revenues that Eagle Bulk will generate at various charter rates. This analysis shows that Eagle Bulk can generate between approximately $300 million and $450 million of addition revenues per year during this time period at charter rates between $40,000 to $60,000 per day. As you may have read in our press release issued earlier this morning, last night we chartered the Kittiwake for one year at $56,250 per day, which is almost doubled the current charter rate of $30,400 per day. We expect this charter will comments in August.

It is important to point out here that this chart does not include the additional 15 vessels that we will be taking delivery of during 2011 and 2012. Slide 11, shows the benefits of our flexible chartering strategy that combines the stability of fixed revenues in the bottom section of each bar coupled with the upside potential to generate significantly increased revenues for the second half of 2008 through 2010. During this timeframe, depending on charter rates, this analysis shows how revenues can increase from just under $200 million to almost $600 million annually.

Specifically, the increased cash flows will be attributed to one; the re-chartering of our on-the-water vessels, which come up current charters starting this summer, and two the delivery of additional vessels from our new building program, which start to deliver to us this summer concurrently, with the first of our on the water vessels that are open for new charters. As you can see, the growth of our fleet starting in 2008, provides us with a chartering flexibility to generate significantly increased cash flows on to the industry.

Slide 13 please, during the first quarter of 2008 China continued to show strong demand for raw materials to supply infrastructure projects around the country. As a result China’s fixed asset investments grew 25% year-on-year to $311 billion in the first quarter of this year.

Also as we have said many times before, China’s coastal trade continues to play an important role not only in the Chinese market but also for global drybulk demand in the Supramax market. As we have mentioned during the last quarter’s call China’s coastal shipping trade hit 400 million tons during 2007. However, new estimates now expect an increase of another 100 million tons during 2008. As inline transportation cannot keep up with demand commodities move along the coast to alleviate land based transportation bottlenecks.

With extreme demand for coal it is expected that about 70 million tones of additional coastal trade comes from coal with a balance coming from grain, iron ore and materials for building. This trend is expected to continue for sometime as Chinese coal consumption is expected to increase from 2.5 billion tons per year in 2007 to 3.3 to 3.5 billion tons per year by 2015. Since many of these commodities move to small ports with more restricted orders and need ships with cargo cranes, Supramaxs are very well suited for this market.

Since 2003, India’s economy has grown at an average pace of almost 9%, which has help drive increasing demand for bulk carriers, much like China, the Indian Government plans to long-term infrastructure development of the country. Current plans are to double the budget for infrastructure development and spend $320 billion by 2012. Additionally India is poised to become the third largest steel producer by 2013 and steel demand is expected to grow by 4% to 5% over the next four years, despite a U.S. slowdown because of the growth of global GDP, growth coming from emerging countries in the Pacific. Regarding the developing regions of the Gulf States, the McKinsey estimate shows a tripling of infrastructure spending to $230 billion.

Slide 14, the growth of Indian demand is important for the drybulk market and the Supramax vessel is best suited to meet this long term market. Eagle Bulk presence in the Indian market is demonstrated by two of our ships the Harrier and the Kite being the first ships to trade to the new Indian port of Krishnapatnam near Chennai to load iron and ore for China when it opened for the first time last month. As you can see with the left pie chart on the slide Handymax vessel types handled more trade two and from India at 18 -- at 58% than the Cape, Mini Cape, Panamax, post-Panamax and Handy vessel classes combined.

Looking to the chart on the right you can see how Handymax vessel is the workhorse of the Indian market and is the only vessel type to realize successive year on year increases since 2005. The big increase from 2006 to 2007 is expected to continue in 2008. In summary the long-term infrastructure projects in China, India, and the Gulf States will acquire Supramax vessels since these ships are very well suited for these markets as many ports in the region cannot handle the larger drybulk carriers like Capesizes, and require ships like ours that have onboard cranes needed to service seaborne transport for much of the region.

Slide 15 shows the breakdown of cargoes we carried we carried during the first quarter of this year and demonstrates the superior trading flexibility of the Supramax vessel. With increase demand for iron ore, coal and grains we saw a fleet carrying more on major bulk cargoes without over half the 1.8 million tones we transported during the quarter being major bulk cargoes. This shift in trade patterns from prior quarters is due to the increased trade of major bulks to the restricted ports in China and India that are not capable of handling larger ships.

It is also important to note that the sub-Panamax, minor bulk ore cargoes such as nickel ore continue to be in high demand and made the other ore category the most moved cargo for our fleet during the quarter. These shifts in trading patterns from quarter-to-quarter continue to prove the flexibility and desirability of the Supramax asset class and its ability to carry any cargo and specifically enter markets that larger ships cannot service.

Please turn to slide 16, for an update of the drybulk supply statistics through 2013. The new message here is that since the last quarter there has been very little change to supply statistics in the world fleet since drybulk vessel ordering slow down significantly during the first quarter of 2008. As a result the order book message remains the same that the Cape size market has the largest order book and we believe many of the deliveries in the Handymax market over the next five to six years will be replacement ships for the roughly 800 Handymax ships that are currently trading over the age of 20.

Lastly we believe the new and untested Greenfield yards will find it challenging to build ships on time or at all due to problems with financing, equipment supply backlogs and skilled labor. We maintain our current estimates that missed or cancel deliveries in 2009 and 2010 may reach 10% to 30% of the current order book. I would now like to pass the call to our CFO Alan Ginsberg who will now update the financial overview of the Company.

Alan Ginsberg

Thank you Soph. Slide 18, a brief recap on our quarterly results of operations. Eagle had another inline quarter again; there are no surprises here all vessels were on time charter during the quarter. Net revenues for the quarter is $36.7, 36% increase over the first quarter of 2007 of $26.9 million. As Soph mentioned earlier our fleet utilization for the quarter was a sterling 99.7%. Operating income is 420.4 million for the quarter an increase of 20% over the first quarter of 2007 of $16.9 million including -- excluding the gain of 900,000 on the sale they shipped the last year. Finally, net income adjusted for non-cash compensation expense was $16.9 million was $0.36 per share for the quarter an increase of 44% over the first quarter of 2007.

Slide 19, our expected cash costs for the year we are reiterating our estimated daily cash breakeven rate of $8000 per vessel per day for 2008. Our cost structure is broken down as follows, $4414 in vessel expenses. Next, we expect to pay our technical managers, V.Ships and Barbers annual fees of approximately 108,000 per vessel per year. This equates to $296 per vessel per day. We estimate our general and administrative expenses for 2007 and $1400 per vessel per day. Continuing on to debt service, our estimated interest expense net of estimated interest income for 2008 is $1338 per vessel per day. Finally, we estimate our dry-dock costs of $500,000 once every 30 months, which equates to $548 per vessel per day.

Slide 20, I just want to offer a few comments on our first quarter balance sheet. Once again, I want to remind everyone on the call that during vessel construction, interest expense and amortization of deferred financing costs as well as supervision costs are capitalized until the vessel delivery - delivers. As I mentioned earlier, $239 million of our debt is against to our on-the-water fleet and a balance of 365.2 is against the newbuilding program. Our book capitalization stands at just over a 1 billion and our net debt to cap stands at approximately 42%, our current liquidity position is just over $1.1 billion. With that I will turn it over to Soph, to complete the presentation.

Sophocles Zoullas

In conclusion on slide 22 we believe 2008 is an important transitional year for investments we made during 2007 will generate clear benefits to our shareholder starting this year. First fleet growth begins in the third quarter of 2008. As the first of our new vessels delivers to us and starts to generate cash flow. This is flowed by two additional ships in the fourth quarter and an increasing deliveries schedule in 2009. Second the ramp up in owned days starting currently with the delivery of our first newbuilds further increases Eagle Bulk’s revenue generating capability and third re-charters of our on-the-water fleet starting with the Kittiwake charter announced today in addition to two opened vessels this summer and continuing through 2009 with an additional 15 vessels should realized large increases in days rates giving current market conditions. In summary, we believe these three factors together translate into a significant increase in Eagle Bulk’s EBITDA in the near future. With that I would like to turn the call over to the operator for questions.

Question and Answer

Operator

(Operator Instructions) Your first question comes from the line of Natasha Boyden with Cantor Fitzgerald. Please proceed.

Natasha Boyden - Cantor Fitzgerald

The returns for the Kittiwake this morning was in a great rate – stronger than we’re expecting. We have several other vessels coming of charter, this turnaround, I think you have one on fixed newbuild, given - giving me just the Kittiwake for one year do you plan to give rest of the two vessels one year you’re looking perhaps maybe for two or three years, the other two coming on?

Sophocles Zoullas

I think Natasha, the Kittiwake charter, the timing of it and the way we did this charter is really a very good example of how we look to charter the summer bulks and then the newbuilds. Basically what happened is after we did our earnings release early in the evening we got a bid an off market private negotiation started on the Kittiwake and we opportunistically saw a rate for a year that effectively equaled about what these ships earning in the sport market currently. So, it was an off market charter that we opportunistically took advantage of in and chartered it for a year, allowing us to get it chance to re-charter the ship again in 12 months and in fact, the market is so, strong right now, we could re-charter the Kittiwake in its open position in 2009 even today. So the reason we chose a one year carter is because, we like to right, we thought it was close to this spot market rates for these ships currently, but we lock it in with the one year charter with obviously continues revenues and no interruption between voyage to voyage and it gives the ability to also re-charter at even today's market at these strong numbers.

Natasha Boyden

Okay, but the other vessels coming off, because typically I think you can forego more for the two to three years. Was I correct in saying that?

Sophocles Zoullas

Yes. No, you're 100% correct. I would say the best way to characterize our chartering strategy going forward is opportunistic and probably to compare it to the way, I would have defined our chartering strategy maybe 12 months ago, I would have called it conservative, because we were chartering ships about nine months early, because we had, much smaller company with a different dividend policy and less contracted revenues and with a smaller fleet we were very, very conservative. So, I would say we are shifting from a conservative chartering strategy to an opportunistic strategy and you can see us probably, I would say charter ships, within that bandwidth that you mentioned and the next one, if we get a bit that we like for a two year rate and we think the differential between the one and two year rate is not that much maybe the next one will be a two year rate. So, I don’t want to -- I want to answer your question and give you all the information you need, I would say opportunistic is the way to characterize. So I am not going to say because we did the Kittiwake of one year all of the future charters are going to be a one year.

Natasha Boyden

Okay, that’s helpful. Soph I know you always did love traveling, I know you have your exit ground in China. We heard a lot of rumors that a lot of these yield going for [Inaudible] to someone who with the very least of having a lot of difficulties in a joint cargo prices rising cost and cost of steal, and we heard the one -- potentially one field actually founded, can you tell us what you all hearing giving the situation out there and what your saving?

Sophocles Zoullas

What I would say because I was just a couple of weeks ago not only in China but I was in Korea and a lot of people don’t know this, but there is actually a quite a few Greenfield yards in Korea too. I would say it’s not just China, its Korea also and obviously other – other countries. Not so much Japan, but other countries in addition to China and Korea. By our estimation already in the first quarter of 2008 at least a 100 ship orders have already been cancelled in the drybulk market, just in the first quarter. So, my sort of real time data that I got from taking not only to sort of end-users, but more shipyard owners in Asia last month is that by their estimation not our estimation, even in 2008 you could have shipyard deliveries delayed 40%.

Natasha Boyden - Cantor Fitzgerald

That's really interesting well thank you. If you have one last question and that's may seem actually a little out of less yield so if you don’t have any answers for it that’s fine. Just wondering given, the increase in fuel prices that we are hearing about on a sort of global unrest that we are hearing about it, if you have seen any kind of change in the grain rate at all or if you expect to see any given kind of feed where its going on, but it’s selling half; I wondered if you have any vote from that?

Sophocles Zoullas

Well I like the question because it keeps the call from getting a little boring, so hey thank you for the slightly different question.

Natasha Boyden - Cantor Fitzgerald

Yes, I don’t know if there is any. We are starting to hear more and more about it in the news.

Sophocles Zoullas

No, no it is in the news quite a bit. I would say the specific impact of what you just mentioned to the drybulk market as we have noticed a very, very, very strong Atlantic market. I mean its gaining in strength almost to the magnitude of what we saw in the fall of last year and a lot of what's the reason -- the impetus behind the pick up in the Atlantic is actually the South American grain market. So, I would say that what you are seeing in that sort of soft commodities if you well, the food products, specifically grain is having a boost of the Atlantic market for drybulk ships and even the Black Sea market is coming back.

Natasha Boyden - Cantor Fitzgerald

Is that because they are bringing the grain out to try and alleviate the food for shortages, in a sort of Middle East areas, Somalia and Africa, Somalia and Pakistan that kind of areas?

Sophocles Zoullas

Yes, what we are seeing is actually a lot of the exports out of South America now; our long haul grain routes which obviously increases ton miles which is good for dry bulk.

Operator

Your next question comes from the line of Doug Mavrinac with Jefferies & Company. Please proceed.

Douglas Mavrinac - Jefferies & Co.

Just a few questions for you guys. First Soph you talked about kind of shifting of your chartering strategy to -- from on that was maybe a little bit conservative to one that is maybe a little bit more opportunistic now. What would you say is the current demand, how would you describe the current demand from large charters, to charter your vessels either operating on time charter contracts that are coming up for renewal our new vessels to be delivered, both in terms of -- how soon before the contractors as far they are approaching you, and then the duration that they would like to charter your vessels on and what you take away from those things?

Sophocles Zoullas

Sure, I think -- listen I have a another real time data point for people on the call today, which is yesterday, earlier in the day we had a firm indication for actually one of our 2011 newbuilds for a five year charter with profit sharing. So, I would say right now it’s the ship owners market and I think specific to Eagle I think it would makes it very interesting for us is not only are we seeing a lot of demand for the on-the-water ships that we have, but we are seeing I mean we could effectively, probably charter all 35 newbuilds if we wanted to today, but as I have said as we are shifting from what I would characterizes as a conservative charting strategy to more either call it opportunistic or aggressive charting strategy. We are holding back capacity to maximize dollars.

Douglas Mavrinac - Jefferies & Co.

That’s very helpful, and then my second question relates to more or less China and a couple of things that are, Taiwan the topic of discussion there and knowing that you were just recently there kind of looking for your view on, one which is nothing more than temporary phenomenon on our potential phenomenon and what you are hearing from some of the end users there, about their preparation for the Olympics and if they are going to shutdown for a little bit of time for – to help of the air pollution and the second one, follow-up to that is iron ore inventories at some of the Chinese ports, we see they are starting to build, but what we don’t see is where the iron ore inventories are at some of the steel mills and so you are not really getting a full picture. Due you have any color on either of those?

Sophocles Zoullas

Sure. I think first of all, with regards to the Olympics. First of all, this is sort of China is coming of age. So China right now is very focused on bringing itself into the world's center stage. I think there is a little bit of talk about whether or not that will be sort of a couple weeks slowdown around the Olympics. If that does happen and it may happen, it's going to be very localized and localized not only in area obviously, it's just going to be around Beijing, but also localized and limited in terms of scope of time. So, I mean I think, probably the strongest indicator of the impact of it is the Kittiwake charter that we did actually delivers in August during the Olympics. So, we had a charter that was willing to pay $56,250 per day for a year taking delivery of the ship during in the middle of the Chinese Olympics, which people said it could slowdown. Obviously, this charter didn’t agree with that, because he took the ship during the Olympics so and then turning to your question on iron ore, I would say the – there have been slight builds in iron ore inventory, but what I would just caution caller us is to look at the inventory, but look at the consumption rates. Because ultimately consumption drives the market and drives Chinese buying more than inventory levels and what I saw last month in China is iron ore consumption is also increasing. So, what’s very interesting I think this was a very tallying quarter that slide that we put up every quarter that has all of our ships and all of the cargoes that we carry. It was very interesting this was I believe the first time since 2005 that we carried more major bulks than minor bulks and I think what as I said earlier in the call, the reasons for that is that to demand for iron ore and coal is so sharp in areas that can’t, they can’t take the bigger ships that in fact that’s why we did 51% of the cargoes in the major bulks and I don’t know also if the people realize the significance that two of our ships the Harrier and the Kite were the first two ships into that Indian market -- into that new port in India near Chennai that is the port, that is designed to do iron ore exports and that was an iron ore trade that our ships did first two ships to going to that port to do iron ore from India to China so, I would say look it inventory but look it consumption which is increasing and we have been really benefiting from that.

Douglas Mavrinac - Jefferies & Co.

Yes, yes and we were hearing to that, because of some of the snow and because of some of the other transportation disruptions that some of those inventory that we are building at the port weren’t able to making necessarily to some of the desired destinations at some of those steel mills so maybe some of that was partial responsible as well. Don’t know if you have any – hearing anything somewhere on that?

Sophocles Zoullas

No, I agree with you. You hit it spot on.

Douglas Mavrinac - Jefferies & Co.

Okay, okay and then final question for you. We talked about constrains for future fleet growth and we covered the credit market we covered the rise in fuel cost but can you also add some color as for as the shortage of available parts whether the main engines or what have you and the impact that could have on a our future fleet growth and that’s my final question?

Sophocles Zoullas

Yes. No, I think right now what’s happening as we are saying -- I mean if you want to get really specific we are saying up to four year backlogs for main engines sort of two year backlogs for diesel generators, hatch cover backlogs of about 2.5 years so, the supply of parts, major critical components for the ships is significant. Even minor parts like a little gas-cut a little feller around the shape that drives the propeller is a about a 1.5 year to 2 year backlog for this little piece. Its not more than 20 grand, but if you don’t have, you can’t operate the ship so, its just relate across bend and we have a real time Data Point on it, because as I said that’s why I heard last month.

Operator

Your next question comes from the line of Scott Burk with Bear Stearns. Please proceed.

Scott Burk - Bear Stearns

First of all wanted to – wanted to see what the key rate, did you touch the three year market at all. Because you got a pretty high rate for a one year ship and just wondering if maybe a three of our market is also looking a bit stronger than what being indicated and some of the, broker indications?

Sophocles Zoullas

What we’ve seen is right now there is a very strong demand for charters to take ships for very long periods. I mean when I was asked the question earlier about demand for our fleet and I mention that we saw a five year demand for our 2011 newbuilds about a week ago five, ten days ago we had two charters coming after us for a 2010 boats for 10 year charters with profit sharing. So

Scott Burk - Bear Stearns

And at the same kind of level that you have the longest charters in your other ships or higher?

Sophocles Zoullas

Higher materially higher, so I would say even more than your three year points that charters are saying to us specifically to Eagle and I think on of the reasons why we getting lot of interest in the fleet Scott, is because as I said earlier, we have up to 18 open vessels between now in 2009 but with 35 new builds it’s almost like a menu, that charter see this very homogonously very young fleet in a very desirable asset class and it forces charters to kind of come and try and do off market deals with us to get access to this ship type to service there commodity contract. So we feel the one year rate on the Kittiwake was a good rate as I said close to the spot market for that type of ship and going forward looked to us to be opportunistic and take the best deal at that point in time based on us looking at 1, 3, 5, 10 year deals either flat rate or profit sharing.

Scott Burk - Bear Stearns

And then that, speaking of deals, ship buys have come off a little bit since the fall pricing, started to comeback. What -- you guys are pretty booked up with our new building schedule, but how does the acquisition market look to you and are you guys looking to buy any secondhand ships in the near future?

Sophocles Zoullas

No, we're definitely, we're definitely looking to acquire more ships Scott and I think, if you look at this company's track record, since 2005 we have acquired 43 ships and if you look at we've done, I think eight or nine deals in that timeframe, I think all but two were private off-market deals. So with over a 150 billion of liquidity and a couple hundred million of that, is head room for acquisitions over our commitments to our new building projects, we are definitely looking. Now, our ship values at the point they were last year. I mean if you look the Kittiwake we brought the Kittiwake last year for $45 million, we put a one year charter that generates about $20 million in revenues of a $45 million acquisition cost 12 months ago. Are we seeing those kind of metrics to day no, but I would say if you run the math’s even at today’s elevated prices now you can find deals and I think one of the strengths Eagle has been able to demonstrate in the market is generating superior returns on off market private deals which is our sort of strong point.

Scott Burk - Bear Stearns

Okay and then finally in terms of rewarding shareholders. When might you would be able to increase the dividend above the $0.50 range, should we expect that kind of later in 2009 after you start to see quite a few and new-building delivered or is that maybe – more near term?

Sophocles Zoullas

I think the best -- we are not giving a hard data or payout ratio, but I think what I can say to people on the call, on the call today is watch what we do. If you watch – if people watch, what we do and they see us put up some charters and the newbuild start to delivering, hearing announcements from us that we took delivery of this newbuild and that newbuild and the cash flows really ramping up. That’s the hint that a dividend increases probably not to for ‘08.

Operator

Your next question comes from the line of [Zack QuickenHouse] with the QuickenHouse & Co. Please proceed.

Zack Quickenhouse - QuickenHouse

Gentlemen, I just want to congratulate you on a marvelous performance. Both in handling the company and in giving of what you’re doing. I don’t have any questions, you’ve answered all of them, but I do have a bid of advice. I think that the – you talk of rates being high, I have a feeling that in the impending recession that we are having here and the deposits that all nations are going to be running, you are going to see much more inflation in the years to come. So, I would limit in your opportunistic sir – procedures or your contracts to three years rather than five years. This is unsolicited advice, but I feel strongly that you are going to see rates much higher than we have seen before. Thank you.

Sophocles Zoullas

I’m fully – no thank you. I fully agree with you. Your spot on and I think that’s why the Kittiwake we did at year, we already has I said have a 1 billion over a 1 billion of contracted revenues. For the 53 ship fleet, 18 open vessels between now in 2009 that give us the ability to really, focus on generating the most cash this company can produce for it shareholders.

Zack Quickenhouse - QuickenHouse

I think not only as the dollar depreciating in fast clip, but you are going to see other currencies depreciate?

Sophocles Zoullas

Again inflation is historically been very good for shipping.

Zack Quickenhouse - QuickenHouse

Yes. Okay, thanks Soph and thanks for the whole team. You have done a great job.

Operator

Your next question comes from the line of Justin Yagerman with Wachovia. Please proceed.

Justin Yagerman - Wachovia Capital Markets, LLC

I just wanted to get a point of clarification on the non-cash compensation and then a jumping to a few industry questions that I’ve got. When looking at that, that’s different from the non-cash compensation. The non-cash compensation now is different from what it use to be, is that correct? Where you use to have report – stuff that dropdown from Kelso and had non-dilutive effect and now it’s more of our restricted stock plan that you have in place that will be going – aren't going forward?

Sophocles Zoullas

Yeah. You're 100% right. Basically, since the company went public, there was no company stock plan and this is the first one that’s been put in place and it's all in the 10-K.

Justin Yagerman - Wachovia Capital Markets, LLC

Excellent. Alright, I appreciate the clarity. I guess a couple of, interesting things when you looking at your calendars recently, let me just take a look, I lost my chain of thought here, I apologize. Well, I guess - something that hasn’t been discussed recently. When you look it - when you talk to charter as an obviously you're talking to them everyday. It sounds like you're in quite a few negotiations. Are the charters worried at all about where bunker cost are going right now, does that enter into conversations at all? Or is that just was kind of a side thought when you’re looking at the need for the ships and the need to move the commodities around the world right now?

Sophocles Zoullas

I would say Justin that -- just to remind the callers today that fuel prices are not even a pass through for us in fact we never see the bill. The charters order the fuel and a bill goes directly to them. In all of the talks we have with all of our end users, all of our charters, actually fuel never enters into the discussion, because I think charters just accept if they want a ship, they want to ship on time charter, they're just going to be paying a big number and the fuel is sort of another factor that they have to deal with, but it doesn’t enter into negations with ship-owner.

Justin Yagerman - Wachovia Capital Markets, LLC

Yes, that you have just giving the demand out there, that makes a lot of sense. On these longer charters that you're seeing interest on the five and the 10 year charters with profit share, regardless or whether not you would take those charters. Are you seeing that profit share component being brought forward in the charter, when we talk about, because I know that in some of our charters that you're signed on newbuild deliveries, it takes a couple of years for the newbuild -- for the profit share to kicking in and giving the strength that you're talking about, I'm just wondering if you're seeing some of that being brought forward.

Sophocles Zoullas

Yes, all the current charges we're talking about with profit sharing are day one profit sharing.

Justin Yagerman - Wachovia Capital Markets, LLC

Got it. That’s an interesting change. You guys mentioned that Chinese coastal trade as a definite driver it’s been brought up a few times and -- it definitely seems to be an area of growth. Can your ships participate in Chinese coastal trade and I guess that’s a kind of industry question, can a non-Chinese flagship or there any qualifications give obviously in the U.S. you need to be joins act to get cabotage right?

Sophocles Zoullas

Yes. No, I would say the best way to think about it is the Chinese coastal trade has two tear effects specifically for Eagle. The most important effect is that the 400 well expected to go to 500 million tons of Coast trade for 2008. Actually takes a lot of ships out of the call it the world market, as a lot of the Chinese flagships are taken out to service that trade meaning that -- there is a lot of fewer ships tracing more cargoes in the rest of the world. What we've also noticed with Eagle, so that’s benefit number one. Benefit number two for Eagle is, because the coastal trade is really ramping up so much. We’ve gotten permission to actually do coastal trade and what I would like to point out for callers today, because this is a new trend and this is really I think going to be very big. Coastal trade in India is huge and is growing and Eagle Ships trade specifically in that trade. Without a need for dispensation, so I would say we’re not only benefiting - benefiting indirectly and directly from Chinese coastal trade, but we are specifically benefiting in a huge way in Indian Coastal trade which is expected to grow dramatically and again to remind people, the Indian market is a much more difficult market for larger ships to trade in because of the restrictions in ports.

Justin Yagerman - Wachovia Capital Markets, LLC

That’s remain interesting, Soph when you are in China recently I’d imagine you spoke you different charters and different end market users. Was there any color than anybody could give over the negotiations going on with the Australians right now from an iron ore standpoint -- when some resolutions is coming I mean we heard soft deadlines of June 1st, but as of now no resolution has been announced anything in terms of on the sense -- on the ground there?

Sophocles Zoullas

Yes, the local Chinese of opinion is that this whole thing will be raped-up by June. Some point in June and it’s going to be at an increase to the sort of 70% numbers referred so far an increases in other iron ore contracts.

Justin Yagerman - Wachovia Capital Markets, LLC

And then just a technical question on the RAN in you showed launching in April and it doesn’t charter till August. I am just curious, not being a ship owner how does that work? What happens between April and August that gets the ship ready for trade?

Sophocles Zoullas

Okay. What happens is, the ship when it launches it basically leaves the shipyard goes into the water, and then goes to an outfitting pear. So, what happens is the ship the goes a long sides, spends a couple of months actually, putting in some additional components, testing the machinery, remember at the very end of this process you effectively we have to dry-dock the ship, get it ready for the ship owner for deliver, and also do speed trials to make sure it's performing at the wanted contract requirements and that takes couple of months.

Justin Yagerman - Wachovia Capital Markets, LLC

And I guess my last question you touched on it. The Atlantic being one of the strongest regions in the world right now, have you had any discussions or can you put any color around the impacts of the Argentinean grain strikes that have been going on and kind of how that has maybe impacted Eagle or the industry in your view and what you see as the outcome there?

Sophocles Zoullas

Well, I would say if you go back I don’t know a month or so, the strikes had an immediate short-term a little negative effect but now there was this hiatus and their kind of talks of being on and off again the impetus has been, whenever you have a backlog whether its weather, congestion, strikes whatever the event is if you have a short-term immediate pull in of demand, what you have because of the macro pictures is so robust. When that short-term situation get alleviated you actually get sort of a huge increase when the situation get fixed, so I would say what’s going on now in Argentina and specifically Brazil is a real boom in the market and we’ve actually seen our Supramax been -- some of our Supramaxs redeployed from the Pacific into the Atlantic to trying capture the value of these big rates that we are starting to see in the Atlantic market.

Justin Yagerman - Wachovia Capital Markets, LLC

Is there any way to make sure that any of your vessels coming up over the next couple of months end up in the Atlantics, so that you can charter them there or maybe a premium to what that get in the Pacific?

Sophocles Zoullas

Well, I think you can, by the nature of the contract you can’t really control it, but some times neither can the charter because if they have certain cargo commitments, and they have the ship in a certain position that just has to get that cargo from the Pacific into the Atlantic we end up getting the benefit of that.

Justin Yagerman - Wachovia Capital Markets, LLC

Last question, you guys have one of the shiniest newest fleets on the water. I would imagine charterers that you having in you book right now are fairly happy with the vessels that there are using from you. Do you see repeat off ender kind of chartering where you are carrying on the order charterers are coming back to you and saying “Hey listen, we don't want to let go of this ship what to we have to do the keep it?”

Sophocles Zoullas

One of the things that’s very hard for investors to tangibly understand, but I can tell you it’s a huge advantage for us. It's because we have one of the biggest fleets with one of the youngest sort of homogeneous fleets in probably one of the hardest market in the dry bulk market right now. You get basically charterers that have your ship on charter. Our ships end of getting a good name with a charterers customers --the end users so, it a big loss if we don't renew them and we use that relationship to our advantage.

Operator

Your next question comes from the line of Omar Nokta, with Dahlman Rose. Please proceed.

Omar Nokta - Dahlman Rose

You talked earlier about the order book and potential for cancellations delays some of the Greenfield yards in both China and Korea. You guys are actually ordering from a relatively young yard, just want to see how do you see those orders coming along and do you see any potential for a slippage on those vessels?

Sophocles Zoullas

No, I would say. Well this is a very interesting thing for people to know on the call. This shipyard, because I spoke to the owner of the yard has never delivered a ship late, ever and we're noticing on our delivery schedule, everything is spot-on. One of the reasons when we did diligence on the deal last year, to do the -- these Chinese ships, it was specifically because this yard was one of the top yards in the world, its one of the largest Supramax shipyards in the world today there is Supramax specialists, they are also 49% owned by a senior management of Burba Group in France a huge French conglomerate so, I would say we are seeing everything spot on.

Omar Nokta - Dahlman Rose

Okay and so, all of the other – and to their equipment like the engines, the cranes, the hatches, the diesel generators those seem to be – the whole supply chain seems to be coming on line as well.

Sophocles Zoullas

Yes, the whole trick is for an experience ship owner and most good ship owners would do this diligence, especially in today’s market. When you order a ship what you want do is you want to make sure that the shipyard can evidence that they secure the critical components. So, A that was done, but B and this is really to the heart of your question Omar, the ships that we are building. The parts for those ships have been procured a long, long time ago, because these are effectively old orders. So, when you here about shipyards today with new orders having trouble securing machinery. It’s going - it’s going to the suppliers today, but if you when – two years ago when all of these critical components were more available, its not – it was not a problem. Not as much of a problem as it is for today.

Omar Nokta - Dahlman Rose

Okay. So, basically some of that tightens in the some of the engines and the generators that stuff, you don’t see that affecting say your 2011 deliveries?

Sophocles Zoullas

No, no because remember even though there are 2011 deliveries the orders we’re putting a long time ago.

Omar Nokta - Dahlman Rose

And then just on those – I think you had the five options less on those Supramaxs, your exercise for at that year-end and I am seeing probably just let those others go away that you had?

Sophocles Zoullas

No, our view on that is very simple. The first four --to start getting those ships in 2010 when you can actually charter 2010 positions at good rates today was a sort of no brainier for the second half of the options where you are getting the majority of those ships in 2012 our view is, because we are seeing a pretty good amount of deal flow on potential acquisition targets currently that we would rather deploy that capital and something that can generate revenues for our shareholders sooner than 2012.

Omar Nokta - Dahlman Rose

Okay. And that’s probably didn’t have that much I guess values since they were that laid out delivery?

Sophocles Zoullas

No, they were at a discount to market if you would say so, but it wasn’t material enough to justify focusing on it, our focus right now was more on how can we deploy that say 200 million into deals in a shorter timeframe to generate more cash flow.

Omar Nokta - Dahlman Rose

I was just wondering if maybe those options had any value that you could sold them for some one else and made maybe a couple million bucks off it.

Sophocles Zoullas

Hard to say

Operator

Your next question is a follow-up from Justin Yagerman with Wachovia. Please proceed.

Justin Yagerman – Wachovia Capital Markets, Llc

I was going to ask on the insurance policy, whether or not you are covered on the new charter that you just signed and then what your thoughts are on that kind of going forward or if you -- would decide at some points to reveal charter counter parties.

Sophocles Zoullas

Okay the as people know the new charter is literally hour old, so we actually now have to go through the process of tucking that new charter into the policy so, the charter was done literally last night. I would say with regards to charters counter parties, I mean specifically this one charter that we did I discussed the point you just brought up Justin and the charter said listen it to them it weakens their negotiating position vis-à-vis their counter parties. So I would say in terms of giving guidance on that we don’t intend to change our policy. We view this as a competitive advantage that allows us to do more off market chartering at better rates and established better relationships with our charters.

Justin Yagerman – Wachovia Capital Markets, Llc

Okay. Not that is completely fair and so I guess the thought process is and you got still obviously worked this out on this vessel but continue with the insurance policy on new charter signed?

Sophocles Zoullas

Yes, unless you hear otherwise. We like it we developed the market in this as you know. It doesn’t cost us very much and I think it really differentiates this company from all the other ones.

Justin Yagerman – Wachovia Capital Markets, Llc

Right. I appreciate Soph. Thank you.

Sophocles Zoullas

You’re welcome.

Operator

Your next question comes from the line of Charles Rupinski with Maxim Group. Please proceed.

Charles Rupinski - Maxim Group

I just have a few quick questions on you some of the trade you’ve mentioned. Very interesting things about what’s developing in the trade on the Indian ore side, what if any effect would be final resolution in the Chinese iron ore negotiations have on Indian trade with China and how will that your effected charters if any, if at all?

Sophocles Zoullas

I think what you would see, as you would see what would happen we’d get a double benefit because last year we were doing iron ore from Australia to China as well as India to China. So, the Australia to China had kind of slowed down for us. So, I think once that get resolved what we will see is, we will the continued India, China route, which is specifically a Supramax route because as I said the ports in India a lot of them cant handle the bigger ships. So, we’ll continue on that, but we will get the benefit of also going back into the Australia, China route like we did last year.

Charles Rupinski - Maxim Group

Let me ask you this. Would there be an affect just from the on the pricing coming out of India in more spot or anything like that that would potentially be a possible sift to move from Australia or are you saying it will be steady forward regardless?

Sophocles Zoullas

Well there is this extreme tension right now, between the minor is trying to push product to the spot market and the Chinese resisting that. So, that tension actually I view will not go away just with, once we hear that all the contracts from Australia to China are concluded. That will continue throughout the year, but specifically to Eagle, I think what we’ll see is as I said this big volume of iron ore from India, coupled with additional trade for Supermaxes from Australian, which frankly in so far this year has been minimum.

Charles Rupinski - Maxim Group

Great and the other question I have is on just on the coal inventory – I just heard a story of the coal inventory being very low in China. I mean do you have a view on that and how that might be a possible catalyst going forward?

Sophocles Zoullas

Yes, I would say for callers today when people think of the coal market, they should actually think of India and China together. China obviously is doing some very interesting things and they are really ramping up their need for coal which is great for us, because we did a lot of coal and we expect the coal and I mention for example we believe coal will be the biggest commodity of growing demand for Chinese coastal trade. At about 70% of the 100 million tones of additional coastal trade that we anticipate this year, so that’s going to be very important, but don’t forget India. India is radically increasing their power great over the next couple of years and their demands are going to be very significant, and I think that's going - I've saying this for about a year, I think India's growing player on the long-term importance in the dry-dock market and we've seen it already and I believe the trend will continue.

Operator

Your next question comes from the line of Urs Dur, with Lazard Capital Markets. Please proceed.

Urs Dur - Lazard Capital Markets

Everything’s been asked, but good morning. I guess it's been really bullish and the one thing I would want ask here is, we have this large order book - you do discuss have a lot of it could be delayed or not delivered at all that’s fine. It’s a common discussion out there, but let's look at that the negative side of things just for a second and let's say that most of the order book is delivered and most of it is delivered on time just for argument sake. What is the -- regardless of the tremendous long-term charter interest right now? What is the default probability going forward not only with your charterers but with others what's the quality of the charterers right now and going forward?

Sophocles Zoullas

Okay. Specifically with Eagle. I think you are asking some great questions here.

Urs Dur - Lazard Capital Markets

Just to look at the other side of the coin for a second. I mean I know things are bullish right now?

Sophocles Zoullas

No, no, and listen, I think the questions you are asking actually really get to the substance of what these different dry bulk companies are doing. So, specifically with default as was mentioned earlier we developed the insurance market for fleet insurance against the risk you just mentioned. So, that’s taken care to July 2010 but I think the first safeguard the first firewall if you will, is management and due diligence and relationships and presence in the market and, if you look at the charter that we just announced on the Kittiwake its with a big international charter that’s been around for decades that has a great name and we – they are comfortable with us, we are comfortable with them and we do off market deals together. This charter probably wouldn't have been announced if we didn’t announce into the market it was just kind of never seen the light of day the shipping market that’s how we do things, but because of the strength of management and the strength of our relationships, we have the luxury also with the quality of the fleet that's very homogeneous very young fleet to have our pick of the charters that we want to business with. So, we don’t do – I’ll tell you who we don’t business with. We don’t do business with new charters. We don’t do business with charters was small balance sheets. We don’t do business with charters that don’t have a good name in the market and investor should look at what we’ve done so far and look at the reputation of this management team to get a sense of, how we’re going to handle the concern you’ve just mentioned.

Urs Dur - Lazard Capital Markets

And just to follow on, I mean there has been some history and I know it’s a long time ago and the market was very different, but they has been some default. Can you say that overall or is this your impression that overall as the commodity trading industry has grown over the years that the picture is very different in terms of the solvency of the individual charters that are out there is - its the quality of company in the broader sense that is chartering ships today better or worse than it was say back in the late 80s or mid 90s. I mean, I know that’s really broad, but, just sort of to give a --

Sophocles Zoullas

No, you are asking good questions. These are broad questions, but these are areas that investor should be aware. So, I think it’s a welcome question. I would say the way I characterize the market today is – there is a lot of new players. So, let's put it this way, new management teams they don’t have experience running dry bulk ships and maybe don’t have deep relationships or the luxury of having a nice fleet to be able to only do business with blue-chip charters, you want to be careful because there is a lot of new players out there, but I can tell people on the call today, I have been in this market specifically in the Eagle bulk carrier markets for over 20 years and I have never had a charter ever renegotiate with me.

Urs Dur - Lazard Capital Markets

Okay. Well that’s very useful and thank you very much lots questions today. Thank you.

Operator

Your next question comes from the line of Christian Wetherbee with Merrill Lynch. Please proceed.

Christian Wetherbee, Merrill Lynch.

Hi, I apologize if missed this before, but I was wondering given the activity at the shipyard snow, what is your expectations for tanker to dry bulk conversions, is that a realistic way to - for owners to get into the dry bulk market?

Sophocles Zoullas

Well, I – I don’t know if everyone is aware but I also Chare, I am Chairman of the US Advisory Committee for Lloyd's Register which is one of the classification societies that actually -- the classifications societies are actually the organizations that have the responsibility and liability for classifying these conversions for trade and I think the market even though there is a lot of stuff spoken about in the media what you are seeing is cost over runs delays in these projects, and problems taking ships that are purposely built for liquid trade that are a longitudinally strengthened for dry bulk trade where the ships were designed to be strengthened horizontally and, we have already - we’ve already seen I think one of the first conversion start to have some trouble structurally. So, our view if you want Eagle’s view is that it’s not going to have a big impact on the market and if does it’s the minimal impact it will have this maybe on the Cape’s and we’re talking about, 4% of the Cape size market. So, I - specific to Eagle I don’t think its going to be any problem for us.

Christian Wetherbee, Merrill Lynch.

Okay, great and just another industry question. Giving the way that, rates have increased over the past couple of months. How well do you see prices for a new building slots keeping pace with that? I mean, how much I guess is, in the spot market is increased? How much of that immediately discounted in surprise of a new build? Or is there any kind of slots you can exploit there?

Sophocles Zoullas

Yeah I think, basically what we're seeing is, shipyards were basically fall for about, I would three or four years. I mean right now, in top Japanese yards, you're looking at 2013 slots for our Supramax. So, we have a pretty good handle on the order book and I would say because of the deliveries are so pushed out, that the current increase in charter rates doesn’t have a big push up in asset values when you talking 2012-2013. That answers your question –

Christian Wetherbee, Merrill Lynch.

Yes it definitely. Just one more given the -- the order books kind of top heavy towards the vessels with the highest capacity, do you see other owners out there with a higher mix of larger vessels starting to come down and diversify their fleets into the smaller vessel ownership?

Sophocles Zoullas

No, we haven’t seen that at all. I would say the people that have order in the Handymax, Supramax market are the traditional Handymax, Supramax owners.

Operator

Your next question comes from the line of Stephen Abernathy with Abernathy Group Please proceed.

Stephen Abernathy – Abernathy Group

The dry-docking efficiency or the efficiency rating that you discussed earlier does that include - does that include planed dry-docking or not. Meaning as we experienced the dry-docking that that rate will go down, or will that rate stay the same?

Sophocles Zoullas

Good question the 99.7% utilization rate that we discussed and this is by the way industry convention so this is in just Eagle. This is basically the dry-docking has taken out. Because, it only calculates the ship owners ability to generate revenues obviously if you in dry-dock, you can’t generate revenues. With a very young fleet I mean if you include the newbuilds we’ve got a two yield fleet. We feel good about the guidance we have given which is 15 days out of service, every 30 months per ship and, about 500,000 per dry-docking.

Stephen Abernathy – Abernathy Group

Okay. I know the call getting kind of long here, and I will just limit just one more and then take the rest offline. Can – but Soph, can you describe any limits that you might have on your ability to pay dividends relative to your debt covenants or any other covenants or any other obligations that Eagle may have going forward?

Sophocles Zoullas

I like to answer this question, because we are so much incompliance by a multiple of all of our - bank covenants. There is no restriction currently on any of our ability to increase our dividends and in fact, I know investors like to look a debt to cap, as a level of as leverage and I think Alan, mentioned a number of, something like 40%. The banks care about something called debt to steel, and our debt to steel ratio is, right now about 30%, which is I mean from our traditional ship owners standpoint we are vary under leveled.

Stephen Abernathy – Abernathy Group

What is that –what is that the debt to steel mean?

Sophocles Zoullas

Debt to steel is basically your debt related to the value of your assets.

Stephen Abernathy – Abernathy Group

Is not debt to scrap or --

Unidentified Company Representative

Debt to current market value of your fleet.

Stephen Abernathy – Abernathy Group

Okay, thanks a million. We will take rest of time. Thanks

Operator

I show no further questions. I would now like to turn the call over to Mr. Zoullas, for any closing remarks. Please proceed.

Sophocles Zoullas

I would like to thank everyone again for joining us for our first quarter earnings call and we look forward to keeping you updated of new developments throughout the year. Thank you very much.

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Source: Eagle Bulk Shipping Incorporation Q1 2008 Earnings Call Transcript
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