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Eagle Bulk Shipping Inc. (NASDAQ:EGLE)

Q2 2008 Earnings Call Transcript

August 7, 2008 8:30 am ET

Executives

Sophocles Zoullas – Chairman and CEO

Alan Ginsberg – CFO

Analysts

Doug Mavrinac – Jefferies & Company

Natasha Boyden – Cantor Fitzgerald

Urs Dur – Lazard Capital Markets

John Chappell – JP Morgan

Mike Liebert [ph] – Wachovia

Chris Wetherbee – Merrill Lynch

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Eagle Bulk Shipping Inc. earnings conference call. (Operator instructions) I would now like to turn the presentation over to your host for today’s conference, Mr. Sophocles Zoullas. Please proceed.

Sophocles Zoullas

Thank you and good morning. I would like to welcome everyone to Eagle Bulk Shipping's second quarter 2008 earnings call. To supplement our remarks today, I encourage participants to access our 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 of 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 turn to slide two for the agenda for the call, which will follow our usual format. After my opening remarks, I will discuss our second quarter 2008 highlights, and provide an update of our growing on-the-water fleet, which includes the delivery of two additional ships at the end of the second quarter, the status of our 35 vessel newbuilding program and an update of our chartering positions. I will also discuss current trends in the market for demand and supply and then pass the call over to Alan Ginsberg for reviews of the company’s financial performance. I will then end the management discussion with some concluding remarks before taking questions.

Please turn to slide four. We are very pleased with our strong second quarter performance, which reflects strong results for Eagle Bulk and importantly marks the beginning of a period of sustained fleet and cash flow growth starting in the second half of this year. During the quarter, our net income increased 25% from Q2 2007 to $14.9 million or $0.32 per share. Net Time Charter revenues also increased 31% to $37.2 million year-on-year. EBITDA increased 24% to $27.8 million year-on-year. Yesterday, we declared a dividend of $0.50 for the quarter, and including this second quarter dividend, we have paid a total of $6.10 per share to date to our shareholders. During the quarter, we again achieved superior operating performance with a fleet utilization rate of 99.9%.

Slide five. Last night, we announced the recent charter of the Cardinal for a one-year charter at $62,000 per day, which represents a 121% increase from the expiring charter. As I mentioned during our first quarter call, the growth of our fleet has enabled us to pursue a more opportunistic chartering strategy without sacrificing our commitment to stable, visible cash flows. The Cardinal charter represents the latest manifestation of this approach, and during the last three months, we have chartered a total of three vessels at significantly higher levels than previous charters.

We also took delivery of our first newbuilding, the Wren, 70 days ahead of the contract date. This is a noteworthy accomplishment in an otherwise uncertain newbuild market, where there are many reports of delays in other shipbuilding projects at different shipyards around the world. Furthermore, this demonstrates Eagle Bulk’s effective management of the newbuilding program and the strong results of Eagle Bulk’s high-quality shipyard partners. As previously announced, the Wren immediately commenced a ten-year profit-sharing charter.

Two weeks ago, we also launched two more newbuild vessels, the Woodstar in Dayang shipyard in China; and the Crowned Eagle, which is the first of five newbuilds we are constructing at IHI in Japan. We are confident that these ships will deliver on time during the fourth quarter this year. Lastly, we have also taken delivery of the first of two young on-the-water vessels that we purchased in May this year; the Goldeneye, which commenced a one-year charter at $61,000 per day. We expect to take delivery of the second vessel, the Redwing, next month. We believe the addition of five vessels to the Eagle Bulk fleet; the three newbuilds as well as two on-the-water vessels, combined with the re-chartering of our existing fleet at significantly higher charter rates to the current expiring contracts, will have a highly accretive impact on future earnings, EBITDA and free cash flow per share.

Please turn to slide seven for a review of our fleet. Eagle Bulk is currently one of the largest owners of modern supramax vessels with 20 vessels on the water with a fleet average age of only six years. Importantly, the future value for our shareholders will be realized as we start taking delivery of our 35 new vessels over the next four years and they start delivering sustainable growth in earnings, EBITDA and free cash flow. I would like to point out that all these vessels were purchased for prices between $33 million to $42 million per vessel, which represents a significant discount to current market values and demonstrates Eagle Bulk’s ability to secure high-quality assets that provide a strong return on invested capital. The delivery schedule for the new ships will ramp up beginning over the next quarter, six months; with three new vessels delivering to us during 2008, nine additional vessels in 2009, eight additional vessels in 2010, eight additional vessels in 2011, and seven additional vessels during 2012. On the right side of this slide, we include photos from the on-schedule Woodstar and Crowned Eagle launching ceremonies two weeks ago.

Turning to our chartering strategy, we have successfully positioned Eagle Bulk to offer shareholders stability from the excess $1 billion of contracted revenues that help support the dividend as well as 18 open vessels and 19 profit-sharing charters to provide upside. We believe this balanced portfolio approach with staggered maturities on our contracts would give the company financial stability and the position to opportunistically grow earnings. We have recently demonstrated the success of this chartering strategy with the charters of the Kittywake at $56,250 per day, the Goldeneye at $61,000 per day, and the Cardinal, most recently at $62,000 per day. Lastly, Eagle Bulk has consistently paid dividends every quarter to our shareholders with a to-date total of $6.10 per share. We intend to increase the dividend payments to our shareholders over time.

Slide eight illustrates the highly-desirable characteristics of our fleet, including the Redwing, which we expect to take delivery of next month, we operate 21 vessels comprised of 18 supramaxes and 3 handymaxes, with an average age of 6 years and their cargo carrying capacity of just over 1 million deadweight tons. Eagle Bulk’s cargo-carrying capacity will increase to 3 million deadweight tons as we continue to take delivery of an additional 34 newbuild vessels. It is important to note that all 35 new vessels are in 3 classes of sister ships, that gives 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 grabs, which panamaxes and capesize ships don’t have, that allow our ships to trade in high-growth developing regions around the world. We expect the remaining four 53,000 deadweight series will deliver to us in the next 18 months. The five 56,000 deadweight series will all deliver to us between Q4 of this year and Q1 of 2010. And the 58,000 deadweight series starts delivering to us next year. During this timeframe, the three series of supramaxes will all start to deliver into the fleet and begin generating cash flow for Eagle Bulk. It is important to note here that all ships are being built at only two high-quality shipyards, which makes it very easy for us to operationally manage our growth.

Slide nine 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, which has increased every year from $44 million in 2005 to $100 million last year. The red line illustrates the growth in vessel owned days, which investors can use as a measure of our ability to generate revenues. Since 2005, the growth in our EBITDA has corresponded with the growth in our owned days. Looking forward through 2012, our owned days are on track to increase by 300%, as we add about 13,000 owned days with our newbuilding program. This analysis assumes we do not make additional acquisitions during the next four years, which is highly unlikely given the profile of this company. Any acquisitions would add corresponding additional owned days to this graph.

Please turn to slide ten for a review of our future chartering positions and strategy. There are two key messages for people on the call today regarding Eagle Bulk’s chartering strategy. The first message appears on this slide as the excess $1 billion of contracted revenues with staggered contracts gives our company significant long-term revenue visibility and stability that supports our dividends and helps insulate Eagle Bulk from market volatility. In fact, we are one of few dry bulk companies that has revenue visibility going out ten years. I would like to also importantly point out that this bar chart is very conservative, since it 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 to our company.

Slide 11 illustrates the second key message regarding our chartering strategy that Eagle Bulk is well-positioned to lock in charters in a strong contract rate environment that significantly increases revenues. 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 $300 million to $450 million per year of additional revenues during this time period at charter rates between $40,000 to $60,000 per day. These numbers are supported by our recently announced charters of the Kittiwake, Goldeneye, and Cardinal at $56,250 per day; $61,000 per day; and $62,000 per day respectively. It is also important to point out that this chart does not include the 15 additional vessels that we will take delivery of during 2011 and 2012 that will add 6,000 additional owned days, which will further increase Eagle Bulk’s revenue-generating capabilities.

Slide 12 is a summary of the prior two slides and shows that the open days and newbuild vessel deliveries significantly increases Eagle Bulk’s revenues. This slide also shows the benefits of our flexible chartering strategy that combines the stability of fixed revenues in the bottom green section of each bar, coupled with the upside potential to generate significantly increased revenues for the second half of 2008 through 2010 and beyond. The well-timed purchases of our 35 new vessels not only represents significant gains in asset values, but also ensures low-case revenue growth of 67% from 2008 to 2009, and 39% growth from 2009 to 2010; high-case growth rates show growth of 106% and 50% respectively for the same periods. More specifically, depending on charter rates, this analysis shows how our revenues can increase from just under $200 million to almost $600 million per year during the next two years. Specifically, increased cash flows will be attributed to; one, the chartering of our open days, such as the Kittiwake, Goldeneye and Cardinal charters I mentioned earlier; and two, the delivery of our additional vessels from our newbuilding program, which we have just started to deliver to us this summer, which provides long-term sustainable growth to our shareholders.

Onto the industry. Slide 14. The central message for dry bulk trade is that long-term demand continues to drive the market. Infrastructure projects, which typically have a very long lead time for completion is the reason for much of this demand. One example of this is China’s plans to build 104 new cities with a population in excess of 1 million people by 2025. These types of infrastructure projects need significant amounts of raw materials over long periods of time. The world’s major mining companies have responded to this clear long-term demand by investing billions of dollars to increase raw material supplies for such projects. In fact, new iron ore mines are scheduled to add approximately 400 million tons per annum requiring seaborne transportation. This considerable new iron ore capacity is expected to significantly increase seaborne iron ore trade starting later this year as a 110 million tons per annum will be added this year, 135 million tons will be added in 2009 and 2010, and 157 million tons will be added by mining projects in 2010 and later.

Historically high demand for coal continues to increase due to power and steel generation capacity needs as well as low thermal coal stockpiles. In fact, coal stockpiles are at historically low levels with China’s big power plants running at only 11 days coal supply. Furthermore, as China expects to increase its power grid by 80-90 gigawatts per year for the next two years, an increase in coal consumption and increased coal consumption by 1 billion tons by 2015, we expect the demand for coal will remain very strong. Furthermore, approximately 70% of Chinese coastal trade is estimated to be intra-Chinese coal shipments, many of which are carried on supramaxes, since this and other commodities move to smaller ports with more restricted waters and the need for smaller ships with cargo cranes.

Slide 15. The growth of Indian demand is important for the dry bulk market and the supramax vessel is best-suited to meet this long-term market as very few ports can handle large ships. As you can see with the left pie-chart on this slide, handymax vessels handled more trade to and from India at 58%, than capesize, mini-cape, panamax, post-panamax and handy-size vessel classes combined. Looking to the chart on the right, you can see how the handymax vessel is the workhorse of the Indian market and is the only vessel type to realize successive year-on-year increases since 2005. Specifically, during the second quarter, several of our supramaxes were involved in Indian coastal iron ore shipments, where larger ships could not service due to their size.

In summary, the long-term infrastructure projects in China and India, as well as the Gulf states will require supramax vessels, since these ships are very well positioned for these markets as many ports in these regions cannot handle large ship types and require ships like ours that have onboard cargo cranes needed to service seaborne transport for much of these regions.

Slide 16 is an update of the cargos we carried on the Eagle Bulk fleet during the first half of 2008 and shows the desirability of this asset class due to the superior trading flexibility of the supramax vessel. As I mentioned earlier, demand for iron ore and coal pushed more of our fleet into this trade and over half of the cargos we carried were in the major bulk markets because of the supramax’s ability to enter markets that the larger ships cannot service. Consequently, 57% of the 3.6 million tons we carried during the first half of 2008 were major bulk cargos.

Please turn to slide 17 for an update of the dry bulk supply statistics through 2013. The new message here is that since the last quarter there has been little change to the supply statistics in the world fleet. We continue to believe that 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 years old. Additionally, new ship supply statistics show continued delays in new ship construction, as second-tier yards as the first half of 2008 shipyard deliveries slipped by 25%. A limited survey of 19 shipyards confirmed this and 10 of those shipyard managers had confirmed order cancellations. Last week, shipyards in Korea confirmed $800 million of cancelled orders. We believe cancellations and slippage in future ship supply will continue in the market and may create buying opportunities for Eagle Bulk.

I would now like to pass the call to our CFO, Alan Ginsberg, who will now provide an update of our financial overview of the company.

Alan Ginsberg

Thank you, Soph. Slide 19. A brief recap on our quarterly results of operations. Eagle had another inline quarter. Once again, I'm pleased to report there are no surprises here. All vessels were on time charter during the quarter. Net revenues for the quarter were $37.2 million, a 31% increase over the second quarter figure of 2007 of $28.3 million. As Soph mentioned earlier, our fleet utilization for the quarter was an almost perfect 99.9% for the quarter, 99.8% for the first half of the year. EBITDA as adjusted for exceptional items under the terms of our credit agreement was $27.8 million for the quarter, an increase of 24% over 2007 quarter of $22.3 million. Finally, net income was $14.9 million or $0.32 per share for the quarter, an increase of 25% over second quarter 2007 of $0.29 per share.

Slide 20. Next I would like to provide an update on our expected cash costs for the remainder of the year. As our fleet continues to grow with newbuildings coming online, our interest expense will increase as we make further draws from our revolving credit facility. Our new estimated interest expense, net of interest income is now $2,200 per vessel per day. Please note that in the second quarter, we put our excess cash on the balance sheet to work by acquiring two vessels, Goldeneye and Redwing, which will impact interest income going forward.

Now onto other expenses. As we grow our fleet by almost 300% over the next few quarters and thereby squeeze out economies that scale from a fleet of young sister vessels, we are not immune to cost escalations being felt across the industry, especially in crewing, crew travel and oil-based lubricants and paints. We expect this trend to continue for the foreseeable future.

Our revised estimated daily vessel operating cost is $4,704 a day, technical management fees paid to our vessel managers are estimated at $296 per vessel per day. Our estimated general and administrative expenses

$1,600 per vessel per day. Finally, we have not changed our estimated dry dock costs at $500,000 once every 30 months, which equates to $548 per vessel per day. We believe that we have one of the most competitive dry dock costs as we have a program of continuous year-round maintenance, which leads to an efficient and cost-effective dry dock.

As mentioned on our previous earnings call, global dry docking capacity has shrank as more shipyards have decided to get into the newbuilding construction business. This has put pressure on availability of ship-repair berths. As a result, we are seeing longer waiting times to get into dry dock. We are therefore increasing our estimated dry dock time from 15 to 22 days. We believe that this phenomenon will positively impact charter rates similar to port congestion as this limits the availability of ships.

Slide 21. I just want to offer a few comments on our second quarter 2008 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 is delivered. As of June 30, $283.3 million of our debt is against our on-the-water fleet and the balance of $382.4 million is against our newbuilding program. We have swapped approximately 90% of our debt. The weighted average effective interest rate for the second quarter was 5.46%, inclusive of our margin. Finally, our book capitalization stands at just over 1 billion and our current liquidity position is over $900 million.

With that, I would like to turn it back to Soph, who will complete the presentation.

Sophocles Zoullas

In conclusion, on slide 22; we believe the second half of 2008 is an important and transitional period for Eagle Bulk, as well-timed investments we made during the last 18 months will generate clear benefits to our shareholders starting next quarter. First, fleet growth begins now, as the first of our new vessels has already delivered to us and starts to generate cash flow. This is followed by two additional ships, which launched last month and we expect will deliver in Q4, followed by an increasing delivery schedule in 2009. Second, the ramp-up in owned days, starting with our newbuild deliveries will further increase Eagle Bulk’s revenue-generating capability. And third, re-charters of our on-the-water fleet is highlighted by the Kittiwake, Goldeneye and Cardinal charters should realize large increases in day rates given current market conditions. In summary, we believe these three factors together translate into significant increases in Eagle Bulk’s EBITDA in the near future.

I would now like to turn the call back over to the operator for questions.

Question & Answer Session

Operator

(Operator instructions) And your first question comes from the line of Doug Mavrinac with Jefferies & Company. Please proceed.

Doug Mavrinac – Jefferies & Company

Thank you. Good morning, Soph and Alan and my congratulations on once again another great quarter.

Sophocles Zoullas

Thank you, Doug.

Doug Mavrinac – Jefferies & Company

Just had a few questions for you guys. First off, we have seen a divergence between the strength in spot charter rates and time charter rates in recent weeks and in recent days. As an owner that transports a broad base of commodities and as an owner that primarily uses time charter contracts, how would you describe in your view the current underlying demand environment for dry bulk commodities in general, and how would also interpret the strength of the time charter market versus the weakening spot charter rate environment?

Sophocles Zoullas

Actually Doug, I think that is a very good question because I think it gives people on the call today insight into what ship owners are seeing in dry bulk and actually – really gets to the heart of the demand issue. What we have going on here is we have what I believe is a couple week expected seasonal summer slowdown coupled with the Olympics, which is sort of underscored by a slowdown in – call it the spot market rates for dry bulk carriers. What you have is a very interesting phenomenon, where long-term charter rates are significantly higher than spot charter rates. For example, supramaxes in the Pacific, around the Chinese Olympics market are trading at about $10,000 higher on long-term charters than they are on spot charters. So what I think it tells ship owners and I hope tells investors is that you have a couple of weeks of expected short-term – call it drifting down of rates, but you have very strong underlying long-term demand and ship owners generally expect a big snap back to strong demand post-Olympics.

Doug Mavrinac – Jefferies & Company

Okay. Fantastic. That is perfect. I thank you. My second question has to do specifically with the grain trade. Both of the upcoming North American harvests and also the South American grain trade with Argentine farmers strike behind us, how does the North American grain trade typically work in terms of the impact on rates? And secondly, is there going to be any follow-through effect on the demand for ships and therefore rates due to the Argentine farmer’s strike being behind us; did those first-half disruptions – will they have an impact on the demand for South American exports in the second half of this year?

Sophocles Zoullas

What I would like to do to answer the question is actually go back about two months, and just explain for people on the call today this Argentine strike situation that happened that had intermittent disruption of grain exports out of the Southern Hemisphere and the Atlantic. As people on the call may have read, there were these very short-term unexpected on-again, off-again strikes that affected grain exports in the spring. Now what is interesting is everyone expected the strikes would really pull down charter rates, because of the disruption of grain movements. However, the strikes happened at a period where we were noticing historically-high charter rates; which needs explanation. What happened was the strikes were occurring, ships were repositioning for what they expected to be a traditional Argentine grain export season, and as the strikes came many times unannounced and were just announced as the ships were ballasting the load, ships were then diverted north into the US Gulf and the US Gulf was experiencing a very strong grain export market in a time when it is not actually an export season. So, what it showed was that there is a swing factor between Argentina and the US for grain, so even when you had disruptions in Argentina, the US through its excess grain in the inventories they had, was able to drive the market. Now looking forward, as we go into – call it the October North American grain harvest has an incremental boost to the market that has traditionally really driven rates anywhere from 30% to 50% higher from summer lows. So we expect the grain harvest to once again have a very stimulating catalyst effect to rates starting in say, October.

Doug Mavrinac – Jefferies & Company

Okay, perfect. Thank you very much. And then one final question before I turn the call back over. Can you talk about, Soph, some of the issues around the lack of refund guarantees being provided by many shipyards and why the lack of those refund guarantees may translate into future order cancellations of orders that are currently on the order book?

Sophocles Zoullas

Again, a very valid point switching to supply. Again, I will start answering the question by explaining the whole refund-guarantee process. In Japan – Japan is the one sort of mature shipbuilding market where refund-guarantees are not typical. Refund guarantees basically allow the ship owner to make progress payments to a shipyard, and if for any reason the ship isn’t delivered to the ship owner, the ship owner can collect their progress payments plus interest from a refund guarantee bank. The major Japanese builders such as IHI, where we are building and Mitsui and all the big – Tsuneishi, refund guarantees are not typical because these are very well capitalized shipyards. However, in the majority of the rest of the world, refund guarantees are the norm and what we have seen is there has been a real buckling of the refund guarantee system, where many of these sort of second-tier and third-tier developing shipyards are struggling to be able to issue refund guarantees because the refund guarantor banks are losing confidence in either a) the shipyard being able to build the ships, or b) are facing their own liquidity issues. So it is sort of an issue that has not been brought to the surface much yet, but is a real driver that could impinge supply of dry bulk ships into the market in the future.

Doug Mavrinac – Jefferies & Company

Excellent. Great. Thank you very much and congratulations once again, guys.

Sophocles Zoullas

Thanks.

Operator

Your next question comes from the line of Natasha Boyden with Cantor Fitzgerald. Please proceed.

Natasha Boyden – Cantor Fitzgerald

Thank you operator. Good morning, gentlemen.

Sophocles Zoullas

Good morning, Natasha.

Natasha Boyden – Cantor Fitzgerald

I just wanted to move over to the dividend. You said that you intend to grow the dividend, I think you have mentioned that in the presentation. Can you give us some sort of timeline regarding that growth and when you do intend to perhaps increase the dividend?

Sophocles Zoullas

That is the $64,000 question and I don’t mean to be anything but direct with you, but we – given the growth of this company, and the contracted revenue streams that we have and by most analyst’s models, the kind of free cash flow above the $0.50 that we are generating, it gave us the confidence to be able to publicly say we are going to raise the dividend for our shareholders. Now, what we are going to do is we are going to do that responsibly; we are going to do that in a way where the two primary uses of the excess cash are going to be debt repayment and dividend increases. I think one of the very positive effects from the big deal we did about a year ago, in 2007, was when we went to a fixed-dividend policy, it gave us this incredible advantage to organically grow the company.

So I think the indicator that we have given to the market and I will reaffirm that today, is look to what we do as the best forward indicator of when the dividend increase comes. So, we have announced a couple of good charters, people can model the kind of excess cash we are going to have over the dividend of fixed $0.50, and people can kind of do a back-of-the-envelope guess on when that dividend increase is coming. We will be responsible, we do not intend to pay out all of our free cash flow in dividends, I do want to highlight that, but people can watch what the company does, report charters, report on-time newbuild deliveries, and after you see a couple of more of those, we are going to deliver what we promised.

Natasha Boyden – Cantor Fitzgerald

I'm glad to hear you are not going to be paying out all your free cash.

Sophocles Zoullas

Those days are gone.

Natasha Boyden – Cantor Fitzgerald

Excellent. Also, clearly I know that your costs are going up and I know that is certainly just you, I know that everyone is and there is not much you can do about that. Can you give us some idea of where you think costs might be going perhaps in 2009 and maybe even beyond that; I mean, are we looking at a 10% to 15% increase maybe beyond that. And again, I realize it is industry-wide, so maybe if you can give us sort of an idea of what you are seeing?

Sophocles Zoullas

Sure. I think there is two things going on with Eagle. You have industry-wide cost escalation, and then you have things specific to our growth. So starting first with industry-wide, and I think I was the first one to talk about this, probably about two years ago; and now it has been a pretty common thing that we have heard from other companies is that you have oil-based supplies such as greasing for the machinery, lubricants going up at very high levels and this pandemic, which is not a dry bulk problem, but is a shipping problem, affects container ships, tankers, LNG, LPG, carriers, all commercial ships is this crewing problem. And we believe crewing through 2009, and I will even venture to go 2010 also, we are looking at crewing increases in the 15% to 20% bandwidth, and people should factor that in, and I'm telling people on the call today that one of the reasons we are able to do 99.9% utilization rate is because we have what we believe are top, top crew and we intend to protect and keep our top crew, so Eagle will most likely be lockstep in that increased bandwidth to maintain the desirable crew to achieve the kind of results we have achieved to date. Now, specific to Eagle, we have realized increases in our G&A that I would like to point out are in anticipation of 300% growth in the company. It would be imprudent of us to wait until we have grown and then increase our G&A. So the G&A is being increased in anticipation of this huge influx of ships coming into the company. So you have two cost drivers that are going to be occurring at Eagle.

Natasha Boyden – Cantor Fitzgerald

Okay, great. Thank you. And then just lastly, I think you have the Redwing being delivered to charter in September, is that correct?

Sophocles Zoullas

That is correct.

Natasha Boyden – Cantor Fitzgerald

Okay. What is your chartering strategies of that vessel and have you received – I'm sure you have – any interesting possible charters yet?

Sophocles Zoullas

Well, similar to the earlier question about the divergence of spot market to longer-term charter rates, in other words, longer term charter rates are above spot market charter rates which signals underlying long-term demand. We have had charters who are interested in chartering the ship longer rather than shorter. I think we expect the ship will come probably at the end of September, which we hope this very short term dislocation of the Chinese Olympics will pass, but I think what we have done opportunistically is be able to read the market pretty well the last three charters, and we will probably look to do something with that ship post-Olympics.

Natasha Boyden – Cantor Fitzgerald

Okay, great. Thank you very much.

Operator

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

Urs Dur – Lazard Capital Markets

Hi, guys. Can you hear me?

Sophocles Zoullas

Hi.

Urs Dur – Lazard Capital Markets

Most of which you have answered I think it is the performance that people expected and we are looking forward to the fact that with the contracted revenues, EPS is going up, EBITDA is going up and the ability to sustaining rates dividends improves, so that is all well and good, but the stock has come back a bit. I was wondering if you guys could comment as to whether there might be other elements that would show interest by the management in the stock like a share buyback or would that just be pretty futile in a market that is focusing unfortunately on the BDI too much?

Sophocles Zoullas

Well, first of all, I would just like to echo your comments that the BDI, which we don’t believe is fully representative of the supramax market and is a relatively thinly-traded market in itself –

Urs Dur – Lazard Capital Markets

And it doesn’t represent your bottom line (inaudible) at this point right?

Sophocles Zoullas

Right. Investors seem to be trading the BDI, which is not reflective of this company’s potential. Now, we feel we continue to deliver superior operating results for our shareholders. Unfortunately we don’t have a lot of control over the vicissitudes of the stock market. To answer your specific question on a buyback, we have looked at it from time to time, we feel it is something that we can put in place very quickly, and we will continue to monitor it, but as you know, we don’t have something in place now and we believe that the continued future delivery of these strong metrics in EPS, EBITDA and free cash flow per share that we believe we can strongly increase for our shareholders will ultimately share price value for our shareholders.

Urs Dur – Lazard Capital Markets

Okay, well thank you very much. That is all I got. Thank you.

Sophocles Zoullas

Thanks, Urs.

Operator

Your next question comes from the line of John Chappell with JP Morgan. Please proceed.

John Chappell – JP Morgan

Thank you, good morning guys.

Sophocles Zoullas

Hi, John.

John Chappell – JP Morgan

Soph, in addition to the BDI, it seems like dry bulk stocks are trading with commodities as well and I think the big concerns running commodities in the last month or so is that maybe China doesn’t have a big ramp-up post the Olympics. Maybe the government sees in the Olympics as a way to kind of ease into a slowing of their infrastructure build-out to maybe tame inflation. What gives you the conviction that post this month, downturn surrounding the event that there were will be a rebound in Chinese infrastructure activity and thus boosting raw material demand?

Sophocles Zoullas

Okay, well. I think you that hit the central subject that is in most of the financial and popular press these days. Actually today, this is kind of a timely report, there was a report that just came out from Barclays that confirmed, first of all in commodities that they don’t see any inventory build in China. With regards to the Olympic effect, I would just like to remind everyone that in China, there is a huge build-out for the 2010 World Expo that is – some people consider on par in terms of infrastructure build with the Olympics. And now looking specifically to the Chinese government, on July 25, in a meeting of the Polit-Bureau in China, they publicly said and reinforced that the current economic goals of China are to deliver fast and sustained growth while keeping a check on inflation. So, having that come out July 25, I think from the Chinese Polit-Bureau itself, reaffirming sustained growth over the long term was very positive. I would also like to highlight something. When we are looking at – there is a very big disconnect between what the popular press is saying in the financial press versus real drivers for dry bulk demand. And yes, there probably is a slowdown of finished material exports out of China. First of all, total exports out of China represent less than 15% of GDP. 85% of Chinese GDP is driven by investments and internal consumption. And when we look at internal consumption, I have highlighted on some of the big ones with the power grid, the coal, the iron ore.

I would like to also underline right now to answer the question, what I think is could be significant driver for the supramax market due to the unfortunate earthquake that happened in May. We have now new estimates that show that about 500,000 homes were destroyed during the earthquake. An additional million homes were seriously structurally damaged and additional damage was caused to highways, roads, dams and affected rail systems. So when you are looking at the rebuild effort, which typically happens six to nine months after sort of a major catastrophe on that level, you were talking about a catastrophe sort of five to six times Katrina and Rita hurricanes combined. You could see, starting in Q1 2009, a huge ramp-up, specifically of cement, which is a huge supramax cargo that the bigger ships don’t carry, and other building materials that could be a real further boost. So I know there is – what we are reading in the press is one thing, but we are seeing in terms of demand for dry bulk market which translates into dry bulk rates is different.

John Chappell – JP Morgan

All right, very good info, Soph. And then specifically to Eagle, with the remaining payments you have on the 35 ships for the next few years, can you just remind us what your current debt facility outstanding credit looks like compared to those payments. Do you need to get any new financing to pay these things whether it is next year or 2011? And also, how do you view equity as a potential use of financing for these new ships?

Sophocles Zoullas

Well, I think first of all, if you look at the commitments we have which are a little over $900 million, and you look at the liquidity, which is in excess of $900 million, excluding any incremental capacity of an additional $200 million, we are very, very comfortable, assuming there is no cash flow coming in above our dividend. So if you factor in that we are probably going to have a couple of hundred million of cash flow coming in, in addition to the current liquidity situation, we are very comfortable in the funding of our – well, call it 34 remaining ships from the 35 ship newbuilding program.

In terms of equity; look, it would be irresponsible of me to say that we are never going to look at the equity markets again. However, I'm really pleased that we have weaned the company off the equity markets and the reliance to issue equity to grow after we went to a fixed $0.50 dividend. So I feel very comfortable we are an organic growth company, we have liquidity to fund the 300% growth rate in the company, and I think we are very well positioned to deliver huge growth to our shareholders.

John Chappell – JP Morgan

Very good. Thank you, Soph.

Operator

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

Mike Liebert – Wachovia

Hi, good morning guys. This is Mike Liebert [ph] filling in for Justin Yagerman.

Sophocles Zoullas

Hi, Mike. Good morning.

Mike Liebert – Wachovia

Morning. Just a couple of quick follow-up questions. First on (inaudible) question. Maybe Soph, you could give some color on the state of the SMP in the newbuild market and whether or not you are actually seeing any distressed opportunities right now and then kind of a corollary, how do you think of those in terms of your current capital structure?

Sophocles Zoullas

Well the short answer is we have seen some – I would call it opportunities and one thing I would like to highlight for people on the call is, being one of the largest supramax owners in the world and also having a reputation in the shipping market for being a very effective and quick buyer of ships, we get first look at most supramax deals that hit the market before anyone else. I would say even though we have seen opportunities of owners running out of liquidity and calling us to see if we want to buy their ships, I think the credit crunch may bring better opportunities for us in the future months. So, I would say whereas the credit crunch may be bad for some national economies, the credit crunch for well-funded shipping companies such as ourselves could create buying opportunities. We have seen a couple, Mike, but I think we will see more a little later, and we think it will be a little more in line with the sweet spot, later on.

Mike Liebert – Wachovia

Okay, that makes a lot of sense. I guess with the growth of the re-charter of the Cardinal, obviously a very strong rate. I guess your last three charters have been one-year charters and I guess taking an overhead view of your charter portfolio, you have got lengthy charter coverage churning out about 50% to 40% through pretty much 2012. Just curious that – how do you look at that going forward, specifically with the handful of re-charter opportunities you have this fall, and do you have some sort of a target 2009 exposure for the end of this year, or is it really on a case-by-case basis?

Sophocles Zoullas

I would say the best way to characterize the policy is opportunistic and I think if we were to do sort of a 75:25 fix to open position, it puts us a little bit in a box and we might see great opportunities and if we say we have gotten to our 75:25 percent ratio, we lose the flexibility to continue to opportunistically take advantage of the market. I would like to remind everyone, when 11 of our 55 ships are on charters to 2018, so we have incredible stability, 17 of our newbuilds are already on profit-sharing charters. So we have real stability in the business model that allows us to be opportunistic. I think the other thing I would like to highlight is we are very cognizant of inflating the fleet from any dislocations in the market, so I think to answer your question, Mike, we are going to look at every individual charter within the context of the fleet rolling off exposure. So we are going to be very aware to keep a staggered approach so we don’t get a huge chunk of our ships coming back at any given quarter. So don’t be surprised if we do a two or three year charter, mix it up a bit and keep that staggered approach.

Mike Liebert – Wachovia

Okay. Great guys, thanks for your time.

Operator

We have no further questions at this time. And you have a question from the line of Chris Wetherbee with Merrill Lynch. Please proceed.

Chris Wetherbee – Merrill Lynch

Hey, good morning guys.

Sophocles Zoullas

Hi, Chris.

Chris Wetherbee – Merrill Lynch

Just wondering if I could – just touching on costs again for a minute, I think you mentioned earlier in the call about G&A and I guess you are gearing up for obviously the increase that we expect in the fleet going forward. So I just want to understand your G&A for the second quarter. Does that look like that is a run rate we should be able to use for the rest of this year, or do you think it is going to continue to move up as we those three additional vessels come on?

Sophocles Zoullas

I would say, for the balance of this year, that is probably a good run rate, we kind of call it bulked up the G&A in anticipation of this year, but in 2009 and beyond, I would like to point out that we are taking delivery of 9 ships next year, so I would say we will give guidance by the end of this year for 2009.

Chris Wetherbee – Merrill Lynch

Okay, and then I guess just jumping over to dry dock expense Alan you had mentioned earlier that you were able to keep the dry dock expense relatively flat despite capacity seeming to come down due to increased demand for dry docking slots. Is this sustainable going forward, you guys have contracts that you can lock in your prices, your $500,000 prices for dry docking, or just how does that work and how should we think about it as a supply/demand situation time.

Sophocles Zoullas

I will jump in here, Chris. I think the way people should think about it on the call is because the Eagle Bulk fleet is a) very young and b) built with very high quality – ships from high-quality shipyards. We are able to currently maintain a very low dry dock reserve for the cost of the actual dry docking. If you think about it on a two, three year old ship, you don’t effectively have any steel replacement. It is going in, cleaning the ship and getting out. The big factors as Alan highlighted, there is now – people are used to port congestion effects on dry bulk rates. Now you have dry dock congestion. So what we have also done very effectively, which I think underscores the way Eagle manages its fleet, to keep the dry docking expense low, we have a year-round maintenance system. So we are continuously keeping the ships upgraded throughout the 30-month dry dock cycle to minimize the impact of the actual dry dock expense when it occurs. Some other ship owners go the other way and don’t do anything for 30 months and then just dump a whole bunch of money into the dry dock expense. We don’t like that strategy because it increases the cost of the dry dock and potentially really expands the number of dry dock days and keeps the ship out of the market. So, I think that is another important thing to highlight that investors on the call probably are not aware of, in terms of how we manage our dry docks.

Chris Wetherbee – Merrill Lynch

Okay, that makes a lot of sense. I guess just turning back to rates quickly. I know we have discussed it a lot, I guess – is it simply just a matter of waiting for the Olympics to pass and getting kind of through August and maybe into September in the fall, where we start seeing some of the seasonal impact starting to come in before (inaudible) your thoughts on the timing of that recovery (inaudible).

Sophocles Zoullas

You broke up a little bit on the line but I think I got the question. I would characterize what we are experiencing now is the expected slowdown. Frankly, a lot of ship owners in the industry are surprised that rates are as high as they are, considering you have the seasonality of the dry bulk market coupled with this Olympics phenomenon. So, I would characterize it in weeks and not months. I think if you look at traditional grain harvest kick-ins of October that is probably a pretty good metric for people to watch for. The Olympics, whether or not things resume the week after the Olympics or beyond, is to be seen but I think – figure October and beyond, as a good jumpstart.

Chris Wetherbee – Merrill Lynch

Okay, that is helpful. I just got one final one. Just kind of a quick detail point. You mentioned coal stockpiles at major Chinese plants being around 11 days. What is the average – I mean, how far below normal is that, I'm just trying to get a sense of kind of where we stand and what the potential is if the resumption to normal levels happens at the end of the year?

Sophocles Zoullas

They are running at about two-thirds to half of what usual inventory levels are. So if you look at it terms of strategic reserves of oil for the US, you could imagine what the US would do if they were running at 50% of their strategic well reserves. So if you look at it in terms of the context of China, they are running at say, 50% to 60%, maybe 65% of what they have traditionally run at, but then you factor in that they want to ramp up their power grid and there is a lot of construction needs, so the traditional inventory levels which are cut in half are not enough to go forward to keep up with the growth for coal. So, that is where the real pressure point is.

Chris Wetherbee – Merrill Lynch

Okay, now that is very helpful. Thank you very much for your time, guys, appreciate it.

Sophocles Zoullas

Thanks.

Operator

I would now like to turn the call back over to Mr. Sophocles Zoullas for closing remarks.

Sophocles Zoullas

I would like to thank everyone again for joining us for our second quarter earnings call and we look forward to keeping everyone updated on new developments in the future. Thank you very much everyone.

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Source: Eagle Bulk Shipping Inc. Q2 2008 Earnings Call Transcript
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