Eagle Bulk Shipping Inc. (EGLE) CEO Gary Vogel on Q3 2018 Results - Earnings Call Transcript

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About: Eagle Bulk Shipping Inc. (EGLE)
by: SA Transcripts

Eagle Bulk Shipping Inc. (NASDAQ:EGLE) Q3 2018 Results Earnings Conference Call November 7, 2018 8:00 AM ET

Executives

Gary Vogel - CEO

Frank De Costanzo - CFO

Analysts

Jon Chappell - Evercore

Fotis Giannakoulis - Morgan Stanley

Magnus Fyhr - Seaport Global

James Jang - Maxim Group

Liam Burke - B Riley FBR

Operator

Greetings, and welcome to the Eagle Bulk Shipping Third Quarter 2018 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the call over to Gary Vogel, Chief Executive Officer of Eagle Bulk Shipping. Sir, you may begin.

Gary Vogel

Thank you, and good morning. I’d like to welcome everyone to Eagle Bulk’s third quarter 2018 earnings call.

To supplement our remarks today, I encourage participants to access the slide presentation that is available on our website at www.eagleships.com. When there, you will note that we’ve relaunched Eagle Bulk website. In addition to general updates, we strive to include valuable information for all of our stakeholders, including industry data, as well as Company-specific information. We welcome your feedback as we will plan to continue to append and update the site.

Please note that part of our discussions today will include forward-looking statements. These statements are not guarantees of future performance and are inherently subject to risk and uncertainties. You should not place undue reliance on these forward-looking statements. Please refer 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.

Our discussion today also includes certain non-GAAP financial measures, including EBITDA, adjusted EBITDA and TCE. Please refer to the appendix in the presentation and our earnings release filed with the Securities and Exchange Commission for more information concerning non-GAAP financial measures and a reconciliation to the most comparable GAAP financial measures. It’s also worth noting that the Baltic Supramax Index, or BSI, that we will reference throughout the presentation is basis to BSI 52 index.

Please now turn to slide three for the agenda for today’s call. We will first provide you with a brief update on our business performance followed by a detailed review of our third quarter financials; we will then provide you with an update on our fleet scrubber initiative before wrapping up the call with a brief review of the rate environment and industry fundamentals. We will conclude our presentation with the question-and-answer session.

Please now turn to slide five. Eagle’s TCE for the third quarter equated to $11,281 per day, representing a beat of $261 as compared to the adjusted net Baltic Supramax Index or BSI. As we indicated on our last call, we elected to fix a number of ships on backhaul voyages during the third quarter, essentially repositioning them into the Atlantic, in order to capitalize on the historically strong Q4 Atlantic market. This strategy impacts our TCE and relative performance for the quarter somewhat, but we believe it’s well positioned, the Company heading into the fourth quarter and Q1 of 2019.

As we’ve discussed previously, another way to look at our TCE results is by converting them to an Ultramax equivalent rate. Meaning, if we operated a fleet of only modern Ultramaxes with specifications similar to those of our recently acquired vessels and our third quarter TCE of $11,281 would equate to approximately $13,000 per day. We believe this is instructive, and it’s important for investors to be able to evaluate TCE results and compare performance on a like-for-like basis.

With these results, I’m very pleased to report that the third quarter marks the seventh consecutive period which we’ve been able to outperform the BSI. When looking at the last 12-month period as a whole, we’ve generated a TCE outperformance of $722 per day, equating to approximately $12.4 million in value creation. As I’ve indicated previously, I believe the consistency in being able to deliver outperformance underscores the value of our differentiated business model and our team’s ability to execute on it.

On the cost side, vessel OpEx and cash G&A equated to $6,123 per vessel per day in the third quarter, down from the prior period and flat year on year.

Since Q1 2017, operating margins and EBITDA have dramatically increased over the period due to both the higher rate environment and our ability to generate added value through our unique active management model. This is clearly evidenced by the widening spread trend between the TCE and OpEx plus G&A line.

EBITDA adjusted for certain non-cash items totaled $20.2 million for the third quarter, up more than 140% year-on-year. Since the first quarter of 2016, when the dry bulk market hit an all-time low, Eagle’s adjusted EBITDA has increased by approximately $140 million on an annualized basis.

Looking ahead, our TCE for the fourth quarter is averaging $12,407 per day with approximately 70% of the available days fixed for the period. Based on the actual BSI for October and FFA curves for November and December, this quarter-to-date figure equates to an outperformance of over $1,000 per day.

Please turn to slide six for a brief update on our fleet makeup. On the left hand side of the slide, we depict our own fleet development since we started to implement a strategic fleet renewal and growth plan. During the third quarter, we executed two S&P transactions. We closed on the sale of the Thrush, in 2011-built Diamond 53 Supramax and closed on the purchase of a 2014-built SDARI-64 Ultramax, which has been renamed, the Hamburg Eagle.

Over the past 24 months, we’ve bought and sold a total of 23 vessels, divesting 10 of our smallest, oldest and least efficient Supramaxes which averaged more than 12 years of age, and we acquired a total of 13 modern Ultramaxes. Each time we acquire a newer, larger, more efficient vessel or sell a smaller, older and less efficient ship, we upgrade our overall fleet makeup and improve our ability to generate higher TCEs.

Our fleet currently totals 47 ships, averaging 8.8 years in age. It’s important to note that our fleet age has remained relatively unchanged over the past couple years due to the implementation of our fleet renewal program.

On the right hand side of side of slide six, we depict the U.S. listed peer group fleet profiles. You’ll note, Eagle remains uniquely focused on the versatile Supramax/Ultramax asset class and owns one of the largest fleets in the world. Owning and operating a large scale homogeneous fleet is vital ingredient in our business model as it provides operational efficiencies, which simply don’t exist across mix fleets. Subject to market developments, we intend to continue executing on our fleet growth and renewal strategy.

With that, I would now like to turn the call over to Frank, who’ll review our financial performance.

Frank De Costanzo

Thank you, Gary. Please turn to slide eight for a summary of our third quarter 2018 financial results.

Revenue, net of commissions for the third quarter, was $69.1 million, a decrease of 8% from the prior quarter. This decrease is a result of a slightly lower TCE and less available days due in part to the previously disclosed Westport Eagle crankshaft replacement.

We believe evaluating revenue net of both voyage and charter hire expenses best reflects core top-line Company performance. In that respect, revenue for the third quarter, net of both voyage and charter hire expenses, came in at $46.5 million, a decrease of 2% from the prior quarter. Revenue, net of both voyage and charter hire expenses, was 31% higher than the same quarter in 2017. The year-on-year increase was primarily driven by an increase in the BSI combined with our platform-driven TCE performance.

Turning to expenses. Total operating expenses for the third quarter of 2018 were $60.3 million, a decrease of 9% from the prior quarter. The decrease in Q3 versus per quarter was driven by lower charter hire, voyage and vessel expenses. Operating expenses as compared to the same quarter in 2017 decreased by 7%. The decrease in Q3 versus prior quarter was driven by lower charter hire, voyage and vessel expenses, in part offset by increases in depreciation and amortization, and general and administrative expenses.

The Company reported net income of $2.6 million for the third quarter versus $3.5 million in the prior quarter. As compared to the same quarter in 2017, we saw an improvement in the bottom-line of approximately $12.8 million.

Basic and diluted earnings per share or EPS in the third quarter of 2018 were both $0.04 versus $0.05 in Q2 of 2018 and up significantly from a basic loss of $0.15 in the third quarter of 2017.

Adjusted EBITDA came in at $20.2 million for the third quarter as compared to $21.1 million for the prior quarter. As compared to the same quarter in 2017, adjusted EBITDA has increased by more than 140%.

In the appendix of our presentation, you will find a walk from net income of $2.6 million to adjusted EBITDA of $20.2 million. Both EBITDA and adjusted EBITDA are non-GAAP measurements. You can also find additional information on non-GAAP measurements in appendix.

Let’s now turn to slide nine for an overview of our balance sheet and liquidity. I would like to report that are wholly-owned subsidiary, Eagle Bulk Shipco LLC received approval yesterday from bondholders to amend bond terms in connection with the financing of scrubbers. This amendment to the bond terms, which is approved by 85% of the attending holders at a meeting at which a quorum was present, will allow us to utilize up to $25 million from vessel sale proceeds towards the cost of installing scrubbers on vessels within the Eagle Bulk Shipco entity.

In addition to this action, and as we have mentioned previously, we are evaluating financing solutions to partially fund the remainder of our scrubber fleet initiative program, outside of the bond silo. We will keep you abreast of any updates.

The Company had total cash of $91.6 million as of September 30, 2018, an increase of approximately $15 million from the end of the second quarter. Total cash includes $10.9 million of restricted cash from the Thrush sales proceeds. The increase from Q2 was a result of cash flow generated by operations and proceeds from the sale of the vessel Thrush in part offset by the down-payment on the Hamburg Eagle and CapEx spending.

The Company’s total liquidity as of September 30, 2018 was $111.6 million and is made up of cash and restricted cash along with the undrawn revolving credit facilities totaling $20 million.

Total debt as of September 30, was the $329.8 million, which is unchanged from the prior quarter. Total debt is comprised of the $200 million Shipco Norwegian bond, the $60 million Shipping LLC bank facility and $69.8 million Ultraco bank facility.

Please note that subsequent to the quarter, we have drawn $12.8 million on the Ultraco debt facility, utilizing the accordion feature for the acquisition of the Hamburg Eagle. The Ultraco facility debt outstanding now stands at $82.6 million.

Please turn to slide 10 for a review of cash flow. During the third quarter, net cash provided from operating activities came in at a positive $13.7 million, a $3.8 million increase from Q2 and up $7 million from Q3 2017. The third quarter result was the fifth consecutive positive quarter for cash from operations.

As the chart at the top of the slide shows, the positive trending cash flow from operations continues, with cash from operations significantly improved from a negative cash flow of $20 million in Q1 of 2016. The chart also shows timing driven variability that working capital introduces to cash from operations, as demonstrated by the differences between the gray bars, which are the reported cash from ops numbers and the blue bars which strip out changes in operating assets and liabilities, essentially working capital. As this chart demonstrates the volatility caused by working capital evens out over time.

Now, moving to the chart at the bottom of the slide, let’s look at the changes in the Company’s cash balance in Q3 2018. I like this chart because it clearly lays out the large themes driving our results for the quarter. The two large bars on the left, revenue and operating expenditures are simple look at the operations. The net of the two bars is positive $19 million, which comes in close to our Q3 adjusted EBITDA number. To the right, you will find a bar covering the $2 million cost for drydocking three ships in the quarter and a vessel bar totaling 3 million, covering the net of the $10.8 million we received for the sale of the Thrush, partially offset by the deposit we paid for the Hamburg Eagle along with payments for both scrubbers and ballast water treatment systems.

Let’s now review slide 11 for our cash breakeven per vessel per day. Cash breakeven per ship per day in Q3 2018 was $7,955, $518 lower than Q2 2018 and $215 lower than full year 2017 breakeven. The decrease of $518 versus prior quarter was largely driven by the $379 decrease in drydock expenditures, as we drydocked three ships in this quarter as compared to five in Q2.

Q3 OpEx came in at $4,547, $245 lower than Q2 and $270 lower than the full year 2017 results. As we have conveyed in the past, we believe that given the lumpy nature of payments related to both stores and annual expenses, it is appropriate to look at OpEx under a multi-quarter average.

Q3 cash G&A came in at $1,576 per ship per day, up $65 from Q2. For the first nine months of 2018, cash G&A came in marginally higher than the full year 2017 number. It is worth noting that if we were to include the chartered in days in our calculation, Q3 G&A per ship per day would have been $202 lower.

Q3 cash interest expense is $1,390 per ship per day, $40 higher when compared to Q2. For the first nine months of 2018, interest expense was $648 higher than the full year 2017 number. The increase in cash interest versus prior year is primarily a result of the higher LIBOR along with the elimination of non-cash second lien PIK note.

It is worth noting that the floating interest rate exposure on 60% of our debt was fixed in Q4 of 2017 as part of the refinancing. The fixing of a meaningful portion of our debt significantly shields the Company from increases in short-term interest rates.

This concludes my review of the financials. I will now turn the call back to Gary, who will continue his discussion of the business and provide context around industry fundamentals.

Gary Vogel

Thank you, Frank.

We would now like to provide you with an update on our recently announced fleet scrubber initiative and IMO 2020 regulations. Please turn to slide 13.

As discussed during an earlier call, the International Maritime Organization’s Marine Environmental Protection Committee or MEPC met in London last month on a wide range of topics including the 2020 sulfur cap. The Committee overwhelmingly reaffirmed the January 1, 2020 implementation date to the 0.5% sulfur emissions limit. One of the most significant uncertainties surrounding the IMO 2020 regulation has been enforcement, particularly at sea when a vessel is out of sight of port and flag state control.

During the meeting, the IMO formally adopted a high sulfur fuel carriage ban that will enter force on March 1, 2020, two months after the 0.5 sulfur limit comes into effect. The carriage ban will prohibit all ships without scrubbers installed from carrying any high sulfur fuel on-board. Under this regulation, a flag or port state will only have to observe non-compliant fuel onboard and non-scrubber fitted ship to prove a violation, and detain and/or find a vessel as compared with having to prove the vessel actually burn the high sulfur fuel. This will provide a robust enforcement mechanism that will help maintain a level playing field.

A somewhat controversial experience building phase or EBP proposal submitted by certain flag states and industry groups and later endorsed by the U.S. administration has an opportunity to delay or phase implementation IMO 2020 was rejected by the MEPC. As what has been seen as a conciliatory gesture, the MEPC didn’t leave the door open to consider targeted proposals for experience building phase at the next MEPC meeting in May 2019, but with scope limited specifically to data collection on fuel quality and fuel availability only. The limitation and scope indicates that any proposals at the next MEPC meeting will not be able to directly impact the implementation on enforcement of the new global sulfur cap.

Please turn to slide 14 for a view of Eagle scrubber initiative. Since our announcement in early September, Eagle scrubber initiative is now well underway. The 19 scrubbers we have on order remain on schedule. We expect to take delivery of our first scrubber within the next month with the remainder delivering throughout the first half of next year. We still hold options for an additional 18 scrubbers. Given our view on IMO 2020 implementation as well as fuel spreads, we expect to exercise these options in the near future in order to ensure a timely installation.

Having all of our scrubbers installed by January 2020 is critically important to Eagle scrubber initiative as we believe the fuel price spread is likely to be widest during the first months following implementation of the new regulations. To illustrate this, if the fuel price spread were to average $300 in the first half of 2020, then we calculate that the difference between having 37 ships ready on July 1, 2020 instead of January 1st would mean forgoing approximately $27 million of incremental cash flow or more than one-third of the scrubber investment.

With significant scrubber announcements and uptake over the past three months, well-known experienced scrubber manufacturers are now essentially booked for 2019 deliveries. There are also rapidly growing lead times for various scrubber components, particularly for the specialized metal alloy required to manufacture the scrubber tower and significant bottlenecks are also beginning to form for class approval and other required services.

Ultimately, all this means that the ship has most likely sale [ph] for owners wishing to install well-built reliable scrubbers prior to the enforcement date. As such, we believe there’s a first mover advantage and that Eagle is sufficiently ahead of the curve with installation of our scrubbers for both our firm orders and options, occurring in time to take advantage of the widest projected fuel spreads in 2020.

On the bottom right hand corner of the slide, we’ve depicted the current order book for scrubbers by asset class, as assessed by DNB.

Looking at dry bulk as a whole, approximately 9% of the fleet is expected to be fitted with scrubbers by 2020. As you’ll note, most of the scrubbers ordered to-date are for Capesize with approximately 35% of this subsegment being fitted. Within the midsize geared segment, only 3% of the Supramax/Ultramax fleet is projected to be fitted by 2020.

Although we understand why many owners have opted to retrofit larger vessels, we view our position as optimal due to the low penetration within the Supramax/Ultramax segment as this will ensure pricing for freight will be set by the non-scrubber fitted fleet, representing about 97 of every 100 ships.

In addition, we believe the lack of uptake in the mid-sized geared fleet will lead to a net slowdown of the Supra/Ultra fleet given that almost the entire fleet will be burning more expensive low sulfur fuel. This would lead to lowering effect to supply thereby leading to better utilization and ultimately higher rates.

Please turn to slide 15. On this slide, we’ve attempted to illustrate the potential benefits and returns of the scrubber investment basis various fuel spread environments. Assuming we exercise all 18 options, we estimate we can generate almost $40 million of incremental cash flow or approximately $0.56 per share basis of $200 per metric ton fuel spread environment. This implies an incremental TCE of roughly $2,750 per day.

As a reminder, a good part of the scrubber retrofitting work will be performed while the vessels are operating at sea with riding crews, while the ships are trading in order minimize off-hire. In the appendix, you’ll find a detailed CapEx table depicting our expected timing and cash outlays for scrubber retrofits, in addition to statutory drydocks and ballast water treatment system installations.

As a result of our hybrid installation program, we’re projecting just 10 days of off-hire time per ship related to the scrubber install work at dock, plus some time for repositioning of the vessels.

Please turn to slide 17 for a review of industry fundamentals. The gross BSI averaged $11,560 per day for the third quarter, up 5% over the prior period and 25% year-on-year. After an uneventful second quarter, which saw spot rates remain range-bound, BSI started to gain traction again in early August. The index gained approximately 6% in August and a further 9% in September. The pickup in rates was driven by the Atlantic market, which posted a 20% increase in the third quarter to average $13,504 per day, while the Pacific market actually fell by 7% to average $10,718 per day over the same period.

As you’ll note from the chart, the Atlantic market tends to significantly outperform the Pacific during Q4 as the northern hemisphere harvest season gets in full swing. It’s interesting to note that this year though the Atlantic market started to outperform Pacific market much earlier. We believe this is due to increased grain cargos coming out of the Black Sea and strong continued exports of Brazilian soybeans.

Looking at Q4, BSI continued to move higher through the first half of October, peaking at $13,138 per day on October 11th. Since then, weakness in the Pacific has put pressure on the index, which is now trading in the middle 11s. Pacific rates are off approximately 20% in the last month, averaging mid-9s, on the back of disruptions in Chinese coal imports. These disruptions are due to a few reasons including certain Chinese ports reaching their import quotas and due to actions by the Chinese authorities to lengthen times two grant customs approvals. There’s a sense that the Chinese are trying to encourage domestic purchase imports for the time being. As we’ve discussed before, coal is a very important commodity in the Pacific and any changes in this trade can cause large swings in the regional index.

The Atlantic market remains firm, but weakness in the Pacific has stilled over slightly with rates down approximately 5% since mid-October. The Atlantic Pacific spread premium has now widened almost 50%, which is not unexpected given seasonal dynamics. While the delta between the basins fluctuates, historically, the Atlantic market generally trades at a premium. This phenomenon is due to a number of reasons including a general overhang of ships selling into the Pacific with cargo and fronthaul voyages [indiscernible] business, as well as the fact that all new buildings get delivered in Asia. Due to the structural imbalance and the impact on rates, repositioning a ship from the Pacific to the Atlantic requires an investment or cash outlay by the owner.

As I mentioned early on in the call, our decision to reposition a net gain of 7 ships back into the Atlantic affected our TCE performance for the quarter as these ships averaged approximately $4,000 per day, but position as well heading into the fourth quarter and beyond where outbound rates currently stand at over $20,000 per day.

Please turn to slide 18 for a brief update on supply fundamentals. Dry bulk new building deliveries totaled roughly 7 million deadweight tons or approximately 74 vessels during the third quarter, representing a decrease of 18% quarter-on-quarter and 24% year-on-year basis [ph] vessel count. Demolition of older tonnage amounted to just 800,000 deadweight tons during the quarter or 9 vessels, representing a significant decrease of 25% over the prior quarter and 84% year-on-year basis vessel count.

Looking at the last 12 months ending September 30th, scrapping totaled just 70 vessels or 5 million tons, down approximately 70% basis vessel count and deadweight. It’s interesting to note that this low demolition is occurring in an elevated scrap rate environment with prices hovering around $465 per lightweight ton, close to the three-year high. As we’ve indicated previously, we believe the decreasing trend in scrapping simply reflects the ongoing improvement in spot rates and forward expectation of further positive rate developments as well.

Given year-to-date demolition figures, scrapping is now forecasted to come in lower for the year at just around 5 million deadweight tons, equating to below 1% of the on-the-water fleet. As we’ve indicated previously, we believe that both the implementation of ballast water treatment regulation as well as the mandated reduction in sulfur emissions coming into force in Jan 2020 will act as a catalyst for some increased scrapping.

As you’ll note from dark blue dotted line on the graph, net fleet growth is low for dry bulk overall with expected growth of 2.8% in ‘18. And this looks even more favorable when drilling down to the Supramax/Ultramax segment, where the net fleet growth as depicted by the lighter blue dotted line, is expected to be just 2.2% of the on-the-water fleet. These figures have been revised up slightly due to the scrapping coming in less than originally expected.

Please turn to slide 19 for a look at newbuilding order. In terms of forward supply growth, newbuilding orders totaled approximately 5.2 million deadweight tons or 51 ships in the third quarter, up almost 4% over the prior quarter. This increase was primarily driven by a pickup in Capesize orders which amounted to 2.4 million tons or about half of all orders placed.

Looking at just the Supramax/Ultramax segment, only 11 vessels were ordered in the period, a decrease of almost 20% quarter-on-quarter.

For the full year of 2018, we’re projecting dry bulk contracting to total anywhere between 25 million to 28 million deadweight tons, a decrease of over 25% as compared with 2017. We’re estimating a similar percentage decrease for Supramax/Ultramax orders, which we expect to total between 3.5 and 4 million deadweight tons, representing just 7% of all orders placed and approximately 1.9% of the on-the-water fleet.

As we’ve indicated previously, given a number of factors, we remain cautiously optimistic that we will not see a material increase in ordering, unless we also see both rates and second hand values increase significantly from current levels. The order book as a percent of the on-the-water fleet stands close to its 16-year low at around 10% basis deadweight tons. The Capesize segment has the highest order book at over 14%, while the Supramax/Ultramax segment stands at just 6% of the on-the-water fleet.

Looking ahead, we believe supply side fundamentals remain favorable, given the low order book and increasing number of older vessels which are becoming less commercially viable due to regulations coming into effect.

Please turn to slide 20 for a summary on demand. From a macro perspective, our views have not changed since last quarter. Global growth expectations remain firm but have been revised down slightly by the IMF due to the impact of the U.S. Chinese trade spat and weakness with certain developing economies including Argentina, Brazil and Turkey.

Global GDP growth is now forecasted at 3.7% for both 2018 and 2019, down 20 basis points since July. Downside risks to global growth remain due to a number of factors including higher oil prices, stronger U.S. dollar, higher U.S. yields and ongoing concern over an escalation in trade tensions and tariffs. As we’ve indicated previously, while we believe actions to date have not been too impactful to dry bulk overall and the full scale trade order is unlikely, it remains to be seen whether there will be any real impact to global GDP growth to which dry bulk demand is inextricably linked.

Dry bulk demand growth as calculated from a bottom up fundamental perspective, has been revised down slightly to 2.5% for 2018, representing an increase of about 125 million metric tons in incremental trade for the year. However, when taking into consideration expected ton mile expansion, 2018 forecasted demand growth should come in at about 2.9%.

Within the 2.5% real demand growth major bulks which are comprised of iron ore, coal and grains are expected to grow by 2.2%. Coal, which represented almost 30% of the cargos we carry during the quarter, is expected to increase by about 49 million metric tons this year to almost 1.25 billion tons. Grains, which represented about 10% of Eagle’s cargos during the quarter are expected to total around 484 million tons for the year.

As denoted in the table on the bottom left hand corner, minor bulks, which lagged total dry bulk trade last year, are expected to grow by almost 3% in 2018, outpacing the major bulks and overall dry bulk demand for the period. This growth represents roughly 60 million metric tons of incremental demand, or approximately 1,200 Supramax/Ultramax voyages. This growth is being driven by improvement in trade, such as scrap, cement, forest products and bauxite. It’s no worthy that as depicted in the pie chart on the right hand side of the slide, roughly 60% of the cargos Eagle carried during the third quarter were comprised of minor bulks.

In summary, we believe a demand picture, which is favored towards the minor bulks, combined with the Supramax/Ultramax, having a lowest order book as a percentage of the existing fleet creates a dynamic that’s particularly favorable for Eagle, given our fleet makeup.

I would now like to turn the call over to the operator and answer any questions you may have. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jon Chappell with Evercore. Your line is now open.

Jon Chappell

Thank you. Good morning, Gary. Just three hopefully pretty quick ones for you. So, first on the scrubber CapEx schedule. It seems pretty incredibly frontend loaded with the first 19. Should we be thinking about the same type of payment schedule for the options once they’re exercised as well, meaning most of the CapEx for those would most likely fall in the first half of next year as opposed to the second?


A - Gary Vogel

Yes. I think, clearly, we’ll provide specific guidance when time is appropriate. But, there’s definitely -- it’s more frontend loaded in the sense of procuring material, and building the scrubber is a significant portion of it. And then, as you know, we’re doing work onboard ship and that’s been more intensive in terms of labor, putting riding crews onboard. So, it is definitely more frontend loaded. Having said that, the optional vessels will skew towards the back half of the year. So, it’s definitely not going to be an overlay of what you see here. But, those ships will tend to be completed in Q3 and Q4 of 2019.

Jon Chappell

Second and I know this is going to vary from quarter-to-quarter, but it is a bit noticeable, the year-over-year decline in the charter in vessels. Is that just a function of there is very little opportunity for you to take advantage of your chartering strategy there? Was it that the rates were kind of seasonally high mid third quarter or was it just kind of quarter-to-quarter volatility?

Gary Vogel

Yes. It really is -- it’s opportunity based, as I said before. We’re not volume driven. Having said that, days were down slightly, but last quarter Q2, we had 22 distinct vessels we chartered in; Q3 was 21. So, we still were doing a fair amount of operating; those tended to be shorter term. We have a couple ships we’ve taken now on short period during the quarter. So, I think you’ll see that number tick up again. But, really, the way I would look at it is when we see an opportunity on a risk-adjusted basis that we think makes sense, we’ll execute, because again, there’s no benefit to us in any regard in terms of volume. So, I think you’ll just see volatility around that.

Jon Chappell

Finally, just an industry question. Obviously, your strategy to shift a lot of your tonnage to the Atlantic Basin has paid off given the disconnect in the demand in Pacific. And obviously, the capacity side is set up really well too as you kind of walked through in your slides. But, I think I certainly am and I think a lot of investors probably as well are a little bit surprised by the directional move in overall dry bulk growth rates at this point of the fourth quarter, which should have been seasonally stronger. You mentioned the coal issues in China. But, is there a broader issue associated with the demand side? Tariffs notwithstanding, I think that’s more sentiment. But, real true demand issue that maybe made the third quarter, mid third quarter better than we thought but now it’s kind of robbing from Peter to pay Paul and taking a little bit away from the fourth quarter?

Gary Vogel

Yes. I mean, I think, volatility is simply part of the landscape we live in. So, what -- third quarter coal demand was extremely high in China this year. And then, now we’re seeing where we have probably reached quotas and so now turning off the spigot. So, that’s a perfect example of where we benefited in Q3 and now it’s weaker in Q4. And that happens to be at the same time also that for instance nickel ore shipments dropped dramatically in this season because of the rain in the Philippines and Indonesia. So, that happens to be happening at the same time as we’re seeing coal coming off. And then, Asia -- Australia had a drought where wheat production is about down about a third this year. So, those all are overlaying, and that’s one of the things that we see as that dry bulk benefits from the fact that it’s -- there’s so many factors that go into it but also the same thing happens when they pull back.

I would just -- what I would do is pull back and look at the overall landscape, and I think it’s really positive. Right? As we spoke to that minor bulk demand this year is almost 3% and expected to grow next year. So, this volatility -- of course, we like a stronger Q4 market. Having said that, we see the volatility as an opportunity to trade around to taking ships to capture value and trade around. So, it’s good for our model, notwithstanding, as I said -- of course, we’d prefer a higher Q4 rate but we just see it as part of a normal course.

Operator

Thank you. And our next question comes from Fotis Giannakoulis with Morgan Stanley. Your line is now open.

Fotis Giannakoulis

Yes. Good morning and thank you. Gary, I want to ask a few questions about the scrubbers. It seems that there is a lot of confusion about the availability of fuel and the quality of fuel, especially at the smaller ports with minor commodities trading. Can you give us an overview of the routes that your vessels trade? And how confident you are that there is going to be availability of high sulfur fuel after 2020?

Gary Vogel

First of all, I thank you for that question, because I’m going to point you towards our new website where on the industry page, if you scroll down to the bottom, there’s actually a global map. And if you move you -- the cursor of your mouse over the various cargos, it shows you all the trade routes dynamically, they’ll get highlighted globally of all the major -- and when I say major, not major bulks, but all the significant cargos that we carry. So, it would take too long for me to do them all now. But, thank you for that, because hopefully, everyone will go and take a look at Eagle’s new website. And I think that that page there is unique and worth looking at.

In terms of fuel, I think people are conflating a few things around fuel and fuel quality -- I mean, fuel availability. We were confident when we declared our scrubber initiative about two months ago. And that’s only increased given that we now expect there’s been significant uptake in scrubbers now circa 2,000 ships. And because of that, and some of the majors have already come out and affirmed where they’ll have heavy fuel available. So, that’s really not an issue in our mind. We do believe that heavy fuel won’t be available in all the small ports. But, what we said, and this was part of how we got comfortable with going forward, is that, we can amend our trading pattern and in a wide fuel spread environment, our ships will be more competitive and therefore will focus on long haul trades, where we go by major bunkering ports. As an example, out of the U.S. Gulf to Japan, let’s say; then, going at out of the U.S. Gulf to China, down pass Singapore, places like that. And if the fuel spread is $200 or $300 and freight is paid at $25, $30 a ton, if we need to cut out some cargo to carry fuel in order to get to pass and that’s major bunker port, that’s a price worth paying. So, we don’t think we’ll have to amend our cargo significantly, but even if we did, it’s part of the calculus that we’re very comfortable with.

Fotis Giannakoulis

Thank you, Gary. And can you tell us which type of vessels -- which of ages ships are you planning to install subscribers? And what is the fuel consumption at today’s rate. You have Ultramaxes, Supramaxes, Chinese, Japanese. At which segment, it makes more sense, and just to give us some guidance on the fuel assumptions?

Gary Vogel

Sure. I mean, in general, the ships with more consumption that have a large --high lift, that combination is the most potent. Having said that, there’s other considerations that go into it. As an example, we have 17 sister vessels CROWN-58. I can tell you we’re going to install scrubbers on those vessels first. If you get to the engineering costs, whether you do 1 ship or 17 shifts, it’s almost the same. So, there’s a significant cost benefit of installing scrubbers across sister vessels.

In broad terms, we would say to use 25 tons a day for a Supra/Ultra as a blend, without getting too specific. We’re not installing scrubbers on the oldest vessels, not that they wouldn’t benefit from it. But, as you know, we’ve sold 10 of our older, smaller vessels, and we’ll continue to do so as part of our fleet renewal. So, we’re focusing on the sister vessels and the larger ones at that.

Fotis Giannakoulis

And, in regards to the chartering activity, I understand that in other segments charters are willing to provide period contracts in exchange for scrubber installation. Is this something that you would consider? Have you seen -- or even without the scrubbers chartering activity becoming -- any pickup in the chartering activity for a period contracts, either for one year or longer?

Gary Vogel

Yes. I mean, there’s definitely -- we’ve had inquiry and frankly we’ve even had some discussions about potentially chartering out a vessel to scrubber. We haven’t done so yet. But, we wouldn’t be averse on a small percentage of the fleet, locking in that fuel spread. But, we haven’t done so.

In general, our markets have tended to be not as long period markets, but it’s out there, if we wanted to do so. We’re constructive on the market; we’re positive on supply-demand, and then on top of it overlaying our view on 2020 and the fleet slowdown that we think is inevitable if fuel prices are where we expect them to be. So, we’ve simply decided not to. But, there is a market out there. So, I think it’s unlikely we would be wholesale -- or we won’t be reletting significant portion of our fleet. But if there is an opportunity to lock in significant fuel spread and a payback on a few of the scrubber vessels we may entertain that.

Fotis Giannakoulis

Thank you, Gary. One last question about the bauxite trade. There is a lot of discussion about a significant pickup in flows from Guinea to China. Is this a real driver for the overall dry bulk market? Have you seen any volumes -- any changes in volumes in the commodities? I see that you transported a little bit more iron ore than the previous quarter, in 3Q, is there anything that we can -- any conclusion that we can draw from your trading pattern?

Gary Vogel

Yes. Thanks for that. Bauxite is a minor bulk, but as we show -- it wasn’t on today’s but we talk about it in some of our investor decks that it’s carried by Panamaxes and it’s dominated by Panamax, Kamsarmax vessels. We do a small amount of bauxite, primarily it’s West Africa, Black Sea. And again, I’ll point you back to our website page, on the industry page. But, the benefit for us in terms of that growth and it’s a significant growth, about 9%, is that it takes up Panamax tonnage, which we compete with our Ultramaxes in particular.

So, while we’re not doing a lot of bauxite directly, it definitely is a positive and that it takes a draw from the tonnage pool that we compete directly with.

Operator

Thank you. And our next question comes from Magnus Fyhr with Seaport Global. Your line is now open.

Magnus Fyhr

Good morning, guys. Just a question on the recent weakness in the market. I guess, the silver lining could be that you’ve seen somewhat a little bit of softness in the asset values. Have your -- what’s your thought there. I mean, you’ve been acquiring vessels here over the last 12 months. Has your fleet renewal strategy changed at all with the changes here with kind of divergence between rates and asset values?

Gary Vogel

Thanks, Magnus. We haven’t changed our view that we think that there’s good value, good upside in ship values, and we just took delivery of the Hamburg Eagle a few weeks ago. And I think that we still are interested. Having said that, we’ve been focused on the scrubber financing, not that they’re completely mutually exclusive, but that’s a significant capital spend, and yesterday was important day with the bond amendment with the approval for installation of up to 18 scrubbers in terms of paying for that.

So, we continue to look and inspect vessels. And as I said, we think there’s good upside. At the moment, there seems to be -- there’s definitely less transactions going on. I think, buyers waiting for a move up. And then, I think on the sell side, owners are fairly relaxed, given supply coming on is low and 2020 is only a year away, and of course, ships are generating cash flow. So, at the moment, we continue to look to acquire vessels. And I said, now that we’ve gotten some of the scrubber financing out of the way, then we’ll probably focus a bit more on that, like we did in the last quarter.

Magnus Fyhr

Your stock is down about 15% since June and trading at a pretty significant discount to NAV. Any thoughts there on buying back stock versus buying steel?

Gary Vogel

Yes. I mean, I’ll stay away from opining on share price. Having said that, it’s something that we discuss internally at the Board level, but haven’t made a determination. We think there’s significant upside in vessel values, and we continue to look to do that. But at the moment, there’s no news to report on share buyback, except for the fact that we do discuss it internally. And if the Company decides, obviously we’ll communicate that at the time.

Magnus Fyhr

And just one last question. I mean, in your own chartering strategy, you’ve been pretty active in using the paper market. Any thoughts about locking in spreads on the fuel spreads going forward, if that spread blows out or will you stay from that?

Gary Vogel

Yes. We’ve definitely been looking at it and evaluating. At the moment, there’s no 0.5 product out there. So, you need to create one and you can, but there’s basis risk in that. There’s also a number of considerations around basis risk around margin requirements, cash, costs, things like that. So, we’re very comfortable using derivatives to hedge risk and are looking at it proactively. But at the moment, we haven’t done so. And again, we would need to get quite comfortable with the things that I mentioned before doing so, because we need to be sure that the product that we’re hedging is actually -- it’s an effective hedge.

Operator

And our next question comes from James Jang with Maxim Group. Your line is now open.

James Jang

So, most of my questions have been answered. Just on the macro side. So, it seems -- wheat forecast and harvest look weak on Baltic and winter wheat planting are done in U.S. Do you foresee enough substitution cargos for I guess a lower wheat harvest moving into 2019?

Gary Vogel

Yes. I think, I mean, the U.S. has definitely lowered its wheat plantings in general. It’s been supplanted by Russian wheat exports in particular, very significant this year or very significant market this year to summer, even still moving at this time. So, for us, obviously, our vessels will pick up cargo anywhere. So, the volume is still moving. And we see wheat is a significant now long haul trade where Indonesia has become the largest wheat importer, passing Egypt last year.

So, you know it’s not so much where -- where it comes from is important in terms of ton mile. But, Russian wheat is definitely a growing market and one that we participate in.

James Jang

And one final one on the fleet make up. So, there’s about eight vessels 15 years and older. Would you be comfortable operating a smaller fleet, without the added replacement of those vessels, if they’re sold?

Gary Vogel

I think, the simple answer is yes. We’re not managing fleet size per se. Having said that, we’ve been able to effect fleet renewal strategy where we’ve acquired 13 vessels and sold 10. And last quarter is a perfect example where one ship came in and one left. So, I’m a big believer, actions speak louder than words. And I would look at that as being instructive as going forward as well. Having said that, if an opportunity came along where we are able to monetize those assets at above what we think is par value, we’d feel comfortable dropping the fleet size down. Also having said that, being an active owner operator, we have the ability to supplement our own fleet through Charter in and then hedge some of that risk through derivatives and other means.

So, the answer is yes, we’re comfortable with it. But I wouldn’t foresee us doing that unless something changes significantly.

Operator

Thank you. And our next question comes from Liam Burke with B Riley FBR. Your line is now open.

Liam Burke

Thank you. Good morning, Gary. Gary, we’re looking at China, there’s been increased focus in that market for a higher grade iron ore. Is that affecting your trade routes or is there any particular change in how you see the either the long-term or the fourth quarter rolling out?

Gary Vogel

Yes. I mean, we are probably the -- given that we’re only Supramax and Ultramax, iron ore really is a very small part of our trade. And so, I’m probably, of all the peer group, the one that is least affected. So, in general terms, that substitution trade seems to be robust. And I see no reason why that will change, also as significant supply continues to come on in Brazil. But, I’d defer to my colleagues in the Capesize segment to give you a better color on that.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session for today’s call. I’d now like to turn the call back over Gary Vogel for any closing remarks.

Gary Vogel

Thank you, operator. I have nothing further. So, I’d like to thank everyone for joining us today and wish everyone a good day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone have a wonderful day.