Q3 2019 Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to say goodbye. Thank you for your patience.
Greetings and welcome to the Eagle bulk shipping third quarter 2019 results conference call.
This time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require further assistance please press star zero.
As a reminder, this conference call is being recorded Oh, no went to turn the call over Gary Vogel, Chief Executive Officer, and freight Dicostanzo, Chief Financial Officer of Eagle bulk shipping Mr. Vogel you may begin.
Thank you and good morning, I'd like to welcome everyone to Eagle Bulks third quarter 2019 earnings call to supplement our remarks today I encourage participants to access a slide presentation that is available on our web site at Eagle ships Dot 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 risk and uncertainties you should not place undue reliance on these forward looking statements.
Please refer to our filings with the Securities Exchange Commission for a more detailed discussion of the risks and uncertainties that may have a direct bearing on our operating results or performance and our financial condition.
Our discussion today also includes certain non-GAAP financial measures, including EBITDA adjusted EBITDA and P.C.. 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 fine.
Natural measures its also worth noting that the Baltic Supramax index for be outside that we will reference throughout the presentation today is basis. The B S. I 58 index.
Please now turn to slide three for the agenda for today's call.
We will first provide you with a brief update overview on Eagles business and our fleet Scrubber initiative after that Frank will provide a detailed review over a third quarter financials will then wrap up the call with a brief review or the rain environment and industry fundamentals and this will be followed by culinary.
Please turn to slide five.
Since the beginning of the third quarter Eagle has been very active on a number of strategic and financial fronts.
As previously reported we relocated our European offices to Copenhagen continue to execute on our fleets carbon installation program reached agreements to acquire six modern high specification ultramaxes for approximately $122 million and raised $148 million in debt, which was comprised of 114 million.
Our convertible bond and a 34 million dollar upsides to our term loan facility.
As of today, we've taken delivery of four of the six vessels all of which are scrubber fitted and expect to take delivery of the remaining two ultramaxes this quarter.
We also closed on the sale of the Castro, a 15 year old 50000 deadweight tons supramax for $7.3 million.
So were sold basis dry dock to saving the company approximately $1.3 million in total capex spend relating to the statutory maintenance as well as the requisite installation of a ballast water treatment system.
Please turn to slide six for review of our fleet makeup evolution.
Inclusive of our recent sale and purchase transactions, we now have acquired and sold a total of 34 vessels over the past three and half years divesting 14 of our smallest oldest family sufficient supermaxes, which averaged roughly 13 years of age itself and acquiring a total of 20 modern ultramaxes averaging around three years of age of purchase.
Our fleet now totals 50, Supramax ultramax vessels, making us the largest publicly listed owner of these types of vessels globally.
Fleet growth and renewal initiatives, we've undertaken over the past few years has significantly enhanced our earnings generation capability, while also improving our operating efficiencies as it relates to vessel speed and fuel consumption.
Please turn to slide seven for a discussion on our Tc performance.
He go achieved a T C for the third quarter of $11014 per day, although we experienced a meaningful improvement quarter on quarter of approximately 13%, we lag to be ESI, which averaged 11590.
Per day on a net adjusted basis.
As we mentioned in previous calls it's more difficult for an owner to outperform the market. When it is rising, especially when it gets higher this is due to the fixed revenue nature of contracted voyages against the constantly moving market.
To be ESI increased roughly 50% quarter on quarter coming up from a low of less than $8000 per day in Q2.
In addition to facing a rising market our performance during the quarter was impacted by other factors, including vessel acquisitions as mentioned earlier, we took delivery of four vessels all of which delivered in the weaker Pacific region, and we also began to position them into the Atlantic, which incurs a significant investment relative to the be aside.
Furthermore, our performance has been affected by the repositioning of our fleet as it relates to the scrubber installation program.
Over the last nine months, we position 32 ships or about two thirds of our fleet in and out of yards located in China.
This notwithstanding approximately half of our fleet is now next open for business in the Atlantic. This is no small feat as we've been women in our ability to fix vessels in the most commercially optimal manner due to the requirements to meet and adjust to yard schedules.
The upshot says that we are now essentially finished with positioning vessels and can you get back to the business or freely operating chefs and executing on our active owner operator model unencumbered.
Scrubber installation program has been impactful to this year's results both from an operations and off hire perspective. However, we firmly believe have being ahead of the curve and getting almost all of our scrubbers fitting in advance of 2020 will pay meaningful dividends next year.
As we've stated in all of our previous calls we do not manage our fleet for quarterly results and believe its long term value creation that's important.
In this regard inclusive of the third quarter, we've achieved an average Tc outperformance over the last 12 months of approximately $1266 per day, equating to roughly $23 million an annual value creation based on our current fleet size of 50 ships.
Looking ahead and as of today, we fix approximately 61% of available days for the fourth quarter had an average Tc of $13150 per day. This equates to a significant outperformance for the quarter based on actual quarter today rates and the forward curve for the balance of the Perry.
Please turn to slide eight.
EBITDA adjusted for certain noncash items totaled $13.2 million for the third quarter, an improvement of approximately 27% quarter on quarter over the last 12 months. He bit die has totaled just over $62 million with approximately one third being derived from Tc outperformance. Please.
Turning to slide nine for a brief update on our fleet scrubber initiatives.
As of today, we've completed the manufacturing of all 41 scrubber towers and have installed 29 to date of these seven ships are fully commissioned and we expect to have an additional 28 ships commission by the end of 19 with three more in the first weeks of January and the remaining three in Q1.
As previously advised we shifted 15 vessels from partly at sea installation to full yard in orders is substantially complete our scrubber program within 2019.
We just commission the first of those full yard installs. This week and currently have eight ships in yards carrying out retrofits.
As of June why do we observed and reported.
Companies, which are installing scrubbers as well as those doing statutory dry docks in China have been experiencing significant delays due to a number of reasons, including the backlog of ships had yards and shortage of labor caused by the extensive amount of work now being performed.
While we were fortunate to have the majority of our fleet out of yards prior to October or shifts. There now are also being impacted and we expect to incur an additional average of 12 days off hire for the 15 installs. During Q4 has compared to previously disclosed estimates. The result of this is an aggregate hundred 85 off hire days while impact.
Tactful, we believe getting these completed now in order to benefit from IMO 2020 already from January 1st is clearly preferred to delaying the work we're spreading the retrofit out over next year, thereby for going fuel differential benefits.
Inclusive of these numbers, we're calculating at an average of 24 days incremental off higher per ship prescriber installation across the fleet.
As you'll note.
On the chart on the right hand side of the slide this year dramatically stands out has a significant period of investment in off hire in order to set up the company for high ammo 2020 and beyond.
Please turn to slide 10 for an update on fuel spreads and scrubber economics.
We're just 53 days to go before IMO 2020 goes into effect, we believe were particularly well prepared to benefit from the regulation based on our preparations as well as our active management approach.
As we've indicated previously we also believe early adopters of scrubbers will benefit most given that fuel spreads are expected to be widest during the period just after implementation of IMO 2020, and the first half of the year before moderating overtime.
Fuel spreads have been fairly volatile as of late but in general have been trending upward over the past weeks, we've begun to lock in some of the fuel spread and currently have about 10% of our 2020 scrubber fuel exposure hedged by selling the spread between <unk> 0.5, LS EFO fuel and 3.5% HFO the average price of those.
Hedges is approximately $240 per metric ton well, there's always basis risk with derivative hedging we calculate that a spread of $240 would equate to annual cash flow of about $46 million.
Separate from this we also believe that would only about 7% of the Super Ultramax fleet being scrubber fitted in early 2020, it's very likely that the fleet will experience a net slow down as a result of more expensive fuel, which will take effect to supply out of the market acting as a positive catalyst for rates with that I'd now like to turn.
The call over to Frank will review our financial performance.
Thank you Gary.
Please turn to slide 12 for a summary of our third quarter 2019 financial results.
Revenue net of commissions for the third quarter was 74.1 million an increase of 7% from the prior quarter.
The increase is the result of higher charter hire rates in part offset by less available days.
The lower available days in the current quarter were impacted by a greater number of off hire days due to statutory dry docks, along with the installation of scrubbers and ballast water treatment systems on our vessels.
As compared to the same quarter in 2018, we saw an increase in revenue of 7%.
We believe evaluating revenue net of both voyage and charter hire expenses best reflects core topline company performance.
In that respect revenue for the third quarter net of both voyage charter hire expenses came in at 43.3 million an increase of 16% from the prior quarter.
Revenue net of both voyage charter hire expenses was 7% lower than the same quarter in 2018.
The year on year decrease was primarily driven by a decrease in charter hire rates and lower availability days.
Total operating expenses for the third quarter of 2019 were $68.3 million decrease of 1% from the prior quarter.
The decrease in Q3 versus prior quarter was primarily driven by lower voyage expenses.
Operating expenses as compared to the same quarter in 2018 increased by 13%.
The increase was driven by higher charter hire and voyage expenses.
The company reported a net loss of 4.6 million for the third quarter versus a 6 million dollar net loss for the prior quarter.
This compares to a net profit of 2.6 million in Q3 2018.
Basic and diluted loss per share in the third quarter of 2019 were booked six cents.
Versus a loss of eight cents in Q2 2019.
In down from basic earnings per share or as a four cents in Q3 2018.
Adjusted EBITDA came in at 13.2 million for the third quarter as compared to 10.4 million in the prior quarter and 20.2 million from Q3 18.
In the appendix of her presentation, you will find a walk from net loss of 4.6 million to adjusted EBITDA of 13.2 million, both EBITDA and adjusted EBITDA. Our non-GAAP measurements you can find additional information on non-GAAP measurements in the appendix.
Let's now turn to slide 13 for an overview of our balance sheet and liquidity.
The company had total cash of 101.1 million as of September Thirtyth 2019.
An increase of approximately 35.7 million from the ended the second quarter.
Total cash included 29.6 million of restricted cash.
The increase in Q3 was the result of the cash proceeds received from the convertible bond offering along with the sale of the Kestrel in part offset by the purchase of three ultramax vessels deposits on an additional three ultramax vessels to be delivered in Q4 and spending on our scrubber program.
The company's total liquidity as of September Thirtyth 2019 was 171.1 million and is made up of cash unrestricted cash along with undrawn revolving credit facilities totaling 70 billion.
Total debt as of September Thirtyth was 449.5 million.
Which increased by $109 million from the last quarter.
Total debt is comprised of the $192 million ship co Norwegian bond, you Wonder and 43.4 million dollar new ultra co debt facility and the 114.1 million dollar convertible bond.
Please note the subsequent to the quarter, we have borrowed an additional $34.3 million under new ultra co debt facility utilizing the accordion feature.
We intend to use the funds for capital expenditures relating to the installation of scrubbers.
General corporate purposes.
The additional debt is collateralized by the three vessels delivered to the company in September .
The new Ultra co facility.
Debt outstanding currently stands at $172.6 million post the accordion draw in an amortization payment of $5 million.
Please turn to slide 14 for review of cash flows from operations.
During the third quarter net cash provided from operating activities came in at a positive 10.5 million.
14 million dollar increase from Q2, 2019, and down 3.2 million from Q3 of 2018.
As a chart shows the positive trading cash flows from operations continues with cash from operations significantly improved in the negative $20 million recorded in Q1 of 2016.
The chart also shows the timing driven variability that working capital introduces to cash from operations as demonstrated by the difference between the dark blue bars.
Which are the reported cash from ops numbers in the light blue bars, which strip out changes in operating assets and liabilities essentially working capital.
As the chart demonstrates the volatility caused by working capital largely evens out over time.
Now please turn to slide 15 for Q3 in 2019 year to date cash walk.
I'd like to is cash flow charts, because they clearly out the large themes driving our results.
Let's now review the chart at the top of the slide for the changes in the company's cash balance in Q3 2019.
The two large bars in the left revenue and operating expenditures are simple look at the operations. The noted. These two bars is 16 million, which comes in reasonably close to our $13 million Q3, adjusted EBITDA number.
The relationship also holds.
With the year to date chart at the bottom of the slide with the net of revenues and operating expenditures at $40 million and adjusted EBITDA for the same period at $39 million.
Back to the charted the top of the slide into the right you will find a bar covering the $2 million in cost for dry docking three ships in the quarter.
A bar totaling $21 million for Capex spending on scrubbers and ballast water treatment systems.
Bar totaling a net of $62 million for the vessels bought and sold in the quarter.
In a bar totaling $113 million, representing the net cash proceeds we received from the convertible bond offering and finally, a bar totaling 7 million for debt principal and interest paid in Q3.
Let's now review slide 16 for our cash breakeven per vessel per day.
Cash breakeven per ship per day in Q3 2019 was $9671.
$766 lower than Q2, 2019 in $1313 higher than full year 2018 breakeven.
The decrease versus prior quarter was the result of lower debt amortization in part offset by an increase in interest expense in GNS.
Please note that Q3 cash breakeven numbers are impacted by timing.
As the anticipated increase and own days on the acquisition of six Ultramax vessels did not fully occur in the quarter.
We expect that the debt in June a breakeven numbers will normalize by Q1 of 2020.
Q3, Opex came in at $4801 per ship per day.
$14 higher than Q2, and $76 higher than full year 2018 results.
We believe that given the lumpy nature of payments related to both stores in annual expenses. It is appropriate to look at our opex under a multi quarter average.
We are also leveraging the scrubber installations to perform additional vessel improvements that will have a positive impact on opex overtime.
Q3 cash DNA came in at $1755 per ship per day up $121 from Q2 and $189 higher than full year 2018.
Geneight was impacted by onetime charges for the closing of our Hamburg and the opening of our Copenhagen offices.
If we were to include the six newly purchased Ultramaxes for the full quarter Q3 gene a per ship per day would have come in at $1563.
Additionally, if we were to include the chartered in days in our calculation Q3 g in a per ship per day would be $1303.
Q3 cash interest expense is $1526 per ship per day, $155 higher when compared to Q2 and $175 higher.
When compared to the full year 2018.
The increase in cash interest is primarily a result of the convertible bonds, which closed in Q3 and less ownership days, which we which will correct itself over the next two quarters as the final two acquired Ultramaxes are delivered.
Q3 debt amortization is $1215 per ship per day.
Richard $55, lower when compared to Q2 and $983 higher than full year 2018.
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.
Thank you Frank.
Please turn to slide 18 for discussion on rates and industry fundamentals.
Supramax ultramax rate averaged $12511 per day for the quarter, an increase of 47% over the prior period. It's noteworthy that the index reached 15000 to 33 during the quarter a six year high.
The Atlantic market averaged $15049 per day up 69% quarter on quarter, while the Pacific market increased by 38% during that same period to average $10726 per day.
The improvement in rates through September was driven by a number of factors some of which we had identified on our previous call. These include continued strong volumes of South American and Black Sea grain exports, which benefited in part due to the drought impacting Australian wheat exports countries, such as Indonesia, the Philippines, which tend to purchase large.
Amount of product from Australia, we're being forced to look at black sea exports longer haul trade.
Arising year on year Chinese coal imports of roughly 10% an increase in nickel our exports out of Indonesia as buyers acted to secure a product ahead of the export ban which was scheduled to go into effect as of January Onest, Indonesia is the world's second largest export of nickel or with almost all of it going to China.
To be ESI peak in early September and has come off to levels around $10500 per day apart from the normal volatility, which inherently exists in our market. We believe rates have been negatively impacted due to a few reasons of note Indonesia abruptly brought forward the nickel ore ban on October 28, which was.
Are we supposed to go into effect in January this has had an immediate and significant impact to the Pacific market with spot ships now looking for alternative cargos. Notwithstanding this the situation remains fluid is Indonesia recently stated they may allow for nickel or exports to resume within the next one to two weeks in.
In addition.
It appears that some Chinese ports are starting to restrict coal imports purportedly under quotas being reached their is however, no clear guidance and as of today, we continue to carry some volumes of steam coal into China.
Probably the biggest factor impacting rates is relative weakness in soybean movements, it's not surprising that Brazilian exports have dropped given the time of year, but nov is typically a strong period for us exports to Asia. Unfortunately, as we saw last year and with the continuing tariffs on us beans little product is moving on what was an important long haul trade.
Typically supports rates in Q4.
Please turn to slide 19 for a brief update on vessel supply.
Drybulk Newbuilding deliveries totaled roughly 10.6 million deadweight tons or approximately 121 vessels during the third quarter, representing an increase of 6% quarter on quarter.
Demolition of older tonnage amounted to just 1 million deadweight tons during the quarter or 13 vessels, representing a decrease of 46%.
As you'll note from the light Blue dotted line on the graph net fleet growth is now expected to reached 3.5% for 2019, a 1% higher than what we are projecting back in August .
This reflects upward revisions to deliveries made by Clarkson, but also lower than expected strapping driven by the improvement and expectations in the underlying market.
Please turn to slide 20 for a look at forward supply.
In terms of forward supply growth Newbuilding orders totaled approximately 4.8 million deadweight tons or 34 ships in the third quarter down over 41% over the prior quarter basis vessel count.
As of the latest information we have we for Ultramaxes were ordered during the quarter and 47 for the year, excluding five chip carriers, which are specialized vessels typically built for contract trades to put this in perspective 102 Ultramaxes were ordered last year by this time.
Our view on future ordering remains unchanged given a number of factors, including the price advantage of second hand ships first newbuildings as well as uncertainty on future regulatory requirements. We remain optimistic that we will not see a material increase in ordering for the foreseeable future unless theres significant pickup in rates.
The Drybulk order book as a percentage of the on the water fleet stands at 11% basis deadweight tons. Capesize segment has the highest order book it over 14%, while most importantly, the eagle to Supramax Ultramax segment Order book stands at just 8% of the on the water fleet, which is around a 20 year low.
Looking ahead, we continue to believe supply side fundamentals remain favorable given the low order book, an increasing number of older vessels, which are becoming less commercially viable due to regulations now eminently coming into effect.
Please turn to slide 21 for summary on demand.
From a macro perspective global growth expectations as forecasted by the IMF had been revised down again since our last earnings call Global GDP growth is now forecast that 3% for 2019 down 20 basis points since our last call and a full 90 basis points since last July when task for first impact.
Those in the U.S., China trade dispute.
This reduction in global GDP equates to about $700 billion of lost production for 2019. This combined with demand shocks from both valley and the Asian swine flu have clearly impacted drybulk rate development. However, we believe the resilience in rates this year speak to an underlying strength in the fundamentals within drybulk.
As we speak there seems to be more concrete and positive news regarding a potential deal between China and the use.
Given the above this would of course be a very welcome development.
We also think the timing could be fortuitous given the recent ongoing soybean harvest in the U.S.
Drybulk demand growth has calculated from a bottom up fundamental perspective is now expected to reach roughly 1.5% for 2019 or up 20 basis points since our last earnings call in August .
I think it's important to note that all projected demand growth in Drybulk for this year is coming from the minor bulks, which represent about 40% of total trade and what's your expected to grow by almost 4%, while the major bulks, which are comprised of iron ore coal and grain are expected to remain flat overall for the year.
Demand for iron ore impacted by the Volleyed damn collapse in the early part of the year as expected to decreased by 1.3% to total 1.4 or 5 billion tons.
Demand for coal, which typically represents about 15% to 20% of the cargo as we carry is expected to grow by 1.2%. This year total 1.28 billion tons, a marginal increase of approximately 10 million tons since our last earnings call and demand for grain, which represents anywhere from 10% to 20% of cargos, we typically carry.
Is expected to grow by about 1.5% this year to total around 480 million tons.
Most importantly to us minor boats as denoted on the last final table and which typically makes up about two thirds of the cargo Eagle carriers are expected to once again surpass overall drybulk and forecast increased by almost 4% in 2019.
This growth representing roughly 80 million metric tons of incremental demand is being driven by improvements in trade such as fertilizer nickel ore manganese ore forest products, ACRA bolts and bauxite.
We believe a demand picture, which remains favorite towards the minor bulks combined with the Supramax Ultramax historically low order belk as a percentage of the existing fleet creates dynamic that is particularly favorable for eagle given our fleet makeup.
Positive supply demand dynamic combined with the impending IMO 2020 regulation with its potential impact a slowing vessel speeds along with Eagles forward leaning scrubber strategy makes for a truly exciting period for our company with that I'd like to turn the call over to the operator and answer any questions you may have operator.
With the prepared remarks completed we will now open the line for questions.
Ladies and gentlemen to ask the question you only to press star one on your telephone to withdraw your question press the pound.
Standby will be compiled acuity Ross.
Our first question comes from Jonathan Shapell with Evercore. Your line is now open.
Thank you good morning, Gary.
Just a quick to partners for you the fuel spread you said you'd be able to hedge roughly 20%.
Fuel spread economics.
Is there liquidity to do more of that and is that your initiative or do you kind of want to just lock in 20% and let it ride on on the widening spread it seems to be occurring right now in the second part is.
Got you given the fact that your ships call on multiple ports and now that were less than 60 days away from the start of the regulations are you still confident in your ability to get enough I silver fuel oil to make the scrubbers worthwhile.
When the regulation start off.
Yeah. Thanks for that first of all just give you a we've hedged about 10% of our.
Scrubber fuel demand for next year not not 20.
There is liquidity and the 2020 market at the moment, we can definitely do more we're actually bullish on the spread but we thought putting some in place to start to do that makes sense, but we've seen it.
Kind of hovering between the 225 and to 45 almost 250 as of this morning, it's actually about to 32 in both Rotterdam and Singapore. So we we may do more as as things develop but we don't feel a particular need because it has said where we're generally bullish that.
We think that the the demand for 3.5 fuel when it falls offset that price is likely to likely to drop from where the forwards are today around 220 in Rotterdam, and then 250 in Singapore.
You know, we're really confident we feel really good about where we are in terms of the dynamics. One aspect. So you know about fuel availability is that we do a lot of businesses that trades around major bunkering hubs as well if 50% of the supers and ultra is in the world had scrubbers I'd be more concerned because we would be relegated to.
Competing for business in kind of the secondary tertiary ports, where fuel wasn't necessarily available, but we expect just 7% of the fleet tab scrubbers in early 2020, the the fleet of Super and Ultra is that we compete with so we think we'll be able to pick trades that are around there and we also of course Kerry.
Can carry sufficient fuel to go up let's say past Singapore into into a north China, and then come back down and pickup fuel and things like that so we feel quite good about it we like where the spreads developing and and we're excited to we're excited to get there on January onest.
All right that's sounds great. Thanks, a lot. Thank you.
Thank you. Our next question comes from Randy given with Jefferies. Your line is now open.
Oh, the gentleman how's it going morning, Randy.
Hi, good hey, so looking at your scope installations in it seems like some of those installations, obviously slipped from the third quarter fourth quarter now into maybe in January . So is that your decision at all I know that theres something owners deferring scrubber installations or is that purely delays the shipyards and then looking at kind of your news cover guidance.
Our off hire days guidance of 587 days in the fourth quarter, how many vessels will be off higher during that quarter, just trying to get an average off hire days per vessel.
Yes. So that's I mean, the 587 is across the fleet Theres 15 ships in Q4 that is doing full yard installs.
So originally originally those ships would have gone and kind of during third quarter early fourth quarter, and then had right inquiries on board. The writing crew aspect has been successful in that we've limited off hire on those ships down to around 12 13 days for time in the yard the problem was they've taken longer that doesnt impact the economics.
That's because the ships have continued to trade and the cost for these right and crews on a longer period is not as doesn't isn't borne by eagle. The problem wise as we got towards November December we could have continued with that program and kept off hire days down, but then those ships likely wouldn't have been commissioned until well into the first quarter second quarter.
We talked about the fact that at the current fuel spread we're estimating roughly $46 million of cash flow on annualized basis. So if we were let's say if our fleet start was scrubber fitted on July 1st instead of January Onest across the fleet will forego 26 million. So the incremental off hire on Q4 to US is really was a no brainer.
Right to bring that forward and take the kind of short term pain for for the long term more or the significantly what we think will be significantly more benefit. So we went from kind of that 13 days, we expected it would be around 30 days and or 28 and now we push we've we've indicated that because of delays going on in China.
We've added another 12 days per ship on average so that's the economics around it but again it was our decision some of the ships we've pushed back simply because yards are so fall it doesn't make sense to sit there and.
And so we just ended up instead of doing in Q3 to spin a shift but it gives me the opportunity to talk about the fact this is clearly impacted our business model. We've had ships that have arrived basically finished up the businesses in order to go into the yard to to you know a retrofit a scrubber and as a backup at the yard so we spend the ship but.
30 days now anytime you make a decision that is not fully commercial it's going to impact your revenue model and that's what's happened here. So spinning a ship back in the Pacific I'd say 10, when the market is 12 overall it hurts our performance. We think it's the right thing overall as opposed to sitting at a yard but those are two different parts of the same basket.
Got it got it.
Alright, and then I just kind of the industry question, how much of the Drybulk trade is impacted by this kind of Indonesia niccolo or ban in are you hearing yeah. This is mostly impacting supramaxes I believe have you seen this weakness it kind of in your operations.
Yes, so it's it's impactful in the sense that it's very concentrated in the area Southeast Asia and it happened overnight. So so you know I mean, if you look at it from a total percentage to dry bulk it's small, but all of a sudden Indonesian the nickel or ban was supposed to happen in January .
And so what we ended up with wise and this has happened before when Indonesia has done. This you end up with more ships go caring nickel or.
To try and get in under the under the wire and then Thats why Indonesia said right. We're going to stop this right now and it literally was overnight. So its ships that were on their way to the load port became free and started competing for other cargoes at the same times. It seems that coal cargoes are backing off so I think in a in a kind of micro level. It's been it's its impact.
Actual because it's so immediate and so and so.
No it's concentrated in that area, but it's about it's only it's about 15 million tons that it impacts, but again it went from kind of hyper movement of cargo to zero overnight.
Got it alright, well that's it for me thanks, so much.
Right. Thank you.
Thank you as a reminder, ladies and gentlemen that Star then once asked a question.
Our next question comes from Amit Malhotra with Deutsche Bank. Your line is now open.
Hey, good ones as Chris side or on from it. So you guys talked a bit about how vessel repositioning is weighing on Tc performance and your ability to outperform on the back of the act the management approach.
So as you look out to 2020 I think this is such a little earlier, but you guys service a high number reports of many of them are small and may not sell high silver fuel oil. So I guess the question is how does this limit your trading flexibility as you need to potentially repositioned the fleet for refueling and how does that impact to the active management approach.
Yes, I think we're definitely going to manage our fleet and operate differently last year, but we always solve for the maximum TCV and so what that means is whether we can carry more lucrative cargo or burn cheaper fuel ultimately you know the cash again, you know monies fungible so.
We'll we'll chase the highest Tc if theres an opportunity for operating first of all we're still going to have nine non scrubber fitted ships and we chartered in ships as well. So if we see an opportunity on a non scrubber fitted trade and we want to do something because we have a scrubber faded ship, we can chartering ships and operate around that so I think our our fleet.
We will will.
Trade differently, but I don't think it'll hinder us the problem right now is that where we're focused on positioning ships into a specific area. It's not as impactful for instance on a capesize vessel, which typically you know often ends up discharging in China, and then ballast thing away. So when you finished discharging our cargo in China you go in.
Into.
Scrubber retrofit and then you balance back towards Australia, Brazil, we don't have that's not really our trade. So that's why it's impactful for US right getting ships from China of course, we could ballast point. The economics are there on a supramax ultramax typically for a balanced away from China. So we need to find backhaul cargos, which are which are not.
Prevalent, hence, hence the backhaul and the and the lower.
Value on them. So we're looking forward clearly to get on the other side of this and get back to what our business, which is outperforming the index something something we've done for few years now notwithstanding this quarter.
Okay, Yeah that makes sense I appreciate the color and then.
As we are trying to think about the scrubber premium realized you know your chart on slide 10 shows that the spread relative to a low sulfur fuel oil is to 30 in the spread relative to Mg I was 340, and that's pretty wide range.
When we consider all of that is essentially margin.
So how do you think about the scrubber premium realizes it going to come out to mid point there.
Any any color there would be appreciated sure. So we try and operate on voyage for each basis, meaning.
Excuse me, we get paid a per ton basis to carry cargo and the beauty of that is that fuel as an internal cost what we pay for fuel isn't negotiated isn't part of the rate. So ultimately the fact that I have a scrubber fitted ship and and and paying less for fuel whether that's $200 less for fuel to 5300 is our own.
Our own costs on our own business. So when we do voyage business. We believe we will capture 100% of that value because ultimately if we pay less at the pump so to speak we keep the deferred the differential when you do timecharter it becomes a negotiation right willing buyer willing seller. So if you're a time charter you know tonnage provide.
Peter and you have a scrubber fitted ship and you say my ship is worth market plus 4000, it's only worth market plus 4000 people will pay you that so the fact that we have an active owner operator model. The fact that we have trading desks in in Stamford in Copenhagen, and Singapore, We think we're we're uniquely positioned to capture.
The maximum amount of that value. So I'm, not saying, we won't do time charter out, but we will be in a position to say that if we don't capture the full value for that alternative is doing voyage business, where we can so we're pretty confident that the vast vast majority of that premium will will go to the bottom line for Eagle.
Okay I appreciate that but I guess the question is is when we're kind of in the voyage business when things are priced on a lump sum basis.
It was that market lump sum basis, do you think going to be reflective of the mgo price or the low sulfur fuel oil price or the I couldn't be port specific yes, sorry, yeah. It's a good clarification I think it's going to be based on the low sulfur price in the Super Ultra because we think 90, 93% of the ships were competing with are going to be carrying.
Matt So we're actually talking about yesterday afternoon. Our job next year is to essentially run all calculations basis low sulfur fuel allow allowed the market to price freight on low sulfur fuel because that's the vast majority of ships and then we can be more competitive than that but we don't want to be two more too much more.
Competitive here and if we can right. Because then we're leaving money on the table. So we absolutely think that it'll be.
It will be driven by the low sulfur fuel oil price, because that's where the vast vast majority of ships will be we'll be paying for fuel I think as you move into the larger size were 30, 540% potentially of of segment like Cape is fitted with scrubber, you potentially could have a different dynamic depending on.
Three if you have five ships competing in three or scrubber ultimately its whoever is willing to to lower the price. So it's also you know how.
People are pricing in and how shop. They are because I think if you are using much cheaper fuel you could have a potential to offer freight that seems attractive to you, but may be too attractive than what you have to do compared to people burning more expensive fuel, it's going to be a totally new market is going to be some transition and achieving or.
Around it, but but again I think we given our business model, we feel that we're really in a good position to to make that transition very smoothly and capture value quickly.
Appreciate that and just one last quick one if I could I'm on slide 21.
You should it shows the minor bulk trade growth falling about 1% in 2020 relative to the growth. We are seeing in 2019 I was little surprising because we're seeing the overall drybulk trade go higher GDP go higher.
Though major box go higher I'm, assuming that doesn't factor in any sort of positive U.S., China trade resolution, but you know what are you seeing there that's causing that.
Celleration in 2020, yes, I mean, so we we use numbers from Clarkson, but bauxite is being growing quite dramatically and that's coming off a fair amount cement trade is almost at 4% year, they're projecting it to traded and increased by 1.4% next year. So.
And so theres a number of things within minor bulks that are coming off in fact within their analysis of minor bulks aside from the top eight others, others, which has a lot of small things you know capture 25% a minor bulk trade overall, which is 10% of dry bulk and that.
This year is growing at 5.5% and they have a down a 1.4, so thats a basket of a lot of different cargos again, I don't I don't have the detail of everything down to the bottom, but you know theres definitely impact on a across a across those I think I don't think that it takes into account the.
You as China Trade war lifting for us that's soybeans, which is is a major bulk of course, I mean, the U.S. soybean trade to.
Put it in perspective went from 40 million in 17 to 20 million in 18 to 14 million projected this year, so pretty demonstrative disruption in terms of volumes. So we think there's definitely upside potential on that and of and of course, you know a one thing in the minor bulk for next year that isn't there.
There would be the nickel ore ban from Indonesia, which which of course.
Now has been accelerated but may be on wound. So that's that's a that's a liquid.
Development.
All right I appreciate the color and thanks for the time.
Thank you appreciate.
Ladies and gentlemen, this concludes our question and answer session I would now like to turn the call back over to Gary Vogel for any closing remarks.
Thank you operator, we have no further comments I'd like to thank everyone for joining us today and wish everyone. A good day. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.