Jul 31, 2008
Executives
Gerry Buchanan – President Peter Georgiopoulos – Chairman John Wobensmith – CFO and Principal Accounting Officer
Analysts
Doug Mavrinac – Jefferies & Co. Jon Chappell – JPMorgan Greg Lewis – Credit Suisse Natasha Boyden – Cantor Fitzgerald Chris Wetherbee – Merrill Lynch Michael Pak – Banc of America Securities
Operator
Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited second quarter 2008 earnings conference call and presentation. Before we begin, please note that there will be a slide presentation accompanying today's conference call.
That presentation can be obtained from Genco's web site at www.gencoshipping.com. To inform everyone, today's conference is being recorded and is now being webcast at the company's web site, www.gencoshipping.com.
We will conduct a question-and-answer session after the opening remarks. Instructions will follow at that time.
A replay of the conference will be accessible anytime during the next two weeks through August 14, 2008 by dialing 888-203-1112 or 719-457-0820 and entering the pass code 1470749. At this time, I would like to turn the conference over to the company.
Please go ahead.
Unidentified Company Representative
Good morning. Before we begin our presentation, I note that in this conference call, we will be making certain forward-looking statements that discuss future events and performance.
These statements are subject to risk and uncertainties that could cause actual results to differ from the forward-looking statements. For a discussion of factors that could cause results to differ, please see the company's press release that was issued yesterday.
The materials relating to this call posted on the company's website, and the company's filings with the Securities and Exchange Commission, including without limitation the company's annual report on Form 10-K for the year ended December 31, 2007, and the company's subsequent reports filed with the SEC. At this time, I would like to introduce Mr.
Gerry Buchanan, the President of Genco Shipping & Trading.
Gerry Buchanan
Thank you and good morning. Welcome to Genco’s second quarter 2008 conference call.
With me today is Peter Georgiopoulos, our Chairman and John Wobensmith, our Chief Financial Officer. I will begin today’s call by discussing our second quarter and year-to-date highlights as outlined on slide five of the presentation.
I will then turn the call over to John to review our financial results for the three and six-month period ended June 30, 2008. Following this, I will discuss the industry’s current fundamentals.
John, Peter and I will then be happy to take your questions. The second quarter 2008 was an important one for Genco Shipping.
The company’s furthered it's position as an industry bellwether by making notable progress in three key areas. First, we posted strong financial results driven by management’s past success working in their expanded fleet on favorable charters as well as our foresight in securing profit-sharing agreements on a number of vessels.
Second, we continued to further our consolidation leadership by entering into two additional transactions to expand our fleet by nine modern vessels. Third, we declared our second dividend under our most recently immense increased target dividend of $1 per share for the quarter.
The strong financial results we achieved for both the quarter and six months 2008 period demonstrated the sizeable earnings of our fleet. For the second quarter, excluding the $2.6 million of dividends received from our investment in Jinhui Shipping and transportation shares, net income was $58.3 million or $1.96 basic and $1.95 diluted earnings per share.
Net income was $134.9 million or $4.61 basic and $4.58 diluted earnings per share for the six months ended June 30, 2008. John will discuss the quarter results in more detail later in the call.
Genco’s strong financial results enabled the company to once again declare a sizeable quarterly dividend during a time in which we further differentiated the company through its disciplined consolidation of the industry. As I mentioned a moment ago, we declared a $1 per share dividend for the second quarter.
Underscoring the ongoing support management's disciplined growth strategy as received from the capital and banking markets, we completed a $204 million follow-on offering accompanied by a secondary offering. During the quarter, we also continued to expand the fleet and are pleased to have entered into two transactions we believe will considerably strengthen our future commercial prospects to capitalize on the strong demand for essential commodities, enhance our fleet profile as we continue to achieve the highest operational standards for our leading customers and further increase our earnings power for the benefit of shareholders.
First, on May 12, we agreed upon the acquisition of two Panamax vessels and one Supramax vessel for $257 million. Building up on this success, we further enhanced our fleet by agreeing to acquire six new builds, three Capesize vessels and three Handysize vessels for an aggregate price of $530 million.
With the addition of these nine vessels, we have expanded our fleet approximately 345% on a net tonnage basis since going public in 2005. We are pleased to have already received delivery of the Genco Raptor and the Genco Cavalier, two of the three vessels from the Bocimar acquisition.
Finally during the quarter, we reached favorable time charter agreements for six vessels, including one from the Bocimar acquisition and one from the nine-vessel Metrostar acquisition signed in July of 2007. Moving to slide six, I will now discuss our continuous success in the execution of our chartering strategy in greater detail.
During the second quarter, we continued to focus on maximizing a return on capital by signing contracts with staggered durations. This portfolio approach served the company well by providing shareholders with a sizeable secured revenue stream and maintaining the ability to benefit from future rate increases.
Consistent with this strategy, during the quarter, we reached time charter agreements at attractive rates for six vessels. Before moving on to discuss our fleet delivery schedule, I note that our significant success in signing attractive charters has resulted in 94% of our fleet’s operating days being secured on contracts for 2008 and 60% in 2009.
On slide eight, we detailed the remaining vessels to take delivery from our acquisitions in 2007 and 2008. As noted on the slide, we expect to take delivery of 11 vessels, seven Capesize, one Panamax and three Handysize vessels from the fourth quarter of 2008 through the fourth quarter of 2009.
Upon completing these acquisitions, our fleet will consist of 41 drybulk vessels, consisting of 12 Capesize, eight Panamax, four Supramax, six Handymax and 11 Handysize vessels with an average age of approximately six years, well below the industry average of approximately 16 years. At this time, I would like to turn the call over to John.
John Wobensmith
Thank you, Gerry. I will begin my remarks by directing you to slide ten which presents our financial results for the second quarter and six months ended June 30, 2008.
For the three-month and six-month period ended June 30, 2008, we recorded revenues of $104.6 million and $196.2 million, respectively. This compares to the revenues for the second quarter of 2007 and six months ended June 30, 2007 of $36.8 million and $74.1 million, respectively.
The year-over-year increases are due to the operation of a larger fleet, higher charter rates for 13 of our vessels and the contribution from our Capesize vessels, two of which have profit-sharing agreements. Operating income for the second quarter and six-month period ended June 30, 2008 was $70.8 million and $156.1 million, respectively.
This compares with operating income for the second quarter and six-month period ended June 30, 2007 of $18.5 million and $40.8 million, respectively. The second quarter and first half of 2008 increases in operating income are attributable to higher revenues partially offset by increased vessel operating expenses, general administrative expenses, and depreciation and amortization associated with the operation of a larger fleet.
Interest expense for the second quarter of 2008 was $11.6 million and $23.4 million for the six-month period ended June 30, 2008. This compares to interest expense of $4.1 million for the second quarter of 2007 and $7.6 million for the first half of last year.
Excluding the $2.6 million of dividends received from our investment in Jinhui Shipping and Transportation shares, net income was $58.3 million or $1.96 basic and $1.95 diluted earnings per share for the second quarter of 2008. Net income was $134.9 million or $4.61 basic and $4.58 diluted earnings per share for the six months ended June 30, 2008.
This compares to net income of $13.7 million or $0.54 basic and $0.54 diluted earnings per share for the second quarter of 2007 and net income of $33.6 million or $1.33 basic and $1.32 diluted earnings per share for the six months of 2007. Moving to slide 11, you will see that we have maintained a strong balance sheet during the time in which we both expanded our fleet and distributed sizeable dividends to shareholders.
Key balance sheet items include the following. Our cash position was $96 million as of June 30, 2008 and our debt-to-capital ratio was 53%.
Our total assets as of June 30, 2008, were $1.95 billion consisting primarily of our current fleet, deposits on vessels to be acquired, Jinhui common stock, and cash. Our EBITDA for the three-month period ended June 30, 2008 was $85.7 million and our EBITDA margin now represents 82% of revenues.
Moving to slide 12, our utilization rate 99.3% for the second quarter of 2008 compared to 98% in the year earlier period. Our time charter equivalent rate for the second quarter of 2008 increased 95% to $40,945 per day from $21,046 per day recorded in the second quarter of 2007.
The increase in time charter equivalent rates was due to higher charter rates achieved in the second quarter of 2008 versus the second quarter of 2007 for two of the Panamax vessels, six of the Handymax vessels, and five of the Handysize vessels in our current fleet. Further, higher TCE rates were achieved in the second quarter of 2008 versus the same period last year due to the operation of the five Capesize vessels that were part of the Metrostar acquisition, two of which have profit-sharing agreements.
By acting opportunistically to capitalize on strong markets demand, in creating the profit-sharing agreements with these vessels, we have been able to earn an average of approximately $110,000 a day, representing a 125% over the vessel’s average basic base rate. In the first six months of 2008, TCE rates obtained by the company increased 84% to $38,419 per day from $20,863 in the same period a year ago.
For the second quarter of 2008, our daily vessel operating expenses were $4,378 per day versus $3,727 per day for the second quarter of 2007. Daily vessel operating expenses for the first six months of 2007 were $4,328 per day versus $3,677 per day for the year earlier period.
These quarterly and year-over-year increases are due to higher crew and lube expenses and the operation of a larger class of vessels namely the Capesize vessels. I would like to note that daily vessel operating expenses for the second quarter and first six months of 2008 were once again below our budget number.
That said, it remains important to note that we believe daily vessel operating expenses are best measured for comparative purposes over a 12-month period in order to take into account all of the expenses that each vessel on our fleet will incur over a full year of operation. Based on the estimates provided by our technical managers and management’s expectations, our 2008 daily vessel operating expense budget is $4,700 per vessel per day on a weighted basis.
As previously announced the increased budget reflects the anticipated increased cost for crewing and lubes as well as the operation of our Capesize vessels. On slide 13, we present a pro forma balance sheet that reflects the company’s declaration of its second quarter 2008 dividend of $1 per share and its effect on our cash position and shareholder’s equity, the effect of the draw-down of the $62.9 million under our credit facility for the payment of the 85% on the Genco Cavalier.
As you will see, our pro forma cash position for the quarter is $64.2 million. As of June 30, 2008, our pro forma liquidity totaled $389 million and our pro forma net debt-to-total capital ratio was 55%.
It should be noted that while the pro forma balance sheet includes $77 million in debt associated with the purchases of Jinhui common stock, it does not include the market value of the position. On slide 14 of the presentation, we outlined our payment scheduled for 11 of our newly acquired vessels to be delivered.
I would like to note that deposit payments have already been made in the amount of $163.1 million. The remaining balance will be made upon the delivery of each vessel scheduled between the fourth quarter of 2008 and the fourth quarter of 2009.
To finance the remainder of the vessels, we intend to draw upon our $1.4 billion revolving credit facility. In addition, we are in the process of negotiating an additional credit facility to meet our longer term requirements for these vessels.
Before moving on to our dividend policy, I will review our anticipated breakeven levels detailed on slide 15. As we mentioned a moment ago, we expect our Q3 2008 daily vessel operating expense budget to be $4,700 per vessel per day on weighted basis on an average number of vessels of 29.98 for the third quarter of 2008.
Furthermore, we expect our daily free cash flow breakeven to be $12,422 and our daily net income breakeven rate to be $18,257. Next, I will discuss our dividend policy, which is highlighted on slide 16.
During the quarter, we declared our second dividend under our most recently announced quarterly dividend target rate of $1 per share. The dollar per share quarterly dividend for the quarter represents approximately 51.5% increase over our second quarter 2007 dividend and a 67.7% increase over our 2006 second quarter dividend.
Based on our closing price yesterday of $66.33, plus the cumulative dividends of $7.49 per share that we have paid to date, we have provided shareholders who invested in our IPO in July of 2005 a total return of approximately 252%. The Board of Directors determines our dividend policy based on the calculation of free cash flow, less cash reserves for fleet maintenance, renewal and growth, and debt amortization.
In seeking to provide our shareholders with sizeable and growing dividends, we have consistently increased our quarterly payout while expanding our fleet since our IPO in 2005. Our ability to consistently generate sizeable cash flows while seeking industry consolidation demonstrates the earnings power of our modern high-quality fleet.
Going forward, we will continue to take advantage of our significant financial flexibility and seek growth opportunities that meet our strict earnings and cash flow accretion criteria as well as return on capital hurdles. Complementing this focus, we intend to continue to draw upon our significant time charter coverage to continue to distribute sizeable dividends to shareholders.
I will now turn the call back to Gerry.
Gerry Buchanan
Thank you, John. I will now take this opportunity to spend a few moments discussing the industry fundamentals.
I will start with slide 18, which points to the drybulk indices. Represented on this slide are the overall Baltic Dry index, the Baltic Capesize index and the Baltic Panamax index.
As can be seen when looking at the first half of 2008, the rate environment has displayed continued strength as compared to the same time last year. It is important to note the volatility displayed over the past six months, which we believe stems from a very tightly balanced market in terms of supply and demand characteristics.
Moreover, the index is up approximate 20% over the corresponding level last year. On slide 19, we will discuss the drivers behind the overall strong rate environment.
As indicated on the graph at the bottom rate, Chinese fuel production grew to 263 million tons, showing a 10% year-over-year increase for the six months ending June 30, 2008 while 139 million tons of iron ore were imported into China, showing a 22% year-over-year increase for the same period. It is important to know that this increase was observed during a period of uncertainty over the recently concluded iron ore price negotiations.
It was only on July 4, 2008 that the final negotiations between BHP and Baosteel were completed at an 80% to 96.5% increase for the contract year commencing April 2008. Moreover, the significant increases in the price of steel through 2008 not only indicate the continuous underlying demand for the commodity but also reinforce the need for incremental iron ore going forward.
Coupled with the fact that the International Iron and Steel Institute projects China’s steel use to grow by 11.5% in 2008 and 10% in 2009; these conditions bode well for the drybulk market. During the first half of 2008, Chinese iron ore import figures indicate that increased volumes of ore have been imported from India as compared to Australia or Brazil.
Indicatively on a year-on-year basis, Chinese iron ore imports from Australia increased by 19%, from Brazil by 14% and from India by 25%. We believe that the settlement of the iron ore price negotiations will hamper spot buying from India and divert more activity to longer trade routes like Brazil and Australia.
At the same time, we expect further growth in the long-term demand for coal. As can be seen on the graph at the bottom left, Australian coal exports have rebounded since the recent flooding disruptions, with the total coal exports reaching 103 million tons through the first half of 2008.
Moreover, increased domestic demand for Chinese coal is forcing the country to become a net importer of the commodity while at the same time India’s economic growth is also adding further pressure to the coal trade in two ways. Firstly, its increased steel production is forcing the country to become a major importer of coking coal, and secondly its increased energy demand is expected to result in higher thermal coal imports.
Furthermore, the fact that Australian coal mines are running at capacity and weather disruptions are prone to stress the existing infrastructure and create bottlenecks, has created increased demand for coal exports coming out of the U.S. On the grains front, the South American grain season, which is usually concluded during the first half of the year, has been extended towards the second half due to the intermittent shipping disruptions as a result of the Argentinean farmers’ strike.
Coupled with the commencement of the North American grain season at the beginning of September, issue bodes well for the drybulk market during the third and fourth quarter. Turning to slide 20, we note that Chinese fixed-asset investment has been showing consistent growth both through the end of 2007 and into the first half of 2008, pointing to the country's efforts to improve their infrastructure platform going forward.
Indicatively Chinese fixed asset investment rose 26.3% through the first half of 2008 and industrial production grew by 16.3%. Combined with the fact that Chinese companies have been actively investing in Brazilian and Australian mining companies in order to access mining rights to iron ore, is a good indication of the bullish demand expectations for the commodity.
Looking at the graph on the bottom of the page, one can see the planned production increases by the major miners to meet the anticipated demand. Indicatively, production quantities are forecasted to almost double from approximately 600 million tons in 2007 to 1,110 million tons in 2012.
And finally in slide 21, we present a view for the supply side of the equation. Looking at the graph on the bottom slide, we can see the drybulk order book by quarter through 2012.
A fairly defined order book over the next two years provides good visibility over the medium-term charter market. Although the drybulk order book has increased to 64% of the existing fleet, it is questionable whether it will be delivered in its entirety.
It's important to note that 23% of the Capesize orders scheduled to deliver in 2009 and 33% of the Capesize orders for 2010 are contracted by Greenfield yards. The increased price of steel could place constraints on some of the startup yards.
Anecdotal evidence of constraints, such as financing for shipyards and smaller owners as well as machinery and equipment shortages, could pose additional difficulties in the delivering the current order book in its entirety. Furthermore, we do not believe that the impact of the much discussed VLOC conversions is certain.
The potential of additional capacity for this year is approximately 10 million deadweight tons. However, the reliability of the converted vessels is questionable.
Rumors of some issues with the first units have risen and better tanker market prospects are dampening interest from the side of the owners. Lastly, over 30% of the world's fleet is 20 years or older.
As we have indicated on past calls, unlike tankers, bulk carrier scrapping is not mandated. It is more of an economical equation on the cost of repair to comply with the requirements of a fifth or sixth special survey.
However, charters do become more selective in less robust markets and many of them will not take vessels which are in excess of 20 years old for long-term time charters. Therefore, we believe that scrapping will become an increasing factor in the future.
This concludes our presentation and we will be happy now to take your questions.
Operator
Thank you. (Operator instructions) And our first question is from Doug Mavrinac with Jefferies & Company.
Doug Mavrinac – Jefferies & Co.
Great, thank you. Good morning and congratulations once again on another great quarter.
Gerry Buchanan
Thanks, Doug.
Doug Mavrinac – Jefferies & Co.
Just have a few questions for you all. First, while we have seen weaker spot charter rates in recent weeks when compared to rates back in May, how would you guys describe the interest on the part of charters in recent weeks for long term charters?
Have we seen increase demand as measured by the longer term rate charters are willing pay?
Gerry Buchanan
Doug, we haven’t seen any drop off in that at all. There is still a very, very strong interest in charters in long-term chartering and I don’t see any change in that at the moment.
Doug Mavrinac – Jefferies & Co.
Okay. Thanks, Gerry.
And then what about intermediate term charters, have you seen an increase in the number of charters like BHP willing to take on vessels for six months at quite attractive rates? Would you say that would be reasonable that charters are starting to make preparations for needs in the late September time frame, i.e., post Olympics at this point?
Gerry Buchanan
Well, first of all, to talk about Olympics, going to change the equation too much. I mean it’s a short term thing, what’s going on with the Olympics.
The interest in charter period, charters like six months or seven, five to seven months or whatever, has always been there and I don’t see that changing, Doug.
Doug Mavrinac – Jefferies & Co.
Okay, great. And then also, Gerry, I mean a lot of talk has been made about the Chinese destocking and everything else.
I mean you have the negotiations beginning once again on November 1. Would you say while the destocking or they maybe have destocked over the last several weeks that it is not too unreasonable to think that it could turn right around and start restocking, so that they are not too short going in those negotiations in November?
Gerry Buchanan
I’m sorry, John and I, we were busy talking here, sorry, we were talking over your question, Doug, and I missed the point of it, because I couldn’t understand what you said at the beginning.
Doug Mavrinac – Jefferies & Co.
No worries. I was just talking about the – a lot of talk has been made about destocking of iron ore inventories since maybe late May.
Our thoughts are that that destocking will be followed up by some restocking in anticipation of building inventories before the November 1 negotiations begin with the global iron ore producers once again. Do you think that's potentially in the cards?
Gerry Buchanan
Yes, I do actually. I mean, we see very strong stocking piles in the Chinese yards at the moment, so John, you can add anything to that?
John Wobensmith
Yes, I mean Doug keep in mind, yes, the inventory numbers are up and part of the problem is that different people are using different numbers whether it’s 19 ports that they are counting or 85 ports. But, I think the standard number right now is somewhere around 63 million tons and it does compare to 45 million tons towards the beginning of the year.
What’s been happening there is that, one, steel productions continue to grow at 11%, 12% year-on-year. So, you expect just from that higher inventory levels.
And two, a lot of the coal shipments have been given some priority in moving in around the country on the rail system. So I think that as that starts to get itself worked out, you’ll see more iron ore inventory moved and destocking occurring pretty quickly.
We actually believe that the ore levels at the actual steel mills are relatively low. So, we expect the destocking and restocking to go on.
Doug Mavrinac – Jefferies & Co.
Okay, I guess, and then also I guess to that point we really haven’t seen what July inventory figures are going to be because we’ve seen a decrease in (inaudible) activity in June, so presumably that would show up in inventory figures that haven’t been come out yet.
John Wobensmith
Yes, that’s exactly right.
Doug Mavrinac – Jefferies & Co.
Okay. And then one final question guys before I turn it back over and that has to do with shipyard deliveries.
I mean we’ve already noticed a 30% shortfall in terms of scheduled shipyard deliveries for the first half of ’08. Can you provide some colors for us, why that may be happening and then clearly what implications maybe for ’09 and beyond given that most of those early deliveries were supposed to be coming from established yards?
Gerry Buchanan
# Let's take the Greenfield sites first of all, Doug. The reported figures was around 30%, 23% for 2008 of Capesize that would be delivered, that is going to come from a Greenfield yard.
To be honest, I mean, the (inaudible) are still Greenfield yards, it is difficult to see how these deliveries are actually going to be made.
Doug Mavrinac – Jefferies & Co.
All right, Okay. I just want to know, some of the current shortfall is maybe due to the inability to get steel plate or the logistical issues, so it's clearly those Greenfield yards will have it well.
John Wobensmith
I think the other deliveries will – Doug, I think a lot of it were logistical issues with some of the other yards. It's just the world is using a lot more steel than did a few years ago and a lot more engines are needed and pipes and wires, and so you’re just seeing slowdown in delivering all of these supplies, all these component parts to the shipyards and that’s slowing everything done.
Doug Mavrinac – Jefferies & Co.
So it makes sense. All right.
Great, thanks a lot, Peter. Thanks Gerry and John.
Peter Georgiopoulos
Thank you.
Operator
And we’ll move to our next question from Jon Chappell with JPMorgan.
Jon Chappell
Thank you. Good morning.
John you mentioned having to go out to banks to get new financing for all the new ships that are coming online. Can you talk about the reception you’ve had from some of the banks?
We’ve heard about shipping banks closing their doors at the end of the last year. It doesn’t matter who you are as an owner and is the availability there that you think is at good pricing to get the financing for these ships.
JPMorgan
Thank you. Good morning.
John you mentioned having to go out to banks to get new financing for all the new ships that are coming online. Can you talk about the reception you’ve had from some of the banks?
We’ve heard about shipping banks closing their doors at the end of the last year. It doesn’t matter who you are as an owner and is the availability there that you think is at good pricing to get the financing for these ships.
John Wobensmith
Yes, I think it (inaudible). It really matters who you are.
I think the larger owners are not having problems. I think some of the smaller owners are definitely having problems.
Genco, specifically, we’re right in the middle of negotiating our credit facility, expect to be able to have an announcement definitely by the end of the August and we’ve received a pretty good reception and I don’t think much has changed since the last conference call. We do expect our pricing to go up slightly maybe 34 basis points, 40 basis points but again we’re negotiating an additional credit facility.
The exciting $1.4 billion will stay in place as it is.
Jon Chappell
And do you think that the smaller owners can't get the financing from the banks, that there would be opportunities for companies like Genco to get assets that may not be able to be delivered otherwise?
JPMorgan
And do you think that the smaller owners can't get the financing from the banks, that there would be opportunities for companies like Genco to get assets that may not be able to be delivered otherwise?
John Wobensmith
Yes.
Gerry Buchanan
Yes, we do believe that.
Jon Chappell
All right. And the final thing, Gerry, you mentioned the VLOC conversion, and if I remember correctly, you are one of the first to point out the potential technical problems with those.
Can you talk a little bit about the technical problems that have happened with the first conversions and what you think that may mean for the schedule for the other deliveries? Is it impacting costs, is it impacting the time that the ships need to be out of the water and may that make the owners second guess whether they want to do this conversions or not?
JPMorgan
All right. And the final thing, Gerry, you mentioned the VLOC conversion, and if I remember correctly, you are one of the first to point out the potential technical problems with those.
Can you talk a little bit about the technical problems that have happened with the first conversions and what you think that may mean for the schedule for the other deliveries? Is it impacting costs, is it impacting the time that the ships need to be out of the water and may that make the owners second guess whether they want to do this conversions or not?
Gerry Buchanan
Sure, it's definitely impacting the cost, because when you take the ship out of service to do the repairs that are required, she is not earning and the repair costs are going up. I think I've mentioned briefly in the last quarter call the differences between a VLCC and what you have to do to covert it to VLOC.
I mean the loading sequence for both vessels are completely different and so therefore the stresses of setting up an ore carrier or a large Capesize carrier are a little higher and more concentrated in those than a VLCC. When you do these conversions, the conversions have done afloat, and they’re not done in a dock in a stationary position.
The ship may be stationary along side the dock but the ship is still moving, it is still dynamic. And so when you stop to put in all the strengthening members that are required to turn this into a VLCC into VLOC, misalignment takes place.
And depending on the level of misalignment, depending on the level of stress that you build into the new structure, and that becomes a problem. When the vessel is in operation, you start getting fractures and cracks.
Now, the exact nature of what the fractures and cracks are on the vessels that have been delivered so far, I don’t know. I mean we don’t have detailed information, but we hear the rumors that are going around and they indicate that there is cracking taking place and that these vessels have to be taken out of service to repair them.
All adds to the cost and if you’re an owner who is looking at a VLCC conversion, you’ve got to take all that into consideration.
Jon Chappell
Very interesting. Thank you, Gerry.
Thanks, John.
JPMorgan
Very interesting. Thank you, Gerry.
Thanks, John.
John Wobensmith
Thanks, Jon.
Operator
Our next question is from Greg Lewis with Credit Suisse
Greg Lewis – Credit Suisse
Thank you and good morning, and congratulations on a great quarter. I just have a follow-up question to John’s call regarding the debt that’s going to – you are looking to fix, I guess potentially by the end of this summer.
Given the fact all those new buildings coming on in 2009, have you thought about potentially fixing forward some of those vessel on long-term contracts, and if so, do we think we could see any those fixed on multiyear deals over the next eight months before the financing is in place?
Gerry Buchanan
We certainly have thought about fixing forward. We’ve looked at it.
We still think that the curve is a little too much of a discount in our mind to fix forward. We believe we’re going to be coming into a stronger market towards the end of the year and so we’re just holding back a little bit.
Greg Lewis – Credit Suisse
Okay. But so the banks haven’t really indicated a desire for you to lock up any of that (inaudible) on long-term contracts?
Gerry Buchanan
No.
Greg Lewis – Credit Suisse
Okay. And then this is more like a general industry question related to – I guess yesterday China and India walked away from the WTO in order to defend their domestic grain farmers.
Do you think that is any sort of a negative impact on the grain trade?
Gerry Buchanan
I didn’t see that, but I don’t think so, to be honest with you.
Greg Lewis – Credit Suisse
Okay, great. Okay.
Well, thank you and congratulations on a great quarter.
Gerry Buchanan
Thanks, Greg.
Operator
(Operator instructions) Our next question is from Natasha Boyden with Cantor Fitzgerald.
Natasha Boyden – Cantor Fitzgerald
Thank you, operator. Good morning gentlemen.
Gerry Buchanan
Good morning.
Natasha Boyden – Cantor Fitzgerald
Want to ask you, with the steel prices being so high, what you are seeing in terms of scrapping, if you have seen any increase? Is it more attractive now for owners to potentially put their older vessels up for scrap?
Gerry Buchanan
We are not seeing any increase in scrapping our bulk carriers, Natasha.
Natasha Boyden – Cantor Fitzgerald
That’s interesting. So even though the fleet thing, some of it being pretty old and the steel prices being pretty high, you are not seeing that at all.
Gerry Buchanan
Yes, I think charters are going to become more selective, to be honest.
Natasha Boyden – Cantor Fitzgerald
That’s pretty interesting. Do you think there would some incentive there to do that?
Gerry Buchanan
Keep in mind, Natasha, in bulkers, it’s a pure economic equation with where freight rates are today.
Natasha Boyden – Cantor Fitzgerald
Yes, I guess the rate is still high enough for them to keep (inaudible) in those vessels.
Gerry Buchanan
Indeed.
Natasha Boyden – Cantor Fitzgerald
Okay. And then just to – you mentioned also that you’re in the middle of negotiations to finance the assets you acquired.
I know (inaudible) market in May to raise some funds. Do you have any or see any need to go back to the markets this year or anytime perhaps next year to raise any more equity?
John Wobensmith
No.
Natasha Boyden – Cantor Fitzgerald
Okay.
John Wobensmith
Again, as we said last quarter, we plan on financing this acquisition remaining of it with bank debt.
Natasha Boyden – Cantor Fitzgerald
Okay, great. That’s helpful.
And lastly, again, this is a lot more general question, there has been a lot of factory shutdowns for the Olympics around Beijing or not yet. (inaudible) have held up remarkably well around the $150,000 mark.
Is it indicative of demand holding out very steadily? There was a lot of chatter about rates collapsing there.
I guess the question is, do you really think there’s going to be a solid rebound or is it just going to market move sideways here because the rate has been holding up so well. Just want to kind of get your feel on what – where you are seeing the market is going to move for the rest of the Olympics?
Gerry Buchanan
You know what, I don’t really see the Olympics having a great impact, Natasha, to be honest. I mean the Olympics is a two-week period and yes, they’re shutting certain plants around the cities where the main events are taking place to try and clean up the air.
But again, it’s a very short period and a lot of the contracts, our main ships are in the water, ships are on the way, I really don’t see it impacting tremendously.
Natasha Boyden – Cantor Fitzgerald
Okay. Do you think it’s just really, people just making excuses?
John Wobensmith
I don’t know. I mean look, I mean Natasha, rates are pretty firm but if we look at what – at least what's anticipated towards the end of the year, you are coming into the US grain season starting mid to late September.
The steel industry usually picks up towards the end of the year in China and coal shipments also pick up at the end of the year, so that’s why we’re positive going into the fourth quarter.
Natasha Boyden – Cantor Fitzgerald
That's helpful. Thanks very much.
Operator
And our next question is from Urs Dur with Lazard Capital. Caller your line is open.
Our next question is from Chris Wetherbee with Merrill Lynch.
Chris Wetherbee – Merrill Lynch
Great, thanks. Good morning.
Wonder if you could just touch on your current demand for a longer term tonnage? It seems like there’s some pretty strong demand for capes going out about ten years or so.
Any thought of doing that or is that something you wanted to kind of keep a little bit more current, sticking to the three to five year numbers?
Gerry Buchanan
We’ll definitely will look at ten-year transactions, but I think if look at what we have done in the past, it has been three to five. We think that’s the sweet spot for earnings, but we look at all these deals and it really is on a sort of a week by week basis and what the market can offer.
Chris Wetherbee – Merrill Lynch
And then I guess as far as progress on the vessels, you have a couple of vessels coming in the fourth quarter there. I’m assuming you guys are obviously working towards signing up charter agreements there.
I guess how important is profit sharing? Is there any sense of going on profit-sharing on some of the smaller vessels?
I know you have a few of the capes that have profit sharing and one coming in the fourth quarter that has it as well. Any sense for the smaller vessels to add that on there, does that make sense to you guys?
Peter Georgiopoulos
I think the profit-sharing agreements in general make sense. It’s just a matter of finding the right charter.
I mean cargo has been a great partner for us in putting these profit-sharing agreements on the capes and we definitely look out on the smaller vessels if it’s available.
Chris Wetherbee – Merrill Lynch
And I guess just kind of touching on something you mentioned earlier, I think the previous questioner asked about the potential for acquisitions. I guess when you think about the market, is the best option or best opportunities coming from the potential of kind of undercapitalized owners not being able take delivery of vessels that are already in the order book?
Does that make sense to you? Is that the best spots for you to hit for acquisitions or are there other places to look for second hand tonnage?
Peter Georgiopoulos
I think it’s across the board. I mean I think there’re second hand tonnage in the true sense that’s available on the market and we look at those transactions.
And I also think there will be some transactions to look at on the new building front where owners are having problems raising cash from banks.
Chris Wetherbee – Merrill Lynch
Okay. Just final, I know you guys have talked about conversions.
It seems that the order book or the orders for conversions have moved up a bit in the last quarter or so. It sounds like from your perspective that at least just the success of this conversion have been somewhat limited.
But I mean, is there anything else driving the conversions other than where rates are now? I mean is there any sense that some of the recent deliveries have had a little bit more success as far as operating or just no real color on that at this point?
Gerry Buchanan
I think it's a function of where the rates are at the present time, which is driving the feeling the interest in the conversions. There’s no doubt that there are operational issues with respect to these.
There’s a very few of these units actually in the water trading at the moment to make any educated guess as to the long term success, but just out of the [ph] question there.
Chris Wetherbee – Merrill Lynch
Okay. Well, thanks very much for your time.
Appreciate it.
Operator
(Operator instructions) Our next question is from Michael Pak with Banc of America Securities.
Michael Pak – Banc of America Securities
Good morning, gentlemen.
Gerry Buchanan
Hi, Michael.
Michael Pak – Banc of America Securities
Question for the team, the capital structure, given the 11-vessel delivery, your fleet, 41 vessels with and the cash flow from that asset base, what kind of optimal capital structure do you guys envision going forward?
John Wobensmith
Well, as far as the debt-to-cap, again, we’ve been pretty consistent in that our target rate is 40% to 60%. So, clearly, we have no problem going above that for the right acquisition and then de-levering pretty quickly.
Again, we planned on putting a new debt facility in place that’s going to cover our existing commitments that we have going to the fourth quarter of next year.
Michael Pak – Banc of America Securities
Follow up question, so how much more do you think you could stretch the balance sheet? You’ve indicated that 60/40 kind of an optimal – I look at your cash flow generative ability and it seems like it could be – the balance sheet could be leverage more.
Would just like to get your thoughts on that.
John Wobensmith
Yes, I mean look – I don’t think the balance sheet is stretched by any plan. You are right.
The cash flow generation that is anticipated over the next few years is significant. Just taking a look at our dividend for a second, that only represented about 45% of our free cash flow payout.
So, there’s a room on the dividend side. I think there’s room for additional acquisitions at this point.
It’s just a matter of finding the right one.
Michael Pack – Bank of America Securities
Great, guys. Thanks a lot.
Operator
And we do have a follow up question with Natasha Boyden with Cantor Fitzgerald. Thank you operator.
Yes, I just have a quick follow up question in terms of cost increasing. Obviously, you had mentioned they are increasing pretty dramatically and we have seen that across the board.
Wondering if you can give us sort of an idea of what we can expect to see year over year in terms of cost increases?
Gerry Buchanan
We are actually in discussions at the moment with our crew suppliers and ship managers as to where the cost are going to go for 2009, Natasha, and a bit early try to forecast to you what that is at this time.
Natasha Boyden – Cantor Fitzgerald
Okay. So, can’t you give us some kind of an idea of the percentage of increase?
I mean are we looking at 10% to 15%, 15% to 20%, 10% to 20%?
Gerry Buchanan
Look, we've just done a deal with a major crew supplier in China for 2009 wages and (inaudible) costs and it looks like they are going to increase somewhere in the lines of 15% or so.
Natasha Boyden – Cantor Fitzgerald
Okay, that’s helpful. Thank you.
John Wobensmith
But that’s only on the crew portion –
Gerry Buchanan
Yes, only on the crew portion.
John Wobensmith
Of the operating cost.
Operator
At this time, there are no further questions. This concludes the Genco Shipping & Trading Limited conference call.
We thank you for your participation. Have a nice day.