Eagle Bulk Shipping, Inc. (EGLE) CEO Gary Vogel on Q4 2018 Results - Earnings Call Transcript

|
About: Eagle Bulk Shipping Inc. (EGLE)
by: SA Transcripts
Subscribers Only
Earning Call Audio

Eagle Bulk Shipping, Inc. (NASDAQ:EGLE) Q4 2018 Results Conference Call March 6, 2019 8:00 AM ET

Company Participants

Gary Vogel - CEO

Frank De Costanzo - CFO

Conference Call Participants

Chris Snyder - Deutsche Bank

Jon Chappell - Evercore

Magnus Fyhr - Seaport Global

Max Yaras - Morgan Stanley

James Jang - Maxim Group

Liam Burke - B Riley FBR

Operator

Greetings, and welcome to the Eagle Bulk Shipping Fourth 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, and Frank De Costanzo, Chief Financial Officer of Eagle Bulk Shipping. Mr. Vogel, you may begin.

Gary Vogel

Thank you, and good morning. I’d like to welcome everyone to Eagle Bulk’s fourth 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. Please note that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and are inherently subject to risks and uncertainties. You should not place undue reliance on these forward-looking statements. 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 refer to 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 fourth 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 fourth quarter equated to $12,142 per day. This is the highest quarterly TCE achieved in almost six years and represents a beat of over $1,200 as compared to the adjusted net Baltic Supramax Index or BSI. As we have 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, our fourth quarter TCE of $12,152 would equate to almost $14,000 per day. We believe this is instructive as it’s important for investors to evaluate TCE results and be able to compare performance on a like for like basis. As a reminder, in the appendix of our presentation, we included slide which provides some guidance on how various Supramax and Ultramax vessel types compare in terms of earning capacity against the BSI Index. We encourage you to reference this slide, and hope you’ll find it helpful.

As we’ve explained in previous calls, our active management approach to operating encompasses a number of different strategies, which we believe allow us to maximize TCE performance. These strategies include trading our own fleet, voyage charter-in with end users, vessel and cargo arbitrage, opportunistic charter-in and a dynamic hedging strategy utilizing both FFAs and bunker swaps.

The gray bar on the chart on slide five also depicts our historical third-party time charter-in business as measured in vessel days. During the fourth quarter, we added total of 850 third-party vessel days, representing 29 distinct ships on charter. It's important to note that charter-in business volume in and of itself is not a goal and this activity is only beneficial if it drives overall higher fleet net income. We charter-in third-party ships in order to support and supplement our own fleet to cover cargo commitments as well as to take advantage of arbitrage opportunity in the market dislocations. Although we expect our charter-in activity to continue to grow over time as we expand our commercial breadth, the number of vessels we take in any given quarter will vary based on opportunities and the risk-reward profile they present.

I'm pleased to report that the fourth quarter marks the eighth consecutive period for which we've been able to outperform the BSI. When we first implemented our active owner operator multi-strategy approach a few years ago, I think we probably received some skepticism from investors on our ability to consistently outperform the market. But, now that we have a track record of over eight quarters, we believe investors are beginning to appreciate the results and benefits of Eagle's differentiated business model. For the full year 2018, we generated a net TCE of $11,471 per day, equating to an outperformance of approximately $900 per day or about $15 million in value creation.

Looking ahead, and for reasons which we will discuss later on the call, the market experienced a significant downturn in the later part of Q4, which accelerated into Q1. From a high of over $13,000 per day in October, the BSI traded down to $4,500 in early February, coinciding with the Chinese New Year. Since then, the BSI has posted a recovery and is now over $8,000.

As of today, we have fixed approximately 90% of available days for the first quarter of 2019 at an average net TCE of $9,124 per day. Based on the BSI quarter-to-date and FFAs forward market for the balance period, our Q1 TCE outperformance currently equates to almost $2,000 per day. Notwithstanding the very-weak start to 2019, looking ahead, we remain constructive, and it's important to note that the futures curve for the second half of the year shows a continuing rebound with levels trading in the upper 10s. While we'll continue to operate as a spot player with the focus on index outperformance, given the strength in the forward curve, we were able to and are actively locking in some revenue for the second half of the year, utilizing both physical positions and FFAs.

Please turn to slide six for historical view of our EBITDA performance. EBITDA adjusted for certain non-cash items totaled $23.5 million for the fourth quarter or $83.6 million for the full year 2018, more than double what it was in 2017. Since the first quarter of 2016 when the drybulk market hit an all-time low, Eagle's adjusted EBITDA has increased by over $150 million on an annualized basis. I believe this illustrates the significant operating leverage in our business model, the magnitude in the market recovery over this period but also improvement we've been able to achieve in our TCE outperformance, which is illustrated by the green portion of the EBITDA columns.

Please turn to slide seven for a brief update on our fleet evolution. Since our last earnings call in November and as previously reported, we executed a total of three S&P transactions. We acquired 2015-built SDARI-64 Ultramax for $20.4 million and sold two 18-year old Supramaxes for a gross aggregate amount of $13.2 million.

The Ultramax which we took delivery of in January and has been renamed to Cape Town Eagle, was purchased with an existing time charter that has a remaining life of approximately 9 to 15 months at a gross rate of 106% of the BSI but with a minimum floor rate of $11,400 per day. Both Supramaxes that we sold were delivered to their respective new owners in January, just ahead of their drydock due dates, saving Eagle over $2 million in total CapEx spend related to the statutory maintenance required and the installation of ballast water treatment systems.

Over the past 2.5 years, we've bought and sold a total of 26 vessels, divesting 12 of our smallest, oldest and least efficient Supramaxes, which averaged roughly 13 years of age at sale, and acquired a total of 14 modern Ultramaxes, averaging around three years of age at purchase. These transactions have resulted in upgraded fleet with an improved earnings generation capability. At the same time, we've managed to keep the average age of the fleet fairly constant over this whole period. Our current fleet totals 46 ships, averaging 8.7 years in age.

On the right hand side of the slide, we depict our U.S. listed peer group fleet profiles. Eagle remains uniquely focused on what we believe to be the most versatile asset class within the drybulk sector. Subject to market developments, we intend to continue executing on our fleet growth and renewal strategy.

With that, I'd now like to turn the call over to Frank to review our financial performance.

Frank De Costanzo

Thank you, Gary.

Please turn to slide nine for a summary of our fourth quarter and full year 2018 financial results. Revenue, net of commissions for the fourth quarter, was $86.7 million, an increase of 25% from the prior quarter. The quarter-on-quarter change was driven by an increase of $861 in the realized TCE along with an increase in our chartered-in business. For the full year 2018, revenue was $310.1 million, an increase of 31% from full year 2017.

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 fourth quarter net of both voyage and charter hire expenses came in at $51.8 million, an increase of 11% from the prior quarter.

For the full year 2018, revenue, net of both voyage and charter hire expenses was $192.5 million, an increase of 35% from full year 2017. The year-on-year increase was a result of both an improving market and our platform-driven outperformance.

Total operating expenses for the fourth quarter of 2018 were $73.2 million, an increase of 22% from the prior quarter. The increase in Q4 versus prior quarter was driven by an increase in both charter hire and voyage expenses. For the full year 2018, operating expenses were $272.5 million, an increase of 15%.

The Company reported net income of $6.5 million for the fourth quarter versus $2.6 million for the third quarter. For the full-year 2018, net income came in at $12.6 million. Basic and diluted earnings per share or EPS for the fourth quarter was $0.09 versus $0.04 for the third quarter of 2018. For the full year 2018, EPS came in at $0.18. Adjusted EBITDA came in at $23.5 million for the fourth quarter as compared to $20.2 million in the prior quarter. Adjusted EBITDA for the full year 2018 came in at $83.6 million, an increase of 112%.

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

Let's now turn to slide 10 for an overview of our balance sheet and liquidity. The Company had total cash of $78.2 million as of December 31, 2018, which includes $10.9 million of restricted cash. Total cash decreased by approximately $14 million from the end of third quarter. The decrease from Q3 was primarily a result of the purchase of the Hamburg Eagle and advance payment on the Cape Town Eagle along with CapEx spending partially offset by proceeds from our original Ultraco Debt Facility and cash flow generated from operations.

The Company's total liquidity as of December 31, 2018 was $98.2 million and is made up of cash and restricted cash along with undrawn revolving credit facilities totaling $20 million. Total debt excluding debt issuance cost as of December 31, 2018 was $338.6 million, an increase of $8.8 million from the prior quarter. The increase is due to the $12.8 million draw on the original Ultraco Debt Facility for the purchase of the Hamburg Eagle, in part offset by the $4 million bond amortization payment. Total debt was comprised of the $196 million Shipco Norwegian bond, $60 million Shipping LLC debt facility, and $82.6 million Ultraco Debt Facility.

As previously reported, we completed a debt refinancing transaction on January 25, 2019, consisting of a $153.4 million term loan and a $55 million revolving credit facility. The refinancing discharged the existing debt of Eagle Bulk Ultraco and Eagle Shipping. The new Ultraco facility carries an interest rate of LIBOR plus 250 basis points and extended the maturity of our bank debt till 2024. The debt refinancing transaction added approximately $65 million of incremental liquidity, a portion of which we intend to use for financing of scrubbers.

The refinancing reflects the continued operational progress made by the Company in the optimization of our capital structure. As previously disclosed, our bondholders have approved an amendment allowing us to utilize up to $25 million of proceeds from the sale of vessels for the financing of scrubber purchases and installations within the Shipco silo.

Moving on to cash flows. The fourth quarter result was sixth consecutive positive quarter for cash from operations. The chart at the top right of the slide shows the 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 the chart demonstrates, the volatility caused by working capital evens out over time. The differences between the blue and the gray bars in Q4, is explained by approximately $10 million of receivables, which were collected in early January.

Please turn to slide 11 and for a bit more in cash flow. The chart at the top of the slide lays out the changes in the Company’s cash balance in Q4 2018. I believe this chart clearly lays out the large themes driving our results for the quarter. The two large bars on the left, revenue and operating expenditures, are a simple look at the operations. The net of these two bars is positive $23 million, which comes in very close to our Q4 adjusted EBITDA number. To the right, you'll find a bar covering the $2 million cost for the drydocking of two ships in the quarter, CapEx spending of $7.6 million for scrubber and ballast water treatment systems along with a vessel S&P bar totaling $19 million, covering the close on the purchase of the Hamburg Eagle and a deposit paid for the Cape Town Eagle. The $12 million loan proceeds bar represents the top of the old Ultraco Debt Facility to finance the Hamburg Eagle acquisition. The chart at the bottom of the slide covers cash movements for the full year 2018. Please note that in 2018, we have paid a total of $12.3 million for scrubbers and ballast water systems.

Let’s now review slide 12 for our cash breakeven per ship per day. For the full year 2018, cash breakeven per ship per day came in at $8,358, $1,059 higher than 2017. The year-on-year increase is primarily a result of the refinancing of a non-cash pick note, drydocking and a slight increase in G&A, partially offset by a decrease in OpEx.

Full year 2018 vessel expenses or OpEx came in at $4,725 per ship per day, $100 lower than prior year. The year-on-year savings were spread across most categories with stores standing out. In 2018, drydocking came in at $484 per ship per day, $326 higher than the 2017 results. The year-over-year increase was driven by an increase in the number of drydocks from 3 to 11.

Cash G&A in 2018 came in at $1,566 per ship per day, up $69 from prior year. If we include charter-in days, full year 2018 G&A would have come in at $1,314. Cash interest expense for the full year 2018 came in at $1,351 per ship per day, which is $532 higher than the full year 2017 number. The increase in cash interest versus prior year is primarily a result of higher LIBOR along with the replacement of the non-cash second lien PIK note. It is worth noting that the floating interest rate exposure on roughly 50% of our debt was fixed in Q4 2017 with the bond issue. The fixing of a meaningful portion of our debt, significantly shields the Company from increases in short term interest rates.

Cash debt principal payments started in Q4 2018 with a $4 million amortization payment on our bonds and added $232 to our full year per ship per day debt service breakeven. Looking forward at full year 2019 breakevens, we see OpEx and G&A around their 2018 levels. We expect drydocks will come in as per the CapEx slide in our presentation. On debt service breakeven, the January 2019 Ultraco bank debt refinancing lowered our LIBOR margins from a weighted average of approximately 319 basis points to 250 basis points. Looking forward, quarterly amortization on the new debt facility will begin in Q2 of 2019.

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

Gary Vogel

Thank you, Frank.

We’d now like to provide you with an update on our fleet scrubber initiative and IMO 2020 regulations. Please turn to slide 14.

As previously reported, we've now exercised all of our purchase option and intend to retrofit 37 vessels, representing 77% of our fleet. Manufacturing has been completed on a number of units with the first installation underway and expected to be completed next month when the riding crew completes their work while the vessel is trading. The photo shows one of the first batches of scrubber tower units completed prior to their transfer to shipyards for installation. We're currently projecting that 34 of our scrubbers will be installed by January 1, 2020 with the remaining 3 in early 2020 during statutory drydocks.

As we've indicated previously, we believe it's an imperative and will be a commercial advantage to retrofit our vessels by January 2020 as we believe the fuel spread between high-sulfur fuel oil or HSFO, and the new compliant fuel will most likely be widest during early days, following the implementation of the new regulations. In addition, having scrubbers fitted prior to January 1st will eliminate the need for tank cleaning and switching over to compliant fuel, only to switch back after a later installation, which will introduce additional and unnecessary time and costs.

We're currently projecting an all-in fully install cost of $2.25 million per unit. This equates to approximately $83 million for the full project. This figure is up slightly as a result of change orders relating to improved specifications and somewhat higher cost associated with installation. We plan to fund CapEx from cash on hand and amounts available under our newly expanded revolving credit facilities which Frank discussed earlier. In the appendix, you'll find a detailed CapEx table depicting our expected timing and cash outlays for scrubber retrofits in addition to the statutory drydocks and ballast water treatment system installations across our fleet.

Please turn to side 15 for a brief update on the latest developments regarding IMO regulations and the scrubber order book. The Marine Environmental Protection Committee or MEPC for short, sub-committee on Pollution Prevention and Response or PPR met in London a couple of weeks ago. PPR is the MEPC's technical body. And as this was the final PPR session prior to the start of 2020, it was a full agenda of items critical to IMO 2020 that needed to be finalized in advance of the MEPC 74 meeting which will occur in May and be the final meeting prior to the regulation’s implementation.

Most importantly, guidelines for implementation and port State control needed to be reviewed and finalized for adoption at the next MEPC meeting to be ready in time for January 1, 2020. These guidelines include recommended actions for Flag and port State control to take a non-compliant scenarios, lay out a fuel oil non-availability report or FONAR templates as well as define conditions for its use and provide recommendations for randomized testing of shore-based bunker storage tanks to ensure sulfur content and quality. Significant progress was made on the draft guidelines for implementation and port State control, and it’s by the way expected that these will be finalized and adopted at the upcoming MEPC meeting.

Review of the revised 2015 exhaust gas cleaning system guidelines was delayed until the next PPR meeting, PPR 7, which will not be held until early 2020. Until the time that the 2015 guidelines are adopted, the 2009 guidelines, to which Eagle scrubbers are designed, will remain in force. There was also an agreement reached that when the 2015 guidelines are adopted, a grandfathering provision will apply to all systems installed prior to the adoption date. Given our projected timeline, this would ensure that Eagle scrubbers will meet all applicable IMO EGCS guideline as originally designed.

Finally, the PPR sub committee recommended to MEPC 74 at further research into the marine environmental impact of scrubbers should be undertaken. This recommendation carries with it a request for submissions from IMO members on the subject and may even result in an IMO funded impact assessment over the next few years. This notwithstanding, we are confident that objective scientific studies like the recently released Japanese Ministry of Transport analysis of open-loop scrubber wash water on marine ecosystems and DNV GL’s analysis of nearly 300 wash water samples against various national and international water quality standards will continue to support the fact that open-loop scrubbers aren't environmentally responsible way to comply with IMO 2020 as compared with the environmental footprint of burning compliant fuel.

In terms of the scrubber order book. The total uptake in drybulk is now estimated at 983 units, representing 8.6% of the fleet. DNB [is currently forecasting total uptake by the end of 2020 to be 1,458 units, including existing and projected orders, equating to 12.7% of the total drybulk fleet.

The Capesize segment has the largest uptake with approximately 37% of the segment expected to be fitted. Within our segment of Supramax/Ultramax, only 10% of the fleet is expected to be fitted. It's interesting to note that more than half of the orders place within the Supramax/Ultramax segment have been done by only a handful of owners including Eagle.

As we’ve indicated previously, we believe the lack of uptake within the Supramax/Ultramax segment will lead to a net slowdown of the general fleet, given that the vast majority of ships will be burning more expensive low-sulfur fuel. This phenomenon should lead to a lowering of effective supply, thereby leading to better utilization and ultimately higher rates.

Please turn to slide 17 and for discussion on the industry. The gross BSI averaged $11,597 per day for the fourth quarter, essentially flat over the prior period and up 8% year-over-year. However, as mentioned earlier on the call, rates peaked in early mid October at over $13,000 per day following for the remainder of the period. Although the fourth quarter is typically seen as a seasonally high period for rates, the market disappointed for a number of reasons, most notably the lack of long haul U.S. soybean and grain exports to China as a result of the ongoing U.S. China trade spat as well as the imposition of restrictions by China on coal imports.

To put this in context, U.S. soybean exports to China in the second half of 2018 totaled just 736,000 metric tons as compared with 21.3 million tons in the same period of 2017. Although China increased its imports from Brazil to substitute for the drop in U.S., it was primarily moved prior to the fourth quarter and do not fully cover the shortfall with total Chinese soybean imports falling 8% year-over-year.

On the coal side, the imposition of import restrictions led to a dramatic decrease in Chinese buying of foreign product. December imports totaled just 6.6 million tons, down over 60% year-on-year. These restrictions were set in place in order to provide some support to the local mining industry and coal prices.

As illustrated on the graph, it is interesting to note that the precipitous drop in Chinese coal demand in Q4 closely matched the timing of the drop in the BSI that carried into Q1. On the back of these factors, we saw that BSI fell off in January from around $11,000 per day to under $5,000 by early February. The underlying weakness in short-term demand was exaggerated by the typical seasonal softness exhibited in January due to a pickup in newbuilding deliveries and in the period leading up to and through Chinese New Year. This also coincided with the swine flu outbreak in China that led to the killing of almost 1 million pigs driving an immediate decrease in demand for animal feed including soybeans. While the severity of the downturn was extreme, as of today, rates have posted U-turn since early February and the index is now trading at over $8,000 per day. This bounce can be explained by both the pickup in activity post Chinese New Year and more specifically an increase in Chinese coal imports where January figures show around 30 million tons being purchased, an increase of almost 400% over the prior month and 20% as compared to January 2018. While not directly affecting Eagle's cargo demand, it is important to note that the recovery exhibited in the Supramax/Ultramax segment is occurring in an environment which has been impacted by negative news within the iron ore market as a result of the Vale dam collapse and resultant effects.

On this slide, we also depict the forward curve. As mentioned previously, it's noteworthy that Q3 and Q4 2019 FFAs have been trading recently around $11,000, exhibiting positive expectations of the market as a result of what we believe are positive fundamentals.

In this regard, please turn to slide 18 for a brief update on vessel supply. Drybulk newbuilding deliveries totaled roughly 5.4 million deadweight tons or approximately 55 vessels during the fourth quarter, representing a decrease of 13% quarter-on-quarter basis vessel count. Demolition of older tonnage amounted to just 1.3 million tons deadweight during the quarter or 12 vessels, representing an increase of 33% over the prior quarter, but a decrease of 56% year-on-year basis vessel count as well.

Looking at full year 2018, scrapping totaled just 57 vessels or 4 million tons, down approximately 72% basis both vessel count and deadweight. It's interesting to note that this low demolition rate is occurring in an elevated scrapping rate environment with prices hovering over $400 per lightweight ton.

As we've indicated previously, we believe the decreasing trend in scrapping simply reflects the overall improvement in spot rates and forward expectation of further positive rate development as well. As we've indicated previously, we believe both the implementation of ballast water treatment regulation as well as the mandated reduction in sulfur emissions coming into force in January 2020 will act as a catalyst for some increased scrapping.

As you will note from the light blue dotted line on the graph, net fleet growth is low for dry bulk overall with expected net growth of around 3% in 2019. But it looks even more favorable when drilling down to the Supramax/Ultramax segment where net fleet growth as depicted by the darker blue dotted line is expected to be just 2.2% of the on-the-water fleet. Given the significant weakness in Q1 we believe scrapping could come in slightly higher than depicted in the graph.

Please now turn to Slide 19 for a look at newbuilding ordering. In terms of forward supply growth, newbuilding orders totaled approximately 7.8 million deadweight tons or 76 ships in the fourth quarter, down 16% over the prior quarter. For the full year 2018, dry bulk contracting totaled 38 million deadweight tons, a decrease of 7% as compared with 2017. As we've indicated previously, given a number of factors, including an increase in newbuilding prices as a result of Tier 3 regulations, we remain cautiously optimistic we will not see a material increase in ordering unless we also see both rates and secondhand values increase significantly from current levels.

Unchanged from last quarter's call, the order book, as a percentage of the on-the-water fleet stands at just 11% basis deadweight tons. The Capesize segment has the highest order book at over 15%, while most importantly, Eagle, the Supramax/Ultramax segment order book stands at 7% of the on-the-water fleet. Looking ahead, we believe supply side fundamentals remain favorable, given the low order book and the 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, global growth expectations as forecasted by the IMF have been revised down slightly since our last earnings call. Global GDP growth is now forecasted at 3.5% for 2019% and 3.6% for 2020, down 20 basis points and 10 basis points respectively. Downside risk to global growth remain due to a number of factors including slowing Chinese growth, uncertainty around Brexit, higher oil prices, stronger US dollar as well as uncertainty on reaching a resolution on the US-China trade spat and other international trading agreements.

As we've now seen, dry bulk has been somewhat impacted by the ongoing US-China trade dispute. As an example, in the soybean trade, China substituted Brazilian product for US exports, while the US was able to find new buyers for some product, overall there was a drop in US global exports of soybean of approximately 8 million tons in 2018. Looking ahead, we remain cautiously optimistic that the US and China will strike a deal, which should lead into a normalization and perhaps an increase in dry bulk trade between the two nations. Dry bulk demand growth as calculated from a bottom-up fundamental perspective is expected to reach 2.2% for 2019, representing an increase of about 116 million metric tons in incremental trade for the year. When taking into consideration expected ton mile expansion, 2019 forecast demand growth should come in around 2.5%. It is noteworthy that the ton mile number is down by about 0.5% or 1%, which is primarily attributable to a projected reduction in long-haul Brazilian iron ore shipments to China on the back of the Vale dam disaster. Within the 2.2% real demand growth, major bulks, which are comprised of iron ore, coal and grains are expected to grow by 1.6% in 2019. Coal, which typically represents about 20% of the cargo we carry, is expected to increase by around 24 million metric tons this year to almost 1.26 billion tons or 1.9% year-on-year. Grains, which represent anywhere from 10% to 20% of the cargoes we typically carry, are expected to total around 496 million tons for the year, an increase of 4% year-over-year.

As denoted in the table on the bottom of the slide, growth in the minor bulk trade is expected to once again surpass overall dry bulk and is forecasted to increase by 3.3% in 2019. This growth represents roughly 66 million metric tons of incremental demand or approximately 1,200 Supramax/Ultramax voyages. This growth rate is being driven by improvements in such trades as steel, nickel ore, forest products and bauxite.

In summary, we believe a demand picture which is favored toward the minor bulks combined with the Supramax/Ultramax having the lowest order book as a percentage of the existing fleet, creates a dynamic that is 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] And our first question comes from Amit Mehrotra from Deutsche Bank. Your line is open.

Chris Snyder

Good morning. This is Chris on for Amit. So, obviously your fleet services a very high number of ports, many of which on the smaller side. Will you need to make special arrangements to source high-sulfur fuel in many of these ports and how could this potentially weigh on the fuel price spread?

Gary Vogel

So, we don't believe that we will be able to buy high-sulfur fuel in many of the smaller tertiary ports that we go to -- last year, we called on 450 ports. Having said that, there's two things that are going to come into play. First of all, we have the ability to change our trading patterns and there's a lot of cargo that we carry on Supramax and Ultramax vessels that trade around major bunkering hubs and given that we expect less than 10% of the Supramax/Ultramax fleet to be scrubber fitted, we will naturally be more competitive going to these areas where we believe high-sulfur fuel will be significantly less expensive. In addition, if there is compelling trades to other ports where we may need to carry some extra cargo, excuse me -- carry some extra fuel at the risk -- at the expensive of slightly shorter lift, that'll be part of our calculation. So it definitely will impact our trading patterns, but we think that there's a lot of variability and optionality in it for the reasons that I stated.

Chris Snyder

Okay, fair enough. It seems like a pretty holistic approach. So just kind of from taking a step back from like a very high level, you would expect -- you expect that many of these kind of smaller ports globally are still are just going to transition from selling low-sulfur -- or high-sulfur fuel to low-sulfur fuel but only kind of maintain one fuel type for sale?

Gary Vogel

Again, I think each port needs to make its own determination. And I think you also have a middle ground, right? You have some ports that are servicing vessels, whether it's Panamax, Kamsarmax and perhaps high-sulfur fuel will be a bit more expensive than it will be in major hubs, because the barges that they have won't be servicing as many vessels, but it will still be available. But when we run calculations, we have a computer system which we put in the various costs and ultimately what we're solving for is the highest TCE depending on duration and ultimate destination. So it's really a fluid process and all of these things go into the calculation, just like port costs, so really no different than if a port raises its port costs or canal dues go up, it simply points you in a different direction on a relative basis for an ultimately higher TCE.

Chris Snyder

And then just to follow up. So we kind of share the view that all bulkers will benefit from slow steaming post 2020. But can you provide some color on maybe just how higher fuel costs may negatively impact some of the lower value minor bulk trades?

Gary Vogel

I think it's really again, it runs the gamut, but clearly the longer haul trade and lower value cargo will be most impacted as compared with high-value cargoes and shorter distance not as much. So really there is no one size fits all, but what we've seen historically is that dry bulk demand is really inelastic as it pertains to both freight rates and fuel prices. So obviously, we have to see how this develops given that this is an exogenous implementation in terms of fuel price development, but I don't expect it to be much different than in the past, where we don't think it will impact volume significantly, but of course, there will be some trade flow changes, I think some would be more positive and some might be negative.

Operator

Thank you. Our next question comes from Jon Chappell from Evercore. Your line is open.

Jon Chappell

You mentioned the recent U-turns in your specific end market, which has been noticeable both on an absolute basis, but also relative to the fact that the Cape market is still falling. I think we can all kind of appreciate some of the anomalous factors happening in the Cape market, but is there any opportunities for the smaller size ships given the disruption to the iron ore trade today? I know there is no direct iron ore movements, but is there any substitution effect, any kind of change in trade lanes, any way that you kind of indirectly benefit or I guess on the other hand or indirectly heard from a major cargo that you're not really moving.

Gary Vogel

Yes. I mean, I think as you started out and I agree, the markets really have very little overlap in terms of one cargo versus another. Having said that, we definitely have had some freight inquiries for iron ore from various places, South America, Europe, in terms of freight inquiry, in response to the dam collapse and potential supply disruptions. So places, which would be less efficient and not competitive normally, but given the increase in iron ore prices, as well as the lack of available products. So we've seen that, but I wouldn't overstate it in that regard, I think they're really independent markets for the most part. Of course, and so -- but we have seen a few as I said some freight inquiries in that regard.

Jon Chappell

And then the other two China trade lanes have cut the headlines recently and I think you're probably really well positioned to kind of see this maybe as a leading indicator, but first on the coal side, I mean, you mentioned the massive decline year-over-year in December, I've asked a peer of yours the same question recently, but do you have any sense for what is exactly going on with the quotas and the unloading delays there and I think we all had a feeling that they hit the quotas early in '18, you had to kind of drop things off in the year-end, but as soon as we hit January 1st, there'd be a reset and be kind of business as usual again, it doesn't seem necessarily that's been the case. And then second, have you seen any early signs of improvement in US cargo flows of grains, as some of this trade headline seems to ease a little bit?

Gary Vogel

So talking about coal first. And we've seen a significant increase in coal movements after Chinese New Year, Indonesian coal thermal which is really our market, we really don't -- we don't move coal from Australia and I think recently you've seen that regarding Dalian and Australia. So, for us, I think that's probably been the biggest driver of that U-turn in the Pacific market has been a return of coal cargoes to China recently as well as Indian coal continues. In terms of soybeans, I've read the headlines, again, freight tenders and inquiry, but we haven't actually on the water seen an increase really in soybean trade yet out of the US. It's interesting to note that South American soybean movements are up significantly and some of that is based on very early harvest certain types of soybeans that were planted, as well as some residual crops. So that continues much more than it has in terms of substitution. But in terms of the U.S., like many, we're waiting for some more clarity on hopefully a resolution to this trade dispute.

As I said in my prepared remarks, last year, the US exports were down around 8 million tons. And that's pretty significant from our market standpoint, as well as on a timing and I think the fact is, is that the 8 million really doesn't begin to tell the picture of what happened where a lot of the substitution was done earlier out of South America and then there really was a dearth of cargoes in Q4 in the Atlantic combined with the coal in the Pacific.

Operator

Thank you. Our next question comes from Magnus Fyhr from Seaport Global. Your line is open.

Magnus Fyhr

Just a question on kind of follow-up on the IMO 2020. It seems like there's a lot of confusion regarding the use -- when you can use your scrubber with more port states coming in with ban on open-loop scrubbers in port, I mean it's not really in the news, but has your return calculation changed at all with the recent announcements or what's your current estimates for usage of scrubbers on a 365-day basis?

Gary Vogel

Thanks for the question because I agree with you. There is a fair amount of confusion and different information out there. First of all, the return calculation, if you look at our previous presentations, we talk about various fuel spreads and we use 200 days at sea, not port consumption. So, it doesn't impact negatively against that. Having said that, the ability to use scrubbers in port versus not in port is probably I would say a payback period if we had a calculation of $200 of two years, it would take it out about 2.1 years. So it's not material, but again to be conservative, the calculations that we've shown don't show us using our scrubbers in port. Having said that, there have been some announcements, as you mentioned, the most notable being Singapore, we think it's unfortunate because there is a lot of reasons why using a scrubber in port is more beneficial, a non-scrubber fitted ship will unfortunately exhaust of things like particulate matter and polycyclic aromatic hydrocarbons. In a scrubber-fitted ship, many of them will get captured and they go into the sea whereas on the non-scrubber fitted ship, they'll go out the exhaust and then they will fall into the sea, unless they blow ashore whether they can be briefed in, in advance, so things like that.

In addition, as I spoke about, the Japanese Ministry did an analysis and concluded that there was no negative impact to wash water -- from wash water and are allowing open-loop scrubbers and DNV GL did analysis almost 300 wash water samples that shows that the scrubber or meet all the surface water and many drinking water except for the fact that it's saltwater. I don't think you'd want to drink it. So we think that the science is extremely supportive and it's on that basis that we went forward as a company, as a responsible way to deal with IMO 2020. I'd just take us a minute and speak about one other thing related, but not specific to your question. You know, it's interesting in that everyone also talks about the fact, how scrubber -- let me say some people speak about scrubbers are bad and compliant fuel is good.

Well, everyone talks about how great IMO will be for tanker demand, both increase light crude and refined product movements, but let's just think about that for a moment. If every ship in the world was scrubber fitted, then nothing would change in that regard on January 1st, in terms of those demands. So yes, every one having the incremental ton miles, including consumption, sulfur emissions, particulate matter can be attributable to the non-scrubber fitted fleet burning the compliant fuel. So, I think it's important. What I'm saying is that scrubbers need to be considered against the alternative, which is burning compliant fuel and not some an ideal zero emission solution, which unfortunately is years away. So I appreciate the opportunity to add that to my prepared comments.

Magnus Fyhr

And I'm not sure if you disclosed this, but on the CapEx, $83 million, what's the split -- what's the cash commitment for that CapEx or expected?

Gary Vogel

So, we've financed the scrubbers through two different means. First of all, within the Norwegian bond -- the US dollar-denominated Norwegian bond that we have, we have an amendment that was passed in during the fourth quarter that says that we can use up to $25 million of proceeds from asset sales in a 2 to 1 ratio against with cash from ops -- cash on the balance sheet within that silo, if you will. And to date, we sold two vessels that with a total of $23 million actually, sorry, three vessels that we sold within that silo that have generated $23 million. So again, on a 2 to 1 basis, that takes you to about $34 million for installing scrubbers within the silo and then the refinancing that Frank spoke about that we closed in January, there is an increment -- incremental approximately $65 million of liquidity and the intention -- is to draw on that revolver to pay for the cash -- to pay for the CapEx regarding both the production as well as installation of the scrubbers.

Magnus Fyhr

So, with current guidance for Q1 around 9,000 and hopefully this will be the weakest quarter in 2019, that's pretty close to your cash breakeven. So if the market improves here going forward, you should be able to generate cash and also fund the scrubbers, it shouldn't take much out of your cash. So what's the comfortable level there to keep on? I know you need some here to weather some of the uncertainty near term, but what do you think is a comfortable level to keep cash on the balance sheet now?

Gary Vogel

Yes. I mean, as you said, first of all, we have a significant CapEx going forward on both the scrubber as well as installation of ballast water treatment systems, which we started in Q -- already in Q1 of this year. And then, there's volatility, and as I said before, we are in a cyclical, volatile industry. We don't have a specific target of what we want to keep. We've been opportunistic and acquired another Ultramax during December that we took delivery of in January. So I wouldn't put a specific number on it, we're always evaluating that and ultimately, what's the best use of our capital, whether it's on the balance sheet acquiring vessels or at some point looking at a dividend as well. But at the moment, we think that's premature and we -- we're focused on executing on the installation of the scrubbers and looking for this market to continue hopefully to rebound as it's done since early February.

Operator

Thank you. Our next question comes from Max Yaras from Morgan Stanley. Your line is open.

Max Yaras

Gary, if I heard you right, you are thinking about starting to lock up some days in the second half of the year. Are there any readthroughs on kind of how you expect the market to play out in the second half of the year, maybe compared to how it is now?

Gary Vogel

Yes. I mean, we think we're constructive on the market overall, we were very surprised about the severity of the downturn, and to be honest with you, I haven't met anyone who hasn't been. So we believe in a continued recovery and there's volatility around those forward curves as well today, they're trading down and so we are actively trading around them with a view to outperform the index. But of course, looking ultimate -- we had cash flows that are supportive of our capital structure. So I think the way to look at it is, is that while we're constructive, we're going to take opportunities that we think are beneficial to the Company overall in terms of being prudent. I said it on the remarks, but it's probably worth repeating -- and that is I would continue to consider us a spot player with a focus on outperforming the index and these positions that we take are all in support of doing that and so we put hedges on, we take them off. As I mentioned, we -- you know, today the futures market is trading down, as an example, I can tell you, last week, we sold derivative on the second half of next year in excess of 11, today, you could buy that back at probably 10.6, capture that value, so putting a hedge on, taking it off is something we dynamically do, we never take open positions to the market, but putting a hedge on and off is something that we actively do and it's one of the strategies that helps us deliver an outperformance or has been able to deliver an outperformance over the last eight quarters, and we are hopeful that we'll continue to be able to do so.

Max Yaras

And then on the scrubber CapEx. You talked about how you raised the estimate a little bit. Just wondering if you could provide any more color on the main reasons for that or how the installation has gone so far cost-wise relative to your expectations, the first installation, I think you said, will be ready in next month?

Gary Vogel

Yes, correct. So the first vessel is in the yard at the moment and then likely leaving in about a week with the riding crew on board. So we're really in the early stages. In terms of the cost, scrubbers are not one size fits all. Obviously, they are manufactured to specification of each individual ship. I think there's a lot of things that go into it in a baseline, and that hasn't changed for us, but who's constructing your scrubber, what is their history? Our manufacturer constructed their first scrubber 50 years ago, shore-based. Also, are you installing a Single Stream scrubber, which means to the main engine only, in which case you'll need to burn compliant fuel in your generators and heavy fuel in the main engine or is multi-stream? We have multi-stream, which means we only out burn one type of fuel. Obviously, it's more expensive, additional size and piping and things like that. We've also upgraded things, I mentioned change orders, we've upgraded certain things such as the pumps so we can run our scrubbers with one pump in case there's a malfunction things like that, fully down to 0.5 and even beyond. So various things like that. And then on top of it, we have found that -- the yard cost is slightly higher than initially expected in terms of actual contracting and I think that might be a development partly in the market in terms of scrubber uptake and yard -- yards being fuller. Having said that, we are, we are looking to limit the amount of time in the yard significantly compared to a traditional installation.

So on balance, we think those impacts are probably less given our hybrid in port and under way installation as compared with just in port. It's also worth noting not to get too long-winded here and that is that if you consider the amount of off-hire days that we believe will save, you're probably talking depending on market, that gets captured in CapEx, but will come back in the form of revenue that otherwise would have been lost well in excess of $4 million. So I think that's at least something worth noting as compared to a traditional all-in shipyard installation.

Max Yaras

And then just final question on the grandfathering provision you mentioned. What exactly does that mean? Does that mean if there's major changes to maybe allowing open versus closed loop scrubbers that whatever you installed prior to 2020 will be grandfathered in or what does that include really?

Gary Vogel

So the comments I made, there's just to take the second comment first. At the moment, there is no discussion about banning open-loop scrubbers under IMO, there's a request for further study of wash water and that's all. So I think that's an important distinction to make. What I was referring to is certain requirements around the design of the scrubber and whether certain parameters more than what are done today, need to be monitored, things like that. So additional information being recorded on the scrubber, we would under the ground filing, we would not have to go back and implement those types of things, in terms of monitoring equipment analysis and what have you. So that's what I'm talking about.

Operator

Thank you. Our next question comes from James Jang from Maxim Group. Your line is open.

James Jang

I have a couple of questions. One is with IMO 2020 and scrubbers coming into effect, how does that affect how you charter-in vessels?

Gary Vogel

Yes. I mean, it's a great question. I mean, it impacts it significantly, we've taken a number of vessels in on charter -- in particular and it's disclosed in our previous filings when we take period ships and one in particular we did where the optional period starts needs to be declared in the early part of 2020. So I have total visibility as to what the market's doing and we think potentially that option has a lot of value. But in terms of cargo contracting going forward, I think we're very cognizant and cautious about what we would do in terms of fuel cost and ensure that there is a fuel adjustment clause or something around it, so that we are covered by it, but at the moment, we don't have any contract cargo going into 2020 for that very reason. But as we get closer, we will be very aware of it, because given the uncertainty around fuel pricing that on a non-scrubber fitted ship will be significant and even on a scrubber-fitted ship, you'd give away your upside by locking in something based on fuel spread today.

James Jang

And also, just to follow up, so let's say, in 2020, I know you mentioned previously that based on the -- whether it's scrubber fitted or not and the ports of call, there could be different trading patterns and different ports of call, just to make sure that you have the right fuel onboard. So with these new dynamics being placed on your charter-in desk, could we see less vessels being chartered-in, at least in 2020?

Gary Vogel

I don't see that, I mean first of all, the charter desk, I mentioned on an earlier question, all of these variables, whether it's fuel price or deviation to a port or cutting out cargo to carry extra fuel is really part of the initial calculation, when you're comparing different cargoes and really no different than today then adding an additional pork cost or cutting our cargo because of a draft change in a port or a canal and things like that. So I don't really see it as a real change on the demands on the charter-in desk. I actually think there may be more opportunities given that we have a scrubber-fitted fleet, but chartering in non-scrubber fitted and we have nine vessels as well. So being able to play that arbitrage between the two different ships, I think will create opportunities for us that most companies want have the ability to execute on.

James Jang

And on slide 28, you guys have shown this before, with optimal speed basis based on the fuel spread. Have you run any scenarios where the spread is lower, let's say $150 or $250 and what the payback would be for you guys?

Gary Vogel

Yes. We actually have put a slide out previously about that, the $200 spread payback given the assumptions that we put on this slide is about two years and a $100 fuel spread is four. Obviously, this we are assuming in between that. But that gives you a bracket in that regard. In terms of optimal speed, clearly less of a fuel spread, and again, this is only indicative of one of our ships and what our models tell us, not every ship necessarily will l speed up and slowdown the same or has an owner that's as focused necessarily on it. But clearly, a smaller fuel spread would indicate less of a delta and a larger one a greater one.

James Jang

And one final question. So it seems a couple of industry headwinds, at least for the first half of this year and we haven't seen scrapping pick up and there is I guess a sizable order book account about 224 vessels due by '20. Do you think rates will stay elevated through '20, if the scrapping doesn't pick up with all these new vessels coming in?

Gary Vogel

Yes. I mean, if we go back and look at Supramax/Ultramax, we think that supply this year -- net supply will be about 2.2%. So a lower number overall than what you're calculating. And 2.2% should be seen against the demand side, Eagle, about two-thirds of the cargo that Eagle moves is minor bulks. And minor bulks are projected to grow this year at 3.3%. And so if you look at that, that's a positive delta, a convergence, if you will, of demand outstripping supply within the Supramax/Ultramax. So that's why we're constructive and that's on a pretty low scrapping estimate as well. So I think, given the weak environment, we could see an increase in scrapping. We've heard some recent ones on larger ships. But I think time will tell. We're not -- we're not budgeting for it, but even without that, I think given pretty conservative estimate, we think demand will outstrip supply in the minor bulks and in the Supramax/Ultramax, which is why we're positive. And your question went on to through 2020, I think time will tell. I mean, I think less efficient vessels given let's see where the fuel spread ends up, I mean $190 traded this morning in Rotterdam, I understand from our bunker desk. So that I believe that spread could be significantly wider in the early days. And all of a sudden, if you have a vessel, which is significantly less efficient, that ship becomes even more inefficient and so you could see that as a catalyst for scrapping as well.

James Jang

Okay. And mind you I'm taking a bear case, let's say, the scrapping doesn't pick up, would you say that Eagle is better prepared to outperform the dry bulk peers through your active commercial management if the scrapping doesn't pick up?

Gary Vogel

I think you know we're, I believe, and it won't come as a surprise to you, I believe we're well positioned in either environment to outperform the market, given our platform and given our track record. I mean, you see what we've been able to put there on paper, we put it out there, we put the index on a curve looking back and consistently every single quarter, whatever it is, we put pen-to-paper of our performance against the index. And I believe what we've shown is even in a rising market, we've been able to outperform pretty significantly. So while we're constructive on the market even in a weaker market, our team across our offices, I think is well situated to maximize the value creation against the market.

Operator

Thank you. Our next question comes from Liam Burke from B Riley FBR. Your line is open.

Liam Burke

Gary, do you think the IMO mandate could potentially accelerate scrap rates in the Supramax category towards the end of the year and you might have a possibly a better supply-demand equation finishing up in 2019?

Gary Vogel

I think, all things being equal, the answer is yes. We believe in the Supra/Ultra -- as I said, over 90% are going to be non-scrubber fitted. So, if compliant fuel costs $200 more per ton or $300 or whatever that spread is more, then less efficient ships become even more inefficient relative to newer benchmark ships. So, I think the answer is yes. I think, we'll have to be right up against it. And even in it for people to act as a catalyst as opposed to, well, this won't likely affect me as much. So, we're not banking on a wholesale increase in scrapping. But I think the biggest driver will likely be how big is that fuel spread and what the forward curves of that spread look like as we get closer and into 2020.

Liam Burke

And you touched on it in one of your comments about adjusting speeds in terms of driving the efficiency of the individual vessel. Is there anything else that you can do, just to drive efficiency at the vessel level, when you're looking at maintaining the low cost of the operation?

Gary Vogel

Yes. I mean, there is a lot of things that we do. First of all, we are using extremely our advanced coatings -- hull coatings, which alleviate the need for hull cleanings which deteriorate the vessel in terms of its ability to maintain its speed and efficiency out of drydock, and these cost significantly more, but we look at it on a business case basis and believe it makes sense. So, we are spending considerable money on that. We are starting to outfit the fleet with things like flow and torque meters in real-time -- we're getting real-time information from these vessels on incredible number of things and we partnered with a company called Nautilus Labs who are using AI and things to analyze routing and things like that. So, there is a lot of things that we're doing in order to make the fleet more efficient and more competitive, going forward.

Operator

Thank you. And I am showing no further questions from our phone lines, I'd now like to turn the conference back over to Gary Vogel for any closing remarks.

Gary Vogel

Thank you, operator. We have nothing further. So, I'd like to thank everyone for taking the time today. Thank you.

Operator

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