Eagle Bulk Shipping Inc. (NASDAQ:EGLE) Q1 2019 Results Conference Call May 8, 2019 8:00 AM ET
Gary Vogel - Chief Executive Officer
Frank De Costanzo - Chief Financial Officer
Conference Call Participants
Jon Chappell - Evercore
Chris Snyder - Deutsche Bank
Liam Burke - B. Riley FBR
Greetings, and welcome to the Eagle Bulk Shipping First Quarter 2019 Results Conference Call. [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.
Thank you, and good morning. I'd like to welcome everyone to Eagle Bulk's First Quarter 2019 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-58 index. This is the first quarter in which we are referencing the 58 index instead of the BSI-52. As the futures markets have transitioned, whereas virtually all new FFA trades are being transacted using this index, which is based on a Japanese specification 58,000 deadweight vessel as compared with the prior 52,000 deadweight vessel.
Please now turn to Slide 3 for the agenda for today's call. We'll first provide you with a brief update on our business performance, followed by a detailed review of our first 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 a question-and-answer session.
Please now turn to Slide 5. Eagle's time-share equivalent, or TCE, for the first quarter equated to $9,607 per day, which is somewhat higher than where our TCE was when we discussed it during our last earnings call. This was primarily driven by a number of strong outbound fixtures near quarter end. Notwithstanding a lower rate environment during the quarter, I'm pleased to report that we were able to achieve our highest TCE outperformance to date, beating the adjusted Baltic Supramax Index, or BSI, by almost $2,400 per day. It is also worth noting that when evaluating our TCE performance using the third-party application, Vesselindex.com, our outperformance comes in even higher.
As we've indicated 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 first quarter TCE number of $9,607 would equate to approximately $10,650 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 include a slide which has been updated to the BSI-58, which provides some guidance on how various Supramax, Ultramax vessel types compare in terms of earnings capacity against the index. We encourage you to reference this slide and hope you will find it helpful. As we have 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 chartering with end users, vessel and cargo arbitrage, opportunistic chartering, and a dynamic hedging strategy utilizing both FFAs and bunker swaps. The grey bars on the chart on Slide 5 depict our historical third-party time charter-in business as measured in vessel phase. During the first quarter, we had a total of 1,036 third-party vessel days, made up of 20 distinct ships we took on charter.
With reference to our third-party activity, it's important to note that 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 opportunities and market dislocations. I'm very pleased to report that the first quarter marks the ninth consecutive period for which we have been able to outperform the BSI.
Although, it's typically easier to beat the index in a falling market, as was the case during the first quarter, I believe the magnitude of our outperformance of over 30% was notable nonetheless, and it should be seen in concert with the previous eight quarters, in which we consistently outperformed a rising market. Over the past 12 months, we've achieved an average TCI outperformance of approximately $1,200 per day, equating to almost $20 million in annual value creation, based on our current fleet size.
Post the recovery in March, the market has stabilized somewhat, with the gross BSI averaging around $8,500 for the second quarter thus far. This represents a 6% increase over the prior quarter and 74% increase over the low, reached just two months ago. As of today, we have fixed approximately 65% of available days for the second quarter at an average net TCE of $9,509 per day. Based on the BSI quarter to date and FFA forward market for the balance period, our Q2 TCE outperformance currently equates to roughly $1,300 per day.
Please turn to Slide 6 for a historical view of EBITDA performance. EBITDA, adjusted for certain non-cash items, totaled $15.4 million for the first quarter, or $80.2 million for the last 12 months. Since the first quarter of 2016, when the dry bulk market hit an all-time low, Eagle's adjusted EBITDA has increased by approximately $120 million on an annualized basis.
As I mentioned previously, I believe this illustrates the significant operating leverage in our business model, the magnitude in the market recovery over the period, and also the improvement we've been able to achieve in out TCE outperformance, which is illustrated by the green portion of the EBITDA columns. For the first quarter, our TCE outperformance equated to approximately $9.7 million, representing roughly 63% of EBITDA generated.
Please turn to Slide 7 for a brief update on S&P transactions and fleet evolution. Subsequent to quarter-end, I'm pleased to report that we reached an agreement to sell the Thrasher, a 2010-built Diamond 53 Supramax, for a gross price of $10.1 million. We expect to close on the sale and deliver the vessel to her new owners next month. I think it's important to mention that the Thrasher is being sold ahead of a statutory dry dock due in January 2020, saving Eagle over $1 million in total CapEx spend relating to statutory maintenance and installation of a ballast water treatment system.
The Thrasher will represent the sixth Diamond 53 vessel we've sold over the past two and a half years, and will mark the completion of our strategic initiative to divest our fleet of these less efficient ships ahead of IMO 2020. Over the past three years, we have bought and sold a total of 27 vessels, divesting 13 of our smallest, oldest, and least efficient Supramaxes, which averaged roughly 13 years of age at sale, and acquiring a total of 14 modern Ultramaxes averaging around 3 years of age at purchase. Together, we believe these S&P transactions have transformed our fleet makeup and significantly improved our earnings generation capability. At the same time, we've managed to keep the average age of the fleet essentially flat over the past three years. Pro forma for the Thrasher sale, our fleet will total 45 ships averaging 8.9 years of age.
On the right-hand side of Slide 7, we depict the fleet profiles of our U.S.-listed peer group. Eagle remains uniquely focused on what we believe to be the most versatile asset class within the dry bulk sector. Notably, the last few months have highlighted the benefit serving a wide away of cargoes and routes as in contrast to the larger size vessels, which are highly dependent on iron ore and coal trades. Subject to market developments, we intend to continue executing on our fleet growth and renewal strategy.
With that, I would now like to turn the call over to Frank, who will review our financial performance.
Frank De Costanzo
Thank you, Gary. Please turn to Slide 9 for a summary of our first quarter 2019 financial results. Revenue, net of commissions for the first quarter, was $77.4 million, a decrease of 11% from the prior quarter. As compared to the same quarter in 2018, we saw a decrease of 2%. 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 first quarter, net of both voyage and charter hire expenses, came in at $40 million, 23% less than prior quarter, and 14% less than the same quarter in 2018. The decrease against both prior periods was driven by the lower TCE, as well as a decrease in available days as a result of the sale of the Condor and Merlin. Our platform-driven outperformance in part mitigated the effects of lower chartering rates.
Total operating expenses, inclusive of voyage and charter hire expenses, for the first quarter were $71.2 million, a decrease of 3% from the fourth quarter. The decrease was driven by a gain in vessels sold, partially offset by an increase in voyage expenses, due to an increase in voyage charter business along with an increase in charter hire expenses, due to an increase in chartered-in days. Operating expenses, as compared to the same quarter in 2018, decreased by 3%.
The decrease was primarily due to a $4.1 million gain on vessels sold, lower stock-based compensation expense, along with OpEx coming in $1 million lower. The decrease in OpEx expense was due to the sale of the two vessels during the first quarter. The company reported net income of $29,000 for the first quarter, as compared to net income of $6.5 million in the prior quarter. As compared to the same quarter in 2018, net income was essentially unchanged.
Basic and diluted earnings per share, or EPS, were $0 for both Q1 '19 and Q1 '18. For Q4 2018, we had a basic and diluted EPS of $0.09. Adjusted EBITDA came in at positive $15.4 million for the first quarter, a decrease $8.1 million from the prior quarter. As compared to the same quarter in 2018, we saw a decrease of $3.5 million. There are two non-recurring items to note in Q1, a $4.1 million gain on the sale of the vessels Condor and Merlin, as well as a $2.3 million loss on debt extinguishment as a result of our January 2019 bank refinancing.
In the appendix of our presentation, you will find a walk from net income of $29,000 to adjusted EBITDA of positive $15.4 million. Both EBITDA and adjusted EBITDA are non-GAAP measurements. You can find additional information on non-GAAP measurements in the appendix on Slide 26.
Let's now turn to Slide 10 for an overview of our balance sheet and liquidity. The company had total cash of $80 million as of March 31, 2019, up $2 million from the end of Q4. The cash balance was higher in the quarter due to the additional cash received from the debt refinancing and the sale of vessels, offset by vessel purchase and scrubber installation payments. I refer you to the Q1 cash waterfall on Slide 11 of the presentation for additional detail.
The company's total liquidity as of March 31, 2019, was $150 million, up $52 million from $98 million at the end of Q4. The increase in liquidity is largely driven by the additional revolving credit facility availability. Liquidity is made up of cash of $80 million and the undrawn revolving credit facility balance totaling $70 million. Total outstanding debt under our debt facilities as of March 31, 2019, was $349.4 million and is comprised of the $196 million Norwegian bond and the $153.4 million new Ultraco debt facility, which closed in January.
On January 1, 2019, the company adopted ASC 842, which revises the accounting for leases. As a result of the adoption, the company recorded a right-of-use asset of $25.4 million and a corresponding lease liability of $26.9 million on our balance sheet as of March 31, 2019. The right-of-use assets is comprised of three time chartered-in vessels and two office leases, all of which have lease terms greater than 12 months. There are no material changes to the company's lease expenses, which will continue to be recorded in charter hire and general and administrative vessels for time charter-in vessels and office leases respectively.
Please turn to Slide 11 for a review of cash flow. In 2019, net cash provided by operating activities came in at a positive $12 million, the seventh consecutive positive quarter in cash flows from operations, up from positive $7 million in Q4. The chart also shows that the timing-driven variability that working capital introduces to cash flow from operations, as demonstrated by the differences between the blue and grey bars, and the cash flow from ops chart. This volatility evens out over time, as demonstrated by the cash from operations number in Q1, which essentially made up for timing issues in Q4.
Now moving to the cash flow waterfall chart at the bottom of Slide 11, let's look at the changes in the company's cash balance in Q1 2019, which highlights the large themes driving our results. The two large bars on the left, revenue and operating expenditures, are a simple look at the operations. The net of the two bars is reasonably close to our Q1 adjusted EBITDA number. To the right, you can see that we spent $11 million on the installation of scrubbers and ballast water treatment systems in the quarter.
Finally, vessel and purchase spend of $6 million is the net of Cape Town Eagle acquisition, in part offset by the proceeds from the sale of the Condor and Merlin. Let's now look at Slide 12 for our cash breakeven per vessel per day. Cash breakeven per ship per day in Q1 2019 is $9,530, $474 higher than Q4 2018 and $1,172 higher than the full-year 2018 cash breakeven. The $474 quarter-on-quarter increase was primarily driven by higher vessel expenses and dry docking, as well as somewhat higher debt servicing. Q1 vessel expenses, or OpEx, came in at $4,830, $156 higher than Q4 and $105 higher than the full-year 2018 result.
As we have seen in prior years, it is not uncommon for Q1 to come in somewhat higher as a result of certain annual expenses. It is also important to note that our OpEx number includes such items as advanced hull coatings when done outside of scheduled dry docks, along with new vessel expenses, such as the Cape Town Eagle, which was acquired in the quarter. Q1 dry docking came in at $608 per ship per day, $193 higher than Q4 2018 result. The quarter-on-quarter increase was driven by an increase in the number of dry docks from 2 to 4. Q1 cash G&A came in at $1,674 per ship per day, essentially flat to Q4.
For full year 2018, G&A came in at $1,566. It is worth noting that in Q1, we chartered in 20 different vessels, accounting for 1,036 additional days. If we included the chartered-in days in our calculation, Q1 G&A would have been $1,340 per ship per day, $334 lower. Q1 cash debt service came in at $2,418 per ship per day, an increase of $140 a day from the prior quarter. Interest expense was $1,400, $54 higher than prior quarter. Q1 debt principal expense is $1,018, $88 higher than the prior quarter. Principal expense is higher as a result of the company now making regular debt amortization payments on both its bond and banks facility.
This concludes my review of the financials. I will now turn the call back to Gary, who will continue his discussion of the business and provide context around industry fundamentals.
Thank you, Frank. We would now like to provide you an update on our fleet scrubber initiative and IMO 2020 regulations. Please turn to Slide 14. As previously reported, we intend to retrofit 37 vessels, or roughly 80% of our fleet. We're currently projecting that 34 scrubbers will be installed within 2019, with the remaining 3 installed during statutory dry docks in 2020. In line with our plan, 5 scrubbers have been installed to date, and riding crews on board these vessels are completing installation work while the vessels continue to trade. Ten additional scrubber towers are projected to be installed over the next two months.
The photo on Slide 14 shows one of the first scrubber towers being lifted into a prefabricated funnel assembly pier-side before the vessel's existing funnel is removed and the scrubber-fitted funnel is lifted on. It's interesting to note that we're actually recycling funnels which have been removed from other ships. In this process, we install a scrubber tower shore side in a funnel which has been removed from a prior ship, and then install it on a sister vessel within the fleet. This is cost effective and also saves time and resources.
As stated on our last call, we're projecting a fully-installed cost of approximately $2.25 million per unit. This equates to approximately $83 million for the full project. In the appendix, you'll find a detailed CapEx table depicting our expected timing and cash outlays for scrubber retrofits, in addition to statutory dry docks and ballast water treatment installations.
Please turn to Slide 15 for a brief update on the latest developments regarding IMO regulations and the scrubber order book. The final IMO Marine Environmental Protection Committee, or MEPC meeting prior to the start of IMO 2020, will take place next week in London. Various guidelines for implementation and port state control are expected to be approved during this session. These guidelines include recommended actions for flag import state control to take in non-compliant scenarios and lay out the Fuel Oil Non-Availability Report, or FONAR, template, as well as define conditions for its use.
The MEPC will also consider undertaking an environmental impact assessment of exhaust gas cleaning systems wash water, which, if agreed, would likely take place over the next few years. Japan has formally submitted the results of its own environmental impact assessment on exhaust gas cleaning system wash water to MEPC 74. The study concludes that risks to the marine environment from discharge of scrubber wash water are within acceptable ranges or negligible from both short-term and long-term perspectives.
The Cruising Lines International Association has also formally submitted the results of the DNV GL assessment of 281 exhaust gas cleaning system wash water samples. This study concludes that the wash water samples are well within both IMO wash water discharge criteria, as well as other relevant water quality standards. We are confident that these and other objective scientific studies will continue to support the position that open loop scrubbers are an environmentally responsible way to comply with IMO 2020, especially when comparing it to the full impact and environmental footprint of producing, transporting, and burning compliant fuel.
In terms of the scrubber order book, the total uptake in dry bulk, as measured by units contracted and/or installed, is now estimated at 1,090 units, representing 9.5% of the fleet. DNB further forecasts that total uptake by the end of 2020 will be 1,458 units, equating to 12.7% of the dry bulk fleet, essentially unchanged since our last earnings call.
The Capesize segment has the largest share, with approximately 38% of the segment expected to be fitted. And within our segment, just 10% of the Supramax/Ultramax fleet is expected to be fitted with scrubbers by the end of 2020. As we've indicated previously, we believe the lack of uptake within the Supramax/Ultramax segment would lead to a net slowdown of the general fleet, given the vast majority of ships will be burning more expensive low-sulphur fuel. This should lead to a lowering of effective supply, thereby leading to better utilization, and ultimately, higher rates.
Please turn to Slide 16 for a look at fuel spreads. Apart from being a responsible way to comply with IMO 2020, our decision to retrofit the majority of our fleet with scrubbers rested on the belief that the economics are attractive basis, what we believe will likely be a wide fuel spread between HFO and 0.5% compliant fuel. On Slide 16, we depict the historical fuel spread between 0.1% low-sulphur marine gas oil, or MGO, and 3.5% sulphur-heavy fuel oil, or HFO. Today, ships burn HFO unless operating within a designated emissions control area, or ECA, where they burn the higher-priced MGO.
Come January 2020, all ships globally which are not fitted with scrubbers will need to burn fuel with a sulphur content of no more than 0.5%. Historically, this product has not existed, so for the purpose of evaluating past data, we look at MGO as a proxy to 0.1% compliant fuel. The 10-year historical spread between HFO and 0.1% MGO averaged $240 per metric ton.
Right now, the forward curve is in contango, with the 0.1% MGO-to-HFO spread for 2020 trading at approximately $305 per metric ton. More specifically, trades are now starting to be executed for new 0.5% compliant fuel, with the spread to 3.5% heavy fuel oil currently trading at about $195 per metric ton for 2020 in Rotterdam. At this spread level, and given our assumptions on fuel consumption and sailing days, we calculate annual generated cash flow of approximately $1 million per ship, equating to an incremental TCA of $2,700 per day and based as our cost estimate, we believe the pay-back period in such an environment would be slightly over two years.
On the right-hand side of Slide 16, we illustrate our calculations on both cash flow and TCE at various fuel spread environments. I note that both charts assume use of a scrubber over 200 sailing days per year. Current price notwithstanding, we believe fuel spreads, both in the derivatives market as well as the physical, will become more volatile as we approach and get into 2020.
Please turn to Slide 18 for an industry discussion. The gross BSI averaged $7,931 for the first quarter, down 33% from the prior period and 26% year on year. Although the Pacific market tends to be quite weak during the month of January and the first quarter in general due to seasonal factors such as the high rate of new building deliveries in the month of January and Chinese New Year, the Atlantic market typically performs relatively well during this period, driven in part by soybean and grain exports out of the U.S. This year, though, very little product has been moving due to the ongoing U.S./China trade dispute and related tariffs, and also due to the swine flu epidemic affecting China's pig population, something we addressed on our last earnings call.
China is the world's largest producer and consumer of pork and maintains a pig population of around 400 million, roughly half of the world's stock. Pigs are fed, among other things, soy, which is derived from soybeans. In order to eradicate the swine flu epidemic, there has been large-scale culling of the herds. In addition, the pig population appears to be decreasing at the moment, due to both the swine disease and due to the fact that farmers have been reluctant to fully replace old stock due to the risk of infection. All this implies that there's been leas seaborne demand for soybeans, and this has had a direct impact on rates. The Atlantic BSI market averaged $8,034 per day during the first quarter, down 47% quarter on quarter.
The Pacific market decreased by 20% during the same period to average $7,682 per day. Apart from seasonal factors mentioned earlier, the Pacific market was impacted by continued limitations of Chinese coal imports. Although Chinese imports were up approximately 40% in January as compared to December, they came off again in February. As we've addressed before, while volatile, historically the Atlantic market tends to trade at a premium to the Pacific, and its premium is usually highest during the first quarter due to reasons stated earlier. Over the past three years, the Atlantic/Pacific Q1 premium averaged almost 50%, while this year it only reached 5%. I believe this underscores how out of sync the market dynamic was in early 2019.
It's also noteworthy that Eagle's cargo mix for the first quarter was 70% minor bulk and just 30% in major, which compared to our historical mix of 60/40. I believe the shift towards minor bulk highlights the resilience of the Supramax/Ultramax segment and our ability to optimize the business basis the underlying fundamentals within the commodity markets. We moved less coal and grains during the quarter, but carried more fertilizer to Brazil, scrap to Turkey, limestone to India, ships into West Africa, and bauxite to China. In this regard, bauxite is the fastest growing seaborne trade in minor bulk cargo, with annual trade expected to reach 130 million metric tons in 2019, up 13% year on year.
As we mentioned earlier on the call, the BSI has posted a strong recovery from the lows in early February. However, up side's been affected by continued muted demand in the grain and coal markets. And while we don't carry a significant amount of iron ore and believe the spillover effect is limited, the profound weakness in the Cape market during the quarter as a result of the Vale Dam collapse has undoubtedly had at least some knock-on effect to [indiscernible] Panamax vessels, which in turn impacts Ultras and Supras. As depicted on the chart, the forward curve is indicating BSI in the mid upper 10s by the end of the year, exhibiting markets' participants have a more positive expectation on a go-forward basis.
Please turn to Slide 19 for a brief update on vessel supply. Dry bulk new building deliveries totaled roughly 8.9 million deadweight tons, or approximately 96 vessels during the first quarter, representing an increase of 68% quarter-on-quarter basis vessel count. This increase is attributed primarily to what we refer to as the January effect. As is typical, deliveries dropped in Q4 and increased in January, as owners pushed off taking delivery of new building vessels to the following calendar year. This way, they're able to own a ship which, on paper, is one year younger.
Demolition of older tonnage amounted to 2.5 million deadweight tons during the quarter, or 23 vessels, representing an increase of 92% over the prior quarter and essentially flat year on year basis vessel count. The quarter-on-quarter increase was driven by older Capes, given the extremely weak spot environment. Looking at the last 12 months ending March 31, scrapping totaled just 57 vessels, or 5 million deadweight tons, down approximately 70% and 55% year on year respectively. Given the muted spot market, high scrap prices, and upcoming regulatory requirements, we believe scrapping will likely pick up over the medium term.
As you'll note from the light blue dotted line on the graph, net fleet growth is low for dry bulk overall, with expected growth of 2.5% in '19, but 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.
Please turn to Slide 20 for a look at new building ordering. In terms of forward supply growth, new building orders totaled approximately 4.4 million deadweight tons, or 49 ships in the first quarter, down over 40% over the prior quarter. For the last 12 months, dry bulk contracting totaled 28 million deadweight tons, a decrease of 50% year on year. Most impactful to Eagle, Q1 recorded just six Ultramax vessel orders, which bodes well for forward supply within our market segment.
As we've indicated previously, given a number of factors, including an increase in new building prices as a result of Tier 3 regulations, as well as an uncertainty on future regulatory requirements, we remain cautiously optimistic that we will not see a material increase in ordering unless we also see both rates and second-hand values increase significantly from current levels. 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 to Eagle, the Supramax/Ultramax segment order book stands at just 7% of the on-the-water-fleet. Looking ahead, we believe supply-side fundamentals remain favorable, given the low order book and increasing number of older vessels, which are becoming less commercially viable due to regulations coming into effect.
Please turn to Slide 21 for a summary on demand. From a macro perspective, global growth expectations, as forecasted by the IMF, have been revised down since our last earnings call. Global GDP growth is now forecasted at 3.3% for 2019, down 20 basis points. Downside risks to global growth remain, due to a number of factors which have been highlighted on previous calls. These include slowing Chinese growth, higher oil prices, as well as uncertainty around both Brexit and reaching a resolution on the U.S./China trade dispute, and other international trading agreements.
Dry bulk demand growth is calculated from a bottom-up fundamental perspective, is now expected to reach 1.7% for 2019, down 50 basis points since our last earnings call. This downward revision is primarily due to lower expectations for iron ore and grain. These revisions have negatively impacted ton-mile demand as well, which is also expected to grow by 1.7% in 2019. This is essentially showing zero multiplier effect for ton-miles, primarily driven by the significant reduction in Brazil-China iron ore, the longest-route on the most traded dry bulk cargo.
According to our analysis, this would be the first time since 2011 that ton-mile demand hasn't exceeded actual demand growth. We believe this is anomaly which will abate as Brazilian iron ore comes back on stream, leading to more normal volumes and growth. Within the 1.7% real demand growth, major bulks, which are comprised of iron ore, coal, and grains, are expected to grow by roughly 1% in 2019.
Demand for coal, which typically represents about 15% to 20% of the cargoes we carry, is expected to grow by 2% this year to total 1.28 billion tons, an increase of approximately 20 million tons since our last earnings call. Demand for grains, which represent anywhere from 10% to 20% of the cargoes we typically carry, are also expected to grow by 2% this year to about 481 million tons, down roughly 15 million tons since our last earnings call.
As denoted in the table on the bottom of the slide, growth in minor bulks is expected to once again surpass overall dry bulk and is forecast to increase by about 3.5% in 2019. This growth represents roughly 70 million metric tons of incremental demand, and the growth rate is being driven by improvements in trades such as steel, nickel, or forest products, agri-bulks, and bauxite.
While no segment has been immune to the recent turmoil in the dry bulk market, the Supramax/Ultramax segment has been relatively stable as compared to the larger asset classes. We believe a demand picture which is favored towards 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.
To wrap up our call, we would like to convey that earlier this week, Eagle was once again rated number one in corporate governance by Wells Fargo in their perennial shipping governance scorecard covering 56 publicly listed companies. Needless to say, we're very pleased with this recognition of what we believe to be a vitally important corporate tenet.
With that, I'd now like to turn the call over to the operator and answer any questions that you may have. Operator?
[Operator instructions] Our first question comes from the line of Jon Chappell of Evercore.
Gary, there's a lot to unpack on Page 5, which is probably the most important slide. So, I understand these things are difficult to predict. How much of the outperformance -- and obviously, don't put a number around it, probably impossible. But how much could you possibly relate to the significant increase in your charter-in activity at that time? So, maybe another way to say it is, did you see opportunities based on your views on cargo flows and arbitrage opportunities and really ratchet up the charter-in during that period, which exacerbated the outperformance in 1Q?
Yes, thanks. As you said, and I agree, there's a lot there. And with this dynamic approach, it's not like we called the market and took in a lot of cargo on a view of the fall into the quarter and then executed on it. So I think it's really more about the dynamic nature of the market. It was really volatile in Q1. We hit a low there in very end January, early February, and then the market went from 6,400 averaging in February up to almost 9,000 in March. And so, I'd say more than anything, it's that volatility that we're able to execute on, whether that's through dynamic hedging, again, arbitrage of cargoes and vessels, but it wasn't a market call, per se. You know, that's really not a major driver for us. Of course we take positions in that regard, but I think it's more about the ability to take in other ships and maximize value through that arb.
Okay, that makes sense. And then second, completely shifting gears, your liquidity situation, $150 million relative to your debt or your market cap or anything, is relatively robust. So in this uncertain time with the volatility you just mentioned, are you thinking more about just playing defense here, maybe accelerating some debt pay down? Obviously, some of this is pegged towards the scrubber investments. Or do you think that this volatility and extreme weakness in the first quarter, which you alluded to was somewhat anomalous, presents an opportunity to be more offensive with our liquidity position?
Yes, so first of all, as you know, we have a significant CapEx program regarding the scrubbers, so that needs to be taken aside from the liquidity. And that's one of the drivers for the refinancing we did in January, which is why we have that revolver really to finance a big part of it, of the scrubbers outside of the Norwegian bond silo, if you will. Having said that, we've been pretty consistent on the view that we want to renew and grow this fleet. And this quarter we just, announced the sale of another one of our least efficient vessels, so we're still looking to continue that program of adding on.
But I think the operative word here is prudent, right? It is a volatile market. We want to obviously have some cushion. But, yes, we think there's opportunities. We still want to grow this business, so it's a balance between the two and we're consistently looking at vessels in which to acquire. And again, we took delivery of one in January, but we'll continue to look to add on and go forward, again, I use the word, on a prudent basis.
Final quick one, you've mentioned you have five scrubbers already installed. Any commentary about the performance of those, maintenance? Have charters reached out, now that you have those ships ahead of time, with inquiry? How has that process been, as you go into the remainder of the fleet?
Yes, so as I mentioned on the prepared remarks, we have riding crews on board those ships still, finalizing installation of, so the main towers are on board and main piping, and they're doing the final work. And then, when the ships arrive at a discharge port, the commissioning will take place, so they're not fully operational yet. So we expect that that will happen within Q2, so I'll give you an update on the next call in terms of operations. In terms of chartering, we've had some discussions. We're quite confident that, given our active operator model, we're going to be in a really strong position to maximize the revenue stream of having a scrubber.
And at the moment, charters aren't willing to pay what we think is fair value for what we'll be able to do there. I mentioned the forward spreads starting to trade and that we think it's going to be volatile. And in my prepared remarks, we talked about a spread of 195, and then this morning a trade was done at over 200 is my understanding. So we think that there's a lot of opportunity, and it's not that we wouldn't re-let a vessel, but I think the bid ask is a little wide, in our view, of what we're willing to do that at.
Thank you. Our next question comes from the line of Chris Snyder of Deutsche Bank.
So over the last year, your owned fleet has gotten a little bit smaller while you've gotten slightly more active on the chartered-in side. Obviously nothing major and maybe this is just opportunistic, but could you talk about how you guys think about this mix in the context of all-in breakeven levels, and also in the context of flexibility, which is important for the management approach?
Yes, thanks, Chris. So first of all, I mean, I think we've gotten smaller from a high of, four ships, right? I think we had a high of 49. So it's not a decision to, let's say, get asset-light, as people say, and charter in more ships at all. We see ourselves as an owner in the Supramax/Ultramax space, and we supplement that fleet opportunistically to have, to on a risk-managed basis, to outperform the index. I like to say our goal with our charter-in fleet is to hit singles and doubles to supplement that value of the time charter equivalent. So that's really what it is. It's about opportunity.
I mean, the last of the Diamond 53 vessels that we sold this quarter, that was a strategic decision taken about a year ago that we wanted to divest of all these vessels in advance of IMO 2020, based on the consumption of those vessels. I mean, on a relative basis, to give you an idea, compared to an Ultramax, that ship burns about 6 tons, on an eco speed, that ship burns about 6 tons more fuel and carries 10,000 tons less cargo. That's pretty demonstrative, and our view is that with the majority of our fleet, including those ships not being scrubber-fitted, that they'll become even more inefficient and less attractive at that time. So our goal was strategic in that regard.
We definitely have said it many times, I'll say it again: we'd like to grow this fleet, but be opportunistic about it. So I wouldn't see it as less of an owned fleet, more of a charter-in fleet. Our view is to grow the owned fleet, and then that charter-in fleet is going to be based on an opportunistic basis under the parameters I mentioned earlier.
Okay, yes, makes sense. And then, on the chartered-in fleet, how should we think about profitability there? We can pretty easily back into the average chartered-in day rate, which is above the company's average TCE rate in Q1, but that's not a fair way to evaluate that business. Is there a dollar-per-day margin you guys target? Just how should we think about the profitability there when modeling it out?
Yes, so I think you're right, because it's really important that it doesn't matter the level we charter a vessel in at, per se, as long as the overall arbitrage opportunity between that and what we get on our own ship is a net positive, right? So even if we have to charter in a ship to cover a cargo at a loss, if it frees up our own vessel to earn significantly more together, we'll do that. So if you look at just the charter-in number, as you said, that wouldn't be helpful in coming to that determination.
I've said, when I joined Eagle that our target for outperformance would be $1,000 per day. Obviously, we'd like it to be higher, and it has been over the last 12 months, helped considerably by this largest outperformance this quarter. But I think if it was me, I think I'd look historically at what we've been able to do and imply some percentage of that on a go-forward basis. I think it's probably the best way, given the limited visibility into the actual operating that we're doing on a quarter-to-quarter basis, because the number of days itself is not really going to get you there.
Yes, okay, thanks for that. And then just lastly, how many vessels do you guys think you need in the fleet to maintain this historical level of outperformance that we've seen, whether it be probably a bit over $1,000? And would you expect a material different level of outperformance if the fleet was, say, 25 or 100 vessels, compared to the 45 or so today?
Yes, it's a great question. I mean, I think that we believe that if you can demonstrate the ability that you have a methodology that can outperform the market, then there are benefits to scale commercially. So notwithstanding even the capital markets, but from a standpoint of having three ships coming open, let's say in the U.S. Gulf in a 10-day period, there's more opportunities than having two ships, and more cargoes as well. So we definitely think there's a benefit to scale.
Having said that, I'm pleased to be able to say that we've been able to outperform and create value with the current fleet we have. So we'll look to grow it, but it has to be done on an opportunistic basis in the sense that it has to -- each position has to make sense. And when we acquire a vessel, it's not just growth for growth's sake. We don't think there's a magic number that will unlock significantly more.
And I do believe that at a certain point, you get to a stage where there will be this economy of scale. I don't think we're near there, but there are -- it gets to a point where if you have so many ships coming open, it becomes more production rather than nuanced art, if you will, about arbitrage and opportunity and where you want to position it. So I think we have significant room to grow this business, but I don't think that that is an infinite number.
[Operator instructions] Our next question comes from the line of Liam Burke of B. Riley FBR.
Gary, you talked a lot about managing the fleet by hedging and the arbitrage. But on the operational basis, is there anything you're doing with the fleet to increase vessel efficiency?
Yes, we are. I mean, we think that's just, that's a given, right? And that is, you need to do everything you can to maximize your efficiency. So whether you buy a very efficient, new Ultramax vessel or a less efficient vessel, once you own it, you need to do everything you can to be as efficient as possible and save as much fuel, for both commercial reasons as well as environmental. So the answer is yes, we're using advanced hull coatings, silicone-based hull coatings, which are much more expensive. But we believe for us, on a business case basis, they definitely give you the ability to spend significantly more time in ports with warm water without fouling of the hull, and therefore, less cleaning.
So you have both less efficiency as growth comes, and then you have to clean the hull. And after you clean a couple two, three times between dry docks, that ablating paint becomes less efficient. So these more advanced paints allow you to go much, much longer without cleaning. I think I've mentioned in the past, we've also partnered with Nautilus Labs. They're using artificial intelligence in terms of getting information from vessels in terms of routing and RPM efficiencies, and things like that. So the answer is, we're looking at everything. We've also installed bos cap fins on the back of the propeller hub on some of our ships for more efficiency, and things like that.
So the answer is, we look at everything, and we really look at each of these things on a business case basis. And as Frank mentioned, we also have taken ships out of service between dry docks, which impacts the OpEx number overall. You don't get to capitalize that, but whether it's to recoat a hull because the coating from 3, 4 years ago in dry dock on a 5-year cycle deteriorated, again, we look at everything in that regard on a business case basis, long-term value, not just short-term cash flow.
And you mentioned earlier that you divested a vessel due to age. This has been a long process. You think about these things well in advance. In terms of the fleet management, we talked about that earlier, are you looking, based on liquidity or return, it looks like you've got a return opportunity here to outdistance competitors with scrubbers, in looking at higher return vessels into 2020?
Yes, I mean, we absolutely are looking at these opportunities. And I think although we have our program as of today, we're open to looking at other vessels and scrubber-fitting vessels as well. We believe in the business case there. So just to clarify, the ship we sold actually is a 2010-built vessel, the recent one, so it's not one of the older vessels in our fleet, but definitely one of the less efficient ones. So, again, whether it's an acquisition or divestment of a vessel, we look at it on a go-forward basis where we think that ship will able, what's it able to deliver to us, whether scrubber-fitted or not scrubber-fitted? And, absolutely, we're looking at opportunities on both fronts going forward, as we remain constructive on the market, notwithstanding the short-term demand challenges.
Thank you. And this does conclude our question-and-answer session for today. I'd like to turn the conference back over to Gary Vogel for any closing remarks.
Thank you, operator. We have no further remarks, so I'd like to thank everyone for joining us today and wish everyone a great day. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.