Feb 6, 2017
Executives
Hugh Baker - Chief Financial Officer Emanuele Lauro - Chairman and Chief Executive Officer Robert Bugbee - President Cameron Mackey - Chief Operating Officer Nicolai Molin - Chartering Manager, Scorpio USA Inc.
Analysts
Jon Chappell - Evercore ISI Herman Hildan - Clarksons Platou Steven Tittsworth - Stifel Noah Parquette - JPMorgan
Operator
Hello and welcome to the Scorpio Bulkers Inc. Fourth Quarter 2016 Conference Call.
This call is being recorded. I would now like to turn the call over to Hugh Baker, Chief Financial Officer.
Please go ahead.
Hugh Baker
Thank you for joining us today. On the call with me are Emanuele Lauro, our Chairman and Chief Executive Officer; Robert Bugbee, our President; Cameron Mackey, our Chief Operating Officer.
And we have one of our traders in our new conference, Nicolai Molin. The information discussed on this call is based on information as of today, February 6, 2017 and may contain forward-looking statements that involve risk and uncertainty.
Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release that we issued today as well as Scorpio Bulkers’ SEC filings, which are available at www.scorpiobulkers.com.
Call participants are advised that the audio of this conference call is being broadcast live on the web and is also being recorded for playback purposes. An archive of the webcast will be available on the Investor Relations page of our website for approximately 14 days.
Now I would like to introduce Emanuele Lauro.
Emanuele Lauro
Thanks, Hugh. Good morning, everybody.
We appreciate your time with us today. I will start from where I left during our third quarter earnings call by saying that whilst our balance sheet is prepared for an extended weak dry cargo market, our modern fleet is well positioned to benefit from any rate recovery.
I am pleased to report that rates have, indeed, recovered slightly compared to when we were talking to you at the end of last year in late October, early November. And as described in our earnings press release of today, during the first quarter of 2017, we have booked more than 70% of our fleet days; on average, $1,000 per day higher than the previous quarter.
Having taken delivery of 5 vessels so far this year, we have now taken delivery of 47 out of the 48 ships, which compose our fleet. This will give us the chance to focus on operating our fleet and commercially position ourselves in the best possible way also from a geographical perspective to cope with what we see as a market which is in the very early stages of recovery for both the asset values as well as the rate environments.
In our positions as management, we of course are hardly satisfied with present earnings. However, as significant shareholders ourselves, we are quite pleased with the company’s balance sheet and operational improvements and are really excited about the position we are in and the opportunities which lies ahead of us.
We are in an ideal position to benefit from the continuing improvement in this dry cargo market. And as previously stated, we shall continue to put a high degree of priority on operational safety, environmental compliance, customer service and better standard of maintenance, and we shall do so keeping an eye on improving the efficiency of what we do day by day.
With this, I would like to turn the call back to Hugh Baker.
Hugh Baker
Thank you, Emanuele. For those of you who have a presentation opened, I would like you to refer to Pages 4, 5 and 6 of that presentation.
If you don’t have the presentation open in front of you, that is not a problem, because it’s very short and I will briefly go through the points that we have to make. I’d first like to refer to our liquidity position.
As of February 3, 2017, we have cash of $141.9 million. We have a remaining CapEx for 1 remaining ship of $18.7 million and we have available debt against that ship of $13.2 million.
So on a pro forma basis for the delivery of the final ship in April this year we expect to have pro forma liquidity of around $136.4 million. I would like also to refer to the time charter equivalent earnings of the company over the last four quarters.
I would like to look at the combined earnings for our Ultramax and Kamsarmax vessels, which were at low points of $3,404 a day in the first quarter of 2016. This has improved to $5,303 a day in the second quarter, $6,791 a day in the third quarter and to $7,303 a day in the fourth quarter.
For the 73% – for the 75% and 73% of days that we booked for Q1 ‘17, we have average earnings of $8,452. What you are seeing there is obviously a quarterly – quarter-on-quarter improvement throughout the last four quarters.
I would also like you to talk about operating costs for Q4 2016. Our OpEx was $5,037 per day, our cash G&A is $1,196 per day and cash interest costs are $1,866 per day.
If you combine those, the OpEx, cash G&A and interest costs give us a breakeven – a cash breakeven of $8,099 a day for the fourth quarter. With that, I would like to pass you on to Robert Bugbee.
Robert Bugbee
Thanks, Hugh. I think what’s really – talk a little bit about what Emanuele is excited about is shareholders and insiders in this company really own quite a significant amount of shares.
If we total out the holding company NPA, it’s in excess of 25%. So this is the time, I think it’s fun to talk about what we are excited about.
We are excited that the – we are right at the very early stages of value of vessel and rate recovery. The second thing is as we can see from Hugh’s chart we have seen the sort of steady improvement out of the bottom.
We have moved now into, whatever you want to call it, operating cash interest breakeven, which is stop the bleeding of the cash. We have a lot of cash on the balance sheet.
And it doesn’t take much now for life to become really exciting. So if you would march these rates up just $3,000, which is still well below that required for replacement, you are suddenly going to turn this company into throwing off $0.20, $0.25 a quarter in terms of cash, cash able to pay down debt, do things with, and that’s pretty – a very exciting position to be in when we look at the dynamics going forward into the market.
But I think we will leave it at that and open it up for questions.
Operator
Thank you. [Operator Instructions] We will go first to Jon Chappell with Evercore ISI.
Jon Chappell
Good afternoon. First question is on chartering strategy, last conference call, you guys laid out a pretty strategic plan of trying to get some time charters through at least the first quarter of this year given typical seasonal trends.
You obviously put a couple more on since that time that gets you into – well into the second quarter and even into the third quarter at one case. Is that a trend that you are going to be a bit more balanced with the chartering going forward, maybe 10%, 20% of the fleet, just to get a little balance in there or are those just opportunities and you really want to have a lot more operating leverage as you get to the back half of the year?
Robert Bugbee
I think that first of all, we – I think it’s a great question. First of all, we really believe in the recovery.
Second, it comes back to the points I have just made, where you are chartering out. And now if you have seen from our latest charters, those charters are, let’s say, about what we are guiding for the first quarter, they are about the operating cash breakeven.
And you are sort of trying to navigate through this point till we get into the low 10%, 10.5%, 11% in the spot market, where if you’ve got this opportunity to take time charter coverage fairly short. It’s not – and it’s not as if we are giving away much as the upside in the expected recovery you didn’t read here.
We just think that’s a sensible, prudent thing to do. The market may not take a recovery curve of bottom left to top right.
It may run into a month or two months of stalling, who really knows. So to the extent that we are seeing with good consumers, first class customers, that will – it will be continued customers.
Yes, we are going to take and continue to take this sort of layered short dated bond portfolio in the next – in the short-term until further advice. But there is no target of percentages at this point.
There certainly was back in October. We felt the requirement to really take out this first quarter to know where we were.
But now with the fleet delivered, the balance sheet, the cash position where it is, we can really take this in a much more opportunistic way.
Jon Chappell
That makes complete sense. Hugh, a question for you, a lot of heavy lifting has been done now as far as the capital structure is concerned, obviously you can’t get complacent, but given the amortization schedule well into 2019, it doesn’t seem that there is a lot left to do, but as you do look at kind of your next steps, what are you kind of prioritizing as far as your – what are you going to do with the balance sheet going forward?
Hugh Baker
I think Jon, you have made the point that the heavy lifting has been done. I think that, that is the case.
We obviously can and do prepare ourselves for the next amount of heavy lifting. But I think for the moment, we are actually sitting still.
We are watching – we are focusing on operating and operating issues. And I actually can’t answer that question.
I think we are very – we are comfortable where we are at the moment. We don’t expect any major changes in the near-term and we obviously are looking out to do things for the best for the future.
Jon Chappell
Got it. Alright, last just…
Robert Bugbee
I think it’s fair that you could have a proper vacation now.
Jon Chappell
It’s about time. Just some clarification, if you will on two quick things.
First of all, the first quarter-to-date bookings, is that – does that include the time charters that you have already booked out or is that strictly on the spot exposed fleet?
Robert Bugbee
It includes the time charters.
Jon Chappell
Okay. And then second Hugh, there was some talk of this time charter in vessel that was redelivered in February where you have a P&L kind of profit sharing I guess with the charter, $14,000 a day for the next 2 years, given that the charter has now been completed, is there any visibility on how that’s going to impact the income statement for the next three quarters?
Hugh Baker
It will flow through – it will flow through the full income. So yes, you will see a very minor effect on our P&L going forward on that - related to that asset.
Jon Chappell
Do you have any idea from – with what absolute number it might be?
Hugh Baker
You would have to model it out yourself.
Jon Chappell
Okay, thank you. Thanks Robert.
Operator
We will go next to Herman Hildan with Clarksons Platou.
Herman Hildan
Good morning guys, can you hear me?
Emanuele Lauro
Yes.
Robert Bugbee
Yes, we can.
Herman Hildan
So just very kind of short question, obviously being up the circular point of the cycle in terms of asset prices, obviously you have a very solid balance sheet at this point, as values increase and probably market materializes, kind of how do you think about do you have any target leverage for your balance sheet or what’s kind of the thinking around how you will deal with having your leverage decreasing and – as well as increase going forward?
Robert Bugbee
Well, I think that first of all obviously, that that has become the – whatever the benefit of the luxury of the company when it’s in the position it is, it doesn’t take much now from tick-up in rates to do that. And as you say, you actually have a balance sheet every day with the values go up, where your LTVs are with a high coverage, etcetera.
But I think the honest answer at the moment is we haven’t actually put much thought to that. The company has – we are really happy with the progress that’s made.
As Emanuele said, we have shifted from let’s say, balance sheet triage into focusing on the operations and we have just gone over the thing there of a time charter strategy getting to the position. And frankly, we have a Board meeting in a couple of weeks and that will be the first time that we will be discussing those type of things that your question is going at.
But it’s great to have that opportunity to finally have those discussions, all the discussion of allocation and capital and what we would see proper balance sheet going – leverage going forward.
Herman Hildan
I agree. It’s might be a bit premature to ask a follow-up question on potential capital allocation in the future, but would it be like it might get to go back into the cape size segment or are you happy about the Kamsarmax tonnage?
Robert Bugbee
We are really happy with the Kams and the Ultramax segment. And I think that the – more than that, we have got a good position in there that gives us trading information, etcetera.
Getting a – I just don’t think that just getting a couple of cape sizes or two or three cape sizes is a thing to do here because you would need to get an awful lot of them to create that commercial and operational advantage, whereas in the Ultras and the Kamsarmaxes, we really have got a block there that provides all of those benefits. The other thing frankly, we are really – I think Nicolai can talk to this a little bit more and I will let him speak in a couple of seconds.
But that Ultramax smaller size is over-performing our best expectations in terms of diversity of cargo, customers and excitement. It’s not dependent upon any given area.
But maybe I will talk to Nicolai, let Nicolai chat for a couple of seconds. Nicolai?
Nicolai Molin
Yes. We are very excited obviously, about our modern fleet, which gives us all the exposure to the spot market and the information that we need to be able to maximize and utilize these great ships.
The market has gotten very fond of these ships. And we are first in line and we are happy to be able to provide this to our customers with the only – the very similar ships, so the customer knows what he is getting and he is getting first class tonnage.
Our job is obviously to find the segments we utilize the great beaches being either large cubic grabs and gear and then the flexibility of owning the fleet that we can do with them basically what we want with – obviously, with great respect for the equipment.
Emanuele Lauro
And to add – Herman, to add on what Robert was saying, Emanuele here, I think that we have to put ourselves back into the mindset that we had when we were disposing of our cape fleet. At that time, it wasn’t that we disliked the cape segment per se, but it was the only segment in which we could find liquidity on the asset leveling order to dispose of such asset.
So it was not a strategic decision to get out of it. And to start with, we have started from the bigger size because we could dispose of the asset.
There was no bid for the smaller ships at that time.
Robert Bugbee
Yes. I mean, what – so...
Emanuele Lauro
And of course I agree with Robert, starting again with one or two now would make no sense. You are not a player, so it would have to be something more strategic going forward.
So as to echo what Robert has said, we are extremely – and Nicolai reaffirmed, we are extremely comfortable with our Ultramax and Kamsarmax fleet as we stand today.
Robert Bugbee
I think the more incredible thing actually, Herman, is the very fact that you are asking the two questions you are asking that the – and this is, for us, and the excitement for us as shareholders here is that we very, very quickly turn from a runaway discussion into a best capital allocation question and define your assumption is, yes, the company has got the ability to off the balance sheet it has without raising equity, it has the ability to actually do things now.
Herman Hildan
And let me then try another question, which I haven’t asked and a lot of them [indiscernible], could you remind us also do you have any buyback policy in place or provide some...
Robert Bugbee
No, we don’t have a – we have a – we went out and we had a $20 million buyback of the bonds themselves. Not surprising, the bond market, out bonds tightened quite considerably since that announcement, anticipating or realizing the improvement in values and improvement in earnings.
But as in all these cases, you are going to evaluate what is the best thing to do for the company. But again, the very fact that you are asking that question, that question as well is pretty interesting.
Herman Hildan
I hope the next 12 months are better than the last 12, I guess.
Robert Bugbee
Sure. I don’t think – again, look, anybody who is investing in dry cargo for 4 months, I mean, what you should be investing here is that on the fundamental dynamics, very fast slowing increases in capacity to the dry cargo fleet, reductions in new building capacity against a very constructive demand profile based of world growth.
And this company, once it crossed this – $3,000 up is great, that’s free cash. $5,000 up, it becomes huge, $7,000, it becomes really fantastic.
And all these numbers are very low in relation to where the point of the cycle is. So, it’s not the question really of where our rates in 4 months, so where is the stock in 4 months.
It is this company has, on very, very easy parameters, the ability to throw off $2 plus in cash flow and go to $20, $25 over a 12 to an 18 month period. That’s the way we are looking at this company, not on the basis of what’s going to happen this quarter.
Any revision to the 10-year mean, then do your numbers yourself, those cash flows then become really ridiculous.
Herman Hildan
Thank you very much, guys.
Robert Bugbee
Thanks.
Operator
We will go next to Ben Nolan with Stifel.
Steven Tittsworth
Hi, this is Steven Tittsworth on for Ben Nolan. Thank you for taking my questions.
Just have a few. First one deals with what you are talking about in terms of reinvesting capital, you have seen some of these dry bulk names start to appreciate pretty significantly and with that, you have seen some due either private secondary offerings here or there.
Have you given any thoughts potentially accessing the capital markets in case to invest further in a dry bulk market?
Robert Bugbee
Well, we have spent the last 2 months, having lots of approaches either by good potential shareholders offering us pipes indicating that they would like to invest in the dry cargo space and an open offering and lots of investment banks sitting and coming and visiting us saying that they have capacity and we can do it, but up until all of these have been very politely declined. And as you can see today, you can see today off that balance sheet with $142 million of cash sitting on a balance sheet with a booked earnings, it would be – would have been pretty dilutive to have accepted any of those positions.
The next aspect that makes difficulties as a company has and this is ironic too is the use of proceeds. You can’t just – when your balance sheet is in great shape anyway, you can’t just go and raise $50 million, $100 million sitting on your balance sheet and compete in a market where single ships are now being inspected by 10 or more people at a time.
You can get into a very, very dilutive situation where you have raised equity at one point and you have been unable to actually put that money to work at the parallel pricing position.
Steven Tittsworth
Okay. No, it makes sense.
Absolutely. And then my next one deals with, I guess, diving further into that, do you think there is going to be more M&A activity that occurs in the market just given how fragmented it is right now?
Robert Bugbee
Maybe, I mean, it’s a – obviously, I think consolidation would be a good thing, not just because of the aspects to fragmentation, but you will have more efficient companies, you will have higher market cap companies. I think that type of thing would be beneficial to borrowing costs.
Clearly, we are seeing now in shipping that lenders are favoring the higher cap positions. The sad thing, the factual thing is that we look through all the public companies for us to buy any of the other public company fleets would be dilutive in quality and would be, I think, negative for us to do.
I can see that every single public company would want to have Scorpio Bulkers fleet.
Steven Tittsworth
Okay. And then my last question just deals with the recent order you saw from Vale ordering more of their VLOCs potentially increasing supply.
Is that a big concern for you or do you just see that as just a one-time thing?
Robert Bugbee
I think you could look at it the other way. You could say that a very big customer believes in the future growth of the demand for Capesizes, so much that it’s chosen this time to acquire on the balance of things, that order isn’t like – really is not like a mega order into that – into the size of that Capesize market.
I think that they are probably seeing and again look at the positive. They are seeing yard capacity being reduced.
They are seeing the demand growth that’s going to happen and more than that, they are probably seeing that once we get into 2018, 2019, if you’ve got a recovery also in the tanker market as well or some form of constructiveness in gas and then containers, that window of opportunity or that door of the yard capacity could start to get pretty narrow. So, I think – I would look at it as a good thing for the customer of their demand visibility is actually acquiring newbuildings.
Steven Tittsworth
Yes, that makes sense. It does.
Okay, that does it for me. Thank you for your time.
Robert Bugbee
I mean it would be pretty strange if you had the major customers of the world were not actually ordering some ships at the market. So, you shouldn’t – when there is so much confirming macro for the fundamentals, we should expect some ordering from these players going forward, but that’s pretty contained.
Steven Tittsworth
Yes, as long as they don’t pickup significantly, that’s not really – I guess, it’s more organic growth. Okay, thank you.
Operator
And we’ll go next to Noah Parquette with JPMorgan.
Noah Parquette
Yes. Just lot of questions have been asked.
But in your talk with charters, the periods that you did fixed, what sense did you get from them, their interest in going longer, I mean, were you guys the ones that said we are going to keep it at this term or they want it longer or just can you talk a little bit about what you are doing from that?
Robert Bugbee
Well, I think that we have seen from some of our competitors that there is the ability to fix ships out for 1 year, 2 years, some of them even 3 years. A couple – one of our competitors obviously haven’t got a balance sheet that can afford to wait for an improvement in the market, so they are almost probably having it fixed with 2 years or 3 years.
Our view is the same as the customer. We believe in the long-term that the market is going to go up and go up significantly.
We are however, prepared in the short-term, which is four months or five months, which is what I was saying earlier, that where we are seeing charted coverage to good customers that we will work with going forward, we are happy to fix some ships out in terms of a like we explained the short dated bond portfolio, but we certainly are not happy to fix away the upside – the real upside in the fundamental change in the market.
Noah Parquette
Okay, thank you.
Operator
And with no further questions in queue, I would like to turn the conference back to Mr. Hugh Baker for any additional closing remarks.
Hugh Baker
Thank you all for joining us today. We have no further closing remarks.
So we look forward to speaking with you soon. Thank you very much.
Operator
Again, that does conclude today’s presentation. We thank you for your participation.