Apr 20, 2017
Executives
Emanuele Lauro - Chairman, Chief Executive Officer Robert Bugbee - President Hugh Baker - Chief Financial Officer Cameron Mackey - Chief Operating Officer
Analysts
John Chappell - Evercore ISI Noah Parquette - JP Morgan Ben Friedman - Morgan Stanley
Operator
Good morning and welcome to the Scorpio Bulkers Inc. First Quarter 2017 conference call.
I would now like to turn the call over to Hugh Baker, Chief Financial Officer. Please go ahead, sir.
Hugh Baker
Thank you, Operator. Thank you all for joining us today.
On the call with me are Emanuele Lauro, Chief Executive Chairman and Chief Executive Officer; Robert Bugbee, our President, and Cameron Mackey, our Chief Operating Officer. The information discussed on this call is based on information as of today, April 20, 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 made available on the Investor Relations page of our website for approximately 14 days.
Now I’d like to introduce Emanuele Lauro.
Emanuele Lauro
Thanks Hugh. Good morning or afternoon everybody, and thanks for being with us today.
We’re generally pleased with the developments of our company. Our markets continue to improve on a fundamental basis.
Rates have improved from our last call substantially, and as described in our earnings release of today, during the second quarter of 2017, we’ve booked around 58% of our fleet days on average 8% higher than the previous quarter. Asset values have increased as well quite rapidly in the last six months, and this has prompted us taking the opportunity to dispose of two of our assets built in 2014, as we had announced two days ago.
Our new building program is now fully delivered and this allows management to focus on operating our fleet. The fleet is the most modern in the industry and as such has minimal capex requirements going forward.
With our recent sales, we feel we have to all effects normalized our balance sheet. This is providing financial flexibility as well as greater potential for shareholder return and value creation going forward.
In general, we do remain highly optimistic for the dry cargo market recovery, which we feel is gradually shaping up, and look forward to further strengthening our position in the market in what is an improving rate environment. With this, I’d like to turn the call back to Hugh Baker.
Hugh Baker
Thank you, Emanuele. As Emanuele mentioned, we have now taken delivery of all of our new ships.
I can confirm that all of the debt for these ships is now drawn. I recommend that everyone examines the supplementary information presentation that we’ve uploaded on our website.
It shows detail on our cash position pro forma for the sale of the two vessels, our projected debt amortization, and current estimated collateral coverage. I’d just like to mention that pro forma for the sale of the vessels, we now have $155 million of cash and our cash breakeven, excluding debt amortization, is approximately $7,800 per day.
When we talk about cash breakeven, we’re talking about operating costs, opex, cash, cash G&A, and interest. Going forward at current rates, we expect to generate cash to further reduce overall leverage, and with that, I’d like to pass you onto Robert Bugbee.
Robert Bugbee
Thanks very much, Hugh and Emanuele. Actually, I don’t really have anything else to add.
I think everybody has covered everything. I think we’ll just go straight to Q&A.
Operator
[Operator instructions] Our first question comes from John Chappell with Evercore ISI. Your line is open.
John Chappell
Thank you. Good morning, good afternoon.
Emanuele, you mentioned the sales a couple times, but I just feel maybe in this call if you can give a little bit more detail surrounding the decision making between maintaining maximum operating leverage in a period when rates are clearly improving versus right-sizing your financial leverage, and then also how much of it is really a Scorpio Bulkers-specific transaction as opposed to a market call.
Robert Bugbee
I’ll take that one, John, and I’ll do it backwards. So it clearly isn’t a market call.
If we felt that the positive view we have to the long-term fundamentals changed, you would have seen a much more significant transaction than the one that you saw. We have to look at the genesis of the company, the company’s balance sheet and across the entire space here, and yes, we’re extremely positive of the future.
There’s been great improvement in both the cash flow and the asset values, but I think it’s important to take the opportunity as quick as possible to what Emanuele has described as normalize the balance sheet, because we will turn, as Hugh has described, this company going forward not just from what it’s been in the last seven or eight months, which is a highly leveraged kind of option gamble, punt on some kind of appreciation in values, to a really investable company that can move forward, deliver EPS, deliver cash flow, and be a proper normal company. One of the things that’s important to do is to recognize that, including ourselves, most of the industry has been given moratoriums from lenders and that we think that the right thing to do is to, at the earliest opportunity which was rational, to right that position, to show our lenders that we’re--we thank them, they’re being responsible, we’re not riding on their backs, so any future developments we do on the company is from the integrity of the company’s balance sheet and its own earnings and cash flow, as opposed to riding on the backs of moratoria.
There are offensive and defensive benefits in this. Obviously when you put yourself in a strong position with a balance sheet at your end, that does give you various numbers of alternatives as to what to do.
You can clearly have a better conversation with your lenders as to the future of the company, the future of the loans. You will be able to much quicker place yourself in a position to either take the strategy of paying dividends or buying back stock if we get into a period where stocks are trading below net asset value, and defensively it’s always not too bad on your balance sheet to have some form of insurance against a very uncertain world.
It doesn’t matter how optimistic we are about the dry cargo market, the world itself could be uncertain. We’ve seen that in the last two weeks - the physical market itself, its fundamentals have gone from strength to strength, yet most dry bulk markets companies have sold down.
That’s really the reasoning behind that.
John Chappell
Okay, that makes a ton of sense. Then just to follow up to that, then, the debt amortization, you kind of addressed that.
All the new builds have been delivered. You’ve played this kind of offense-defense game now for the last several quarters.
What are kind of the next steps as you position yourself for what you just laid out - an improving market with some still macro uncertainties?
Robert Bugbee
Well, I think that the first thing to recognize is that our debt obligations for the next three years, ’17, ’18 and ’19, including all amortization, including the repayment to the baby bond, is actually about what cash we have on hand, and we’ve lowered our cash breakeven now to below $8,000 and we expect that to go lower. There’s a written statement in the results that we expect our opex to go down in this quarter too.
So we are in a very strong position to get answers for that question that you’ve given, but we have no intention at this particular point of giving those answers. We’re rather focused on the next weeks and creating as many different opportunities as we can.
John Chappell
Okay. One super-quick one for Hugh - sorry I haven’t been able to go through the supplemental information yet, but has there been no debt draw for the Jive in the second quarter?
It seems like in the press release, the debt totals you set for March 31 and April 19, so I assume that was all cash financed?
Hugh Baker
We drew down the Jive in Q1. We took delivery in Q2, but we drew down in Q1.
John Chappell
All right, great. Thanks Hugh.
Thanks Robert.
Operator
Thank you. Our next question comes from Noah Parquette with JP Morgan.
Your line is open.
Noah Parquette
Thanks. I wanted to ask you guys about the ballast water treatment connection later this year in September, what your views are there.
We’ve heard that owners have taken the IOPT certificate and got away from the [indiscernible] survey. Do you think this is going to change how scrapping changes going forward?
Cameron Mackey
It’s Cam here. I think you have to--it’s a dynamic playing field out there insofar as you have two different, distinct sets of regulations or standards.
You have an IMO standard or an international standard, and then you have a U.S. standard.
Now, if you do not care about the ability to trade your vessel to the United States at any point in the near future, you don’t have to worry about the U.S. standard; however, the Coast Guard has been adopting a very stringent view, rigid view to implementation of the Convention and not allowing for normal extensions or waivers to the installation of the equipment.
So I think that to summarize, disassociating or separating your IOPT certificate from your other surveys may not have the benefit that most of the market has been led to believe, and so we still continue to think that there will be a bump. The size of the bump is debatable, but there still will be a bump where the vessels are either forced into trading exclusively in tertiary markets or go to scrap because they simply cannot compete with vessels that have the equipment installed in time.
Noah Parquette
Would it be a safe conclusion then to say that the vessels that trade - if that’s the U.S., say the Supermaxes, would be more influenced by that versus the larger ships, or do you think it will be sector-wide?
Cameron Mackey
I think it will be sector-wide. What I think you’ll see is, say, reversion to what you know to be the case, which is Atlantic and Pacific markets can trade at a spread to each other, and what I would expect you to see is a widening of the spread.
Noah Parquette
Okay.
Cameron Mackey
So if you have a modern Supermax or Ultramax and you want to trade quality charters in the Atlantic basin, that premium historically vis-à-vis the Pacific will probably start to rise, and you’ll see that across other sectors too.
Noah Parquette
Okay, that’s all I had. Thanks.
Robert Bugbee
I’d just like to add something complementary on to John Chappell’s question. Look, I think when it comes to we don’t want to be vague about what alternatives we have, we really are exploring the different alternatives.
The judgment on those alternatives will be really based on what is going to get the greatest return to the shareholder. I mean, this company, around 25% of all of the stock is held in one way or another by insiders.
We’re not interested in being the biggest company. We’re interested in getting the best return to ourselves.
It is a very selfish enterprise, and I’d just like to leave it at that.
Operator
Thank you. Our next question comes from Ben Friedman with Morgan Stanley.
Your line is open.
Ben Friedman
Hey guys, how’s it going?
Robert Bugbee
Good.
Ben Friedman
So most of my questions have been answered, but just a few quick ones more on the market. So I understand that your longer term outlook for rates is obviously positive, but I’m more concerned with your view kind of in the interim.
It seems as though rates have kind of decelerated in terms of their rapid growth as of late, but how do you kind of expect the rate development to develop over the next few months, and do you expect adverse seasonality to kind of take hold or what seems to be still very high iron ore inventories in China to kind of play a bigger part?
Robert Bugbee
Well, we’ve sort of--almost in the public company, we’re pretty disinterested in daily rate to rate changes or stock price changes, and for us it really is a long-term movement. I could argue that the pricing of iron ore coming down is very constructive for the long term fundamentals.
You know, it’s going to do two things: it’s obviously going to be more beneficial for demand growth, and also it’s going to put further pressure on those marginal Chinese iron ore producers. So what we’re seeing right now may be partly short term detrimental - who knows?
The Capesize market could rip up 5,000 tomorrow if people sit there and think, okay, we found a bottom in iron ore, let’s buy the physical, thank you. You know, there’s super volatility in the spot market.
We tend to actually still be very constructive, so the public company doesn’t do it but the private company is in the market now buying paper on the long side, so I guess that’s [indiscernible] management’s view short term. But again, for the public company, it really matters to us--the long-term fundamental here matters much more to us that the stock is up 270% in the last nine months than it’s down 15 or 20% in the last 10 days.
It’s an investment, not a short-term punt.
Ben Friedman
Right. Okay, thanks Robert.
Robert Bugbee
Good luck to those people who play shifting with a short-term view.
Ben Friedman
Just one more question, I guess to piggyback on ballast water, but this one on the IMO. So it seems as though recently more players in the space have at least started to assess the advantages and disadvantages of the scrubber technology and conversations have kind of accelerated to some extent here.
Are these same conversations happening on your end, and how do you expect the scrubber versus--or I guess it’s more of the game there between the scrubber technology and the low sulfur oil to kind of play out over the next year or two.
Cameron Mackey
Ben, it’s a good question. I think we consider it still very early.
There are a number of assumptions that people are struggling with, obviously. The one that receives the most attention is how refiners will respond, how prices of the various fuels will respond, the most recent study by Wood Mackenzie being the latest example.
Getting a grip to that is one element that I think a number of owners, not just ourselves, are dealing with, but there are others. For example, analogous or the biggest lesson from the ballast water treatment experience is that regulations change - they get delayed, they get modified.
One of the biggest concerns we have about the scrubber regulations is this concept that by virtue of taking pollutants in the air and putting them into the sea, you’re actually making the problem disappear. Well, we know that’s not the case and we consider it only a matter of time before closed loop scrubbers become required, not just open loop scrubbers.
Another factor people are struggling with is existing scrubber technology and whether it really works well or not. The cruise industry and ferry industry, for example, have a lot of experience here and we’re learning a great deal from our conversations with them, so the short answer--I’ve given you a longer answer, but the short answer is absolutely we’re looking at it.
There still is time. We’re skeptical of the regulatory landscape in light of other experiences in our industry, but watching it very closely and we’ll make a decision as we get closer to or get our hands around some of these assumptions.
Ben Friedman
Sure. Thank you so much, guys.
Operator
Thank you. I’m showing no further questions at this time.
I would like to turn the conference back over to Hugh Baker, Chief Financial Officer for any closing remarks.
Hugh Baker
Thank you, Operator. We have no closing remarks, so I’d just like to thank everyone for joining us today and we look forward to speaking with you all soon.
Thank you very much.
Operator
Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect.
Everyone have a great day.