Jul 24, 2017
Executives
Hugh Baker - Chief Financial Officer Emanuele Lauro - Chairman and CEO Robert Bugbee - President Cameron Mackey - Chief Operating Officer
Analysts
Gregory Lewis - Credit Suisse Jon Chappell - Evercore Amit Mehrotra - Deutsche Bank Ben Nolan - Stifel Magnus Fyhr - Seaport Global Noah Parquette - JP Morgan
Operator
Hello. And welcome to the Scorpio Bulkers Incorporated Second 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, our 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, July 24, 2017 and may contain forward-looking statements that may 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 Statement 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, and good morning, everybody. Thanks for joining us today.
Back in April on the previous earnings call we have been talking about the fact that we had managed to normalize our balance sheet. This normalization has continued and we were able to take an importance step in the right direction.
Just last week we’ve reached agreements in principal with our lenders whereby principal repayments on our debt that were previously deferred would be reinstated to their original form. Under these agreements in principal, we will be required to make principal payments of approximately $7.3 million in the third quarter of this year and quarterly repayment ranging between $1 million to $4.5 million per quarter from this quarter throughout the fourth quarter of 2020.
This step is significant and allows the company to really have all option at hand, including but not limited to the restoration of the ability to pay dividends. What I just mention was achievable, thanks to a number of factors, of which some stability in the rate environment is the most significant one.
As outlined on page four of the slide, which we've uploaded, we have just made, where you can see the rate environment has stabilized since the beginning of this year. Whilst it is still not satisfactory levels and whilst we expect the rate environment to improve further into future quarters, this stability has actually allowed management to take positive structural measures to improve the status of our company.
Our markets continue to improve on a fundamental basis, asset values have now stopped rising after a rapid increase which we experienced in the first four months or five months of the year and being opportunistic we were able to sale two of our Kamsarmaxes back in April as we discussed already. Our newbuilding program is now fully delivered and this allows management to focus on operating our fleet, which being amongst the most modern in the industry has minimal CapEx requirements going forward.
We believe that the company steps are providing financial flexibility, as well as greater potential for shareholder returns and value creation going forward. In general, we are optimistic for the dry cargo market recovery and look forward to further strengthening our position in the market in what is an improving rate environment.
With this, I would like to turn the call to Hugh Baker.
Hugh Baker
Thank you, Emanuele. I would like to refer all of you to our supplementary information presentation that we have uploaded to our website and that provides some supplementary information to this earnings press release.
We made a net loss of $13.4 million in the quarter, which is $0.19 per share. However, I can report that we made positive cash flow from operations.
Our cash position as of July the 21st was $148.3 million. During the second quarter of 2017, just as mentioned by Emanuele, we completed the sale of two Kamsarmax vessels for $45 million where $20.1 million of debt was repaid and net, net cash proceeds of $24.2 million was received.
We also agreed to time charter in one Ultramax vessel for two years, which has a further one year option at the company's option. During the second quarter of 2017, our OpEx was reduced to $4,858 per day, cash G&A was $929 per day and cash in interest, I am sorry cash interest amounted to $1,797 per day.
In total, OpEx, interest and G&A amounted to $7,584 per day. During the second half of the year we expect to manage these costs downward further or further downward.
In addition, during the quarter we reinstated $45.4 million of principal rate -- principal repayments that were previously deferred. This $45.4 million will be payable over the next two years and will be made from the third quarter of 2017 to the fourth quarter of 2020.
In addition, the restriction on the payment of dividends and share buybacks has been removed from all credit facilities. We are very pleased that we've been able to normalize our existing bank relationships and reinstate the loans to their original form.
I would also like to mention that in addition to the fact that there are no restrictions on dividends or share buybacks, we have no other restrictions in place either. We don't have any cash sweeps, any pick interests, any requirement to hold restricted cash as a result of debt service liquidity or ballast water treatment system reserve accounts.
Most importantly, we don't have any major debt maturities due to the past to firm into principal. As a result, we feel we have a considerable flexibility and optionality for the future.
Now, I’d like to open the call up for questions.
Operator
[Operator Instructions] Our first question comes from Gregory Lewis with Credit Suisse.
Gregory Lewis
Yes. Thank you and good morning.
Emanuele Lauro
Good morning.
Gregory Lewis
Hugh, I guess one of my first question would be regarding the ability for you to work with your lenders to get them to, you're reinstating the debt prior to the relief of the amortization gives you the ability to pay the dividends. How should we be thinking about the dividends?
Clearly you have a lot of cash on the balance sheet that you could fund some type of dividend, but should we be thinking about the dividend as more of a cash flow from operations type number?
Robert Bugbee
I think you should -- Hugh, I will take that. I think he should be thinking correct.
The company is being focused in the last months and maybe a year on, first of all, surviving a very, very bad market and then what writing the ship and now what we've been doing is normalizing the position. I think that's where the focus of the company is being.
The company itself has, as Emanuele said, and he just done this in the last week or so, so we are now, only now for the first time got all our options in place, et cetera. And we haven't sat down either properly as a management neither nor with our board to determine which of these options we are going to use going forward and that will be determined over the next week or months.
Gregory Lewis
Okay. Great.
Yeah. Thanks for that color, Robert.
And then just on slide four you kind of talk about the projections that you booked already in Q3, just as we look at the market over last couple weeks, it looks like it’s improved a little bit. Do you have any sense for what type of rates those vessels are fixing today and maybe how we can think about the remaining, I don’t know what, 45% to 50% of the days, if we were to just roll through what we are seeing, what you guys are seeing in the market today?
Hugh Baker
I can answer the first part of that question and maybe Emanuele would -- can answer it. Greg, what we've been saying is that in the, we obviously make projections as a group going forward and what I -- what we can see is that the projection, the rates that we are booking for August are a little bit higher than the rates that are indicated there simply because of the -- those rates are averages for the period that we have forward-looking for.
So I would probably, I will pass this to Emanuele, but I would say the curve is upward slightly.
Emanuele Lauro
Yeah. I agree Greg.
I don’t have much to add to what Hugh has said in the sense that, you've seen the stability in the rate environment that has been there since the first quarter really. If you look at Q1, Q2 and Q3, the rates are very, very similar there or what has been booked in Q3 so far.
So whilst we would like to see the rate environment improve more significantly. It’s tough to tell you what you should budget for the reminder of the quarter.
What we do instead is, in order to be transparent, we take for our internal projections third-party indications of where the markets ease and use those, so that the board gets comfortable that management doesn't just make up a number depending on mood. But I would say that that rolling those numbers for the reminder of the quarter is probably safe enough.
Gregory Lewis
Okay. Perfect gentleman, Hey, thank you very much for the time and have a great summer.
Emanuele Lauro
Thank you.
Operator
Our next question comes from Jon Chappell with Evercore.
Jon Chappell
Thanks. Good morning.
Good afternoon. First, obviously on the financial side, you have given little bit of faith that you're in a strong position, but also that you are little bit more optimistic in the market and therefore willing to kind of as you said normalized to capital structure?
From an operating standpoint, you’ve chartered in one ship now after rolling up a pretty heavy chartered in fleet. How do you kind of perceive both the charter in fleet going forward as you think the market continues to come off the bottom, but also your willingness then to add-on tonnage?
Robert Bugbee
I think that comes in…
Emanuele Lauro
I am, sorry, Robert, if you want to go explain.
Robert Bugbee
I have just going to say just generally, Jon, that's in -- we think there is great value in the charter we have just done now. I think that the company has been focused against the same answer to the dividends that we've been really focused on getting the operating efficiencies that being coming down, I mean, it is just fantastic we can sit here as we go into the summer period with all these alternatives.
Yes, it's legitimate that very shortly the company could pay dividend if they wants too. Yes, we could buy assets if we found that was the right we took the curve and it's the same as the dividends.
That type of question we will start to answer ourselves over the next weeks and months in terms of our real strategy.
Jon Chappell
And let me ask a follow-up on that same topic, if you look at the order book in the segments that you've chosen, obviously, that's down to levels that you haven't seen major asset classes in, probably, more than 20 years. It seems like some newbuilding momentum is started to pick up in one of the segments where you have a large focus to Kamsarmaxes.
If you just talk about what you see going on there, is that just yards kind of getting desperate and putting out prices that are too good for others to pass up, is that more of the secular change, how do you kind of proceed that order book and what that means to your fleet going forward?
Emanuele Lauro
I'll take this, Emanuele here. It’s weird, right.
As soon as there is a little bit of the positiveness in the market you see report that newbuilding orders that have been placed. I think if you want to look it from a positive perspective, you have to think about the fact that the shipbuilding capacity has run significantly.
You see that now only a small -- a much smaller number of yards are building vessels and these vessels are or these orders are placed by generally quality owners, the few owners that have access to capital and have access to debt or don't need the debt even in these markets and sort of. You are not so concerned, because these ships are going to end up in relatively strong hands, as opposed to before where you could not really control where the orders were placed.
You didn't know whether it was how opportunistic the order was at all really. And so it is a fact more than 60% of the shipbuilding capacity has disappeared in the last seven years.
However, of course, are we pleased with the fact that orders are continued to be placed, definitely not, we have the most modern fleet out there and we certainly don't wish for it to increase. And pricewise, to address the latter part of your questions, I think that, pricewise we are still seeing a relatively attractive pricing out of China and instead in Japan the prices are for the asset class you are referring to the Kamsarmaxes, are definitely on the high 20s and they don't seem to be moving from there and this is why -- this has created some sort of resistance, because with the rates that there are today and that -- we are experiencing today, we're still not out of the woods, if you are paying in the high 20s for the asset.
So it's just wait and see. Hopefully, it will be strong hands and good shipyards only in the next wake of newbuildings and hopefully it will not happen in any significant way for another year or so.
Jon Chappell
Right. Okay.
That’s very helpful commentary. Thanks Emanuele.
Thanks Robert.
Emanuele Lauro
Pleasure.
Operator
Our next question comes from Amit Mehrotra with Deutsche Bank.
Amit Mehrotra
Hey. Thanks.
Hi, guys. Thanks for taking my questions.
Emanuele Lauro
Hi, Amit.
Amit Mehrotra
So first one is on the partial reinstatement of the amortization payments. It’s obviously not a significant amount of incremental dollars.
But, I mean, frankly, it's still a little bit of a head scratcher in my view. I mean the company was still very cash flow negative in the first half, if you adjust for the asset sales, the third quarter looks to be weaker than the second quarter based on the disclosures.
So just against that backdrop you just kind of explain the thinking behind accelerating debt repayments and what are the other reasons aside for maybe the removable of any dividend or restricted payment covenants you mentioned? Thanks.
Hugh Baker
Amit…
Robert Bugbee
Well, I think, Hugh, I will answer…
Hugh Baker
Go ahead Robert.
Robert Bugbee
I think that we would see in the third quarter, Amit, that, yes, the Kamsarmaxes might be behind, but the Ultramaxes are ahead and we have more Ultramaxes than we have Kamsarmaxes. So there is every reason with Emanuele commentary that -- than Hugh’s commentary related to the spot rates earlier that your cash flows in 3Q are going to be better than 4Q.
Obviously, we feel that the market is going to continue to improve and whether improves $1,000, $2,000, $3,000, $4,000 during this period. We never let really it’s going to improve.
We don't have much cash out with a new fleet. And then it's just really important in your makeup to normalize when you can afford it and you think you can afford it to normalize that balance sheet as quickly as possible.
We don't think it's the right thing to go out and buy assets or chartering ship or pay dividends or buyback stock or all the things that you can do or even standstill if you can afford it on the back of your lenders giving you more rates. You just should get back into your -- into a normal amortization and the normal relationship with your lenders as soon as possible.
Amit Mehrotra
Okay. Okay.
So this move is really more of a normalizing of relationships with the banks as opposed to inducing your ability to pay equity holders in this current market, is that how we should interpret it?
Robert Bugbee
No. It's both.
It's -- first of all you are normalizing your position with your banks which then enables you to both legally and structurally and correctly, so we could still bought buy assets up to yesterday that would not mattered. So it allows you all of your options going forward.
Amit Mehrotra
Okay.
Robert Bugbee
And it is also a sign that management believes that we are through the worst of the dry cargo market.
Amit Mehrotra
Right. Okay.
That’s helpful. Just one other question on the dividend, if I could, possible dividend, shipping companies over the last past cycle have really got into a lot of trouble by dipping into the equity of the company, whether it's the cash flow on the balance sheet or raising outside equity to fund dividend payments that they really can't afford.
You guys own a very large percentage of the company, which is seemingly aligns you well with shareholders and this kind of goes back to Greg's question, the first question, really about what the source of any prospective dividend payments are going to be, because as you stand today, the company does not have enough cash flow to fund dividend, the debt repayments, frankly, from an operating cash flow basis. So is there any, can you provide any assurance that the other equity holders of the company, that future dividend payments are going to be pays for by generated free cash as opposed to future dividend payments are going to be pays for by generated free cash flow as opposed to existing?
Robert Bugbee
Well, I think -- at the moment I think the assurance that we would give anybody is what we have said before that we haven’t even discussed during the dividend -- doing a dividend within management, not alone going to the board. That is a movement that allows you the optionality and then you're going to sit down and work out what is doing.
But I would agree in general principle is not a good thing to voluntarily go and start to pay a meaningful dividend if you were running cash flow negatives.
Amit Mehrotra
Okay. One last…
Robert Bugbee
We don’t know where we're going to be in one quarter or six months. This market is moving very fast.
Remember it was only a few months ago that all of these companies were still running negative operating cash flow numbers.
Amit Mehrotra
Right. One last question…
Robert Bugbee
Where we are now it doesn’t take the company very much go from actually positive earnings and set positive all cash flow.
Amit Mehrotra
Yeah.
Robert Bugbee
Doesn’t take that much of rate increase.
Amit Mehrotra
Yeah. I guess vice versa too, I mean, because you are pretty sure…
Robert Bugbee
Sure. Which…
Amit Mehrotra
… operator will give.
Robert Bugbee
But that’s why you are in a great position, you can afford either -- you can truly afford either position.
Amit Mehrotra
Okay. I am not going to ask the third question, I will let someone else ask.
Thank you very much guys for taking my questions. Have a good day.
Emanuele Lauro
Thanks.
Operator
Our next question comes from Ben Nolan with Stifel.
Ben Nolan
Hi. Yeah.
Thanks, guys. So I have just two quick ones.
First, Hugh, you mentioned that, you have this $70 -- almost $7,600 a day of cash expenses and the G&A expenses have been coming down quite a lot. Is that where you would see a little bit more room to cut or how should we think about when you said that you'd expect your cash cost come down?
Hugh Baker
I think we see room for slow but steady reductions in OpEx and G&A. I don't want -- I want to manage expectations on that.
I don't think that you are going to see very large force, but I think we're obviously working very hard to bring in all of the cost items in the company and it’s a -- we are comfortable that the cash G&A and the cash OpEx are -- probably are going in the right direction. I think that’s as far as I’d like to go.
But, again, I think, we would like quarter-on-quarter to show you good news there. But I don't want to go any further than that.
Ben Nolan
Okay. No.
That’s helpful. And then sort of associated with that, perhaps, but when talking about sort of the normalizing of your loan facilities, are there any movements in your interest margins, as well as a function of sort of getting back to amortization and so forth?
Hugh Baker
No. They aren’t -- we -- all of our decks is priced between LIBOR plus $290 2.5% and 3%.
So this is sort of 8 basis point spread between all of our secured debt and we don't see that reducing, mainly, so we don’t actually see ourselves refinancing it in the near future. I think if we were to acquire new assets or to refinance, I think, we would be looking at margins that would be either at similar levels or slightly below.
Ben Nolan
Okay. All right.
Hugh Baker
And again -- we feel that we have, I mean, terrific flexibility in our financings, because we don't have any of the sort of -- what I call the legacy problems that that lot of drybulk companies incurred including pick interest and cash sweeps. So we -- our financing is essentially very plain you know and what you see is what you get.
Ben Nolan
Right. Okay.
Perfect. Makes a lot of sense.
I appreciate you are taking the time.
Operator
Our next question comes from Magnus Fyhr with Seaport Global.
Magnus Fyhr
Yeah. Good morning.
Just -- most of my questions has been answered.
Emanuele Lauro
Yeah.
Magnus Fyhr
But just on the fleet, I mean, with the restrictions removed now, do you feel like you have the right fleet composition, I mean, you sold out of the Cape sizes and now mainly focused on Kamsar and Ultramaxes, maybe you can elaborate a little bit on why you think you're well-positioned there with those two asset classes or if there is options to go into other asset classes?
Emanuele Lauro
I will take it. Emanuele here.
Hi, Magnus. And then my colleagues can chip in.
But, first of all, I don't think that we have exited the Cape size market because of disbelief in the market, but it was just a necessity and as we discussed in the past, I think, buyers at the time when the company needed to sale were only on the Cape size segment or only interested in the Cape size segment. So we were basically divesting there through lack of other alternatives.
We have sold what we could back in the day to keep the company alive. Having said that, yes, the focus now is on Kamsarmaxes and Ultramaxes.
We are comfortable in the two segments in which we operate. Ironically actually our team was least experiences in the Capes and now, of course, we don't have that problem anymore.
We are looking at the advantages that these segments can provide like on the Ultramaxes the variety of customers the variety of products that you shape, et cetera. But we don't dislike for instance the smaller segments like the Handys or the bigger segments like the Capes.
So it was not a strategic measure back in the day as we made public, we were divesting through necessity not through a strategic move. So that's where we are.
Magnus Fyhr
All right. Thank you.
And just you have been operating the fleet now for over year and I mean, you have a very modern eco fleet. Can you tell us a little bit about the cost savings that you've achieved on fuel savings, if you have little bit more evidence?
Emanuele Lauro
[Ph] There are lend (28:20), I don’t know if Cameron wants to elaborate further. But you know, there are difficulty to, okay, two things.
First of all, we've made public that, yes, the more modern fleet are batter in consumption. How do we quantify that or translate that into dollars especially on dry cargo unlike tankers is a little bit more difficult, because in dry cargo a lot of the voyages are time charter voyages and you basically pass on the cost of the bankers or the saving of the bankers to the end-user, to the charterer.
Now in this rate environment which still is sub-optimal and it has been very, very severe. The owner negotiating position as being weak -- quite weak as opposed to the charters one, right, definitely was a charters market.
So didn’t able to pick shoes and do movement on the voyage basis rather than a time charter basis has not been the easiest. We've been focusing really on making sure that we were getting the best cargo for the sheep in position.
As you remember we've actually fixed quite a lot of vessels for period ranging between four months to six months or five months to seven months. So we elected or decided to give away any potential upside there by way of securing what we thought was the best employment for the fleet at that time.
So I don't know if that answers the question, but it’s difficult for me to give you a dollar number. Whilst it is very easy to say that in -- on average between Ultramaxes and Kamsarmaxes you can see that 4 tonnes a day to 6 tonnes a day on a normal cruising speed for the full speeding day are saved between an eco and a non-eco vessel.
Now with the cost of bankers being what it has been lately with the barrier which has floated with 40 box barrier for a while with savings are not exciting if you translate them in dollar terms.
Magnus Fyhr
All right. Well, thanks for providing that color.
That’s all I had. Thanks.
Emanuele Lauro
Thank you.
Operator
Our next question comes from Noah Parquette with JP Morgan.
Noah Parquette
Great. Thanks.
I just wanted to get your thoughts on the delay of the Ballast Water Regulations 2019. Is that something you guys thought that was probably happening and given your young fleet as it changes thinking around strategy at all?
Thanks.
Robert Bugbee
Perhaps, I can take that Emanuele.
Emanuele Lauro
Go ahead.
Robert Bugbee
I think those among us who are bit cynical probably saw this or the possibility of this delay coming and are not surprised. I don't think on the other hand that we ever argued that there would be some dramatic step function in the composition of fleet towards the makeup of the owner -- ownership of the fleet when these regulations became effective.
It was always in our mind that this was going to be a gradual phase of implementation coinciding by the way with, as Emanuele mentioned earlier, restrictions on capital to traditional ship owners. So let's put it this way there is a glass half empty and glass half full elements to this which is, yes, some scrapping on the margin and some financial stress on the margin has been postponed for those operating older ships or weaker balance sheets.
That's absolutely true. On the other hand, there were other means and the delay of couple years we don't think this going to have a dramatic influence either way on the shape of the market and supplies meant fundamentals.
So we’d take it as it comes out. That being said, further delays we find very implausible at this point.
However, we really are at the end and so we were looking at, like I said, some owners that even with a year or two in hand will have a lot of difficulty meeting these standards system or basis of the cost and time and availability capital that it will require.
Noah Parquette
Okay. That’s great.
Thank you.
Operator
Our next question comes from Amit Mehrotra from Deutsche Bank.
Amit Mehrotra
Thanks. Thanks for taking the follow-up.
I just had one quick one on the overall market, iron ore -- and maybe this question for Cameron or Robert. But iron ore to China, obviously, such a big part of the trade and people are getting a little bit more nervous maybe about the inventory levels at Chinese ports.
But then, just in terms of where you guys play in the Ultra and Kamsarmax segments. Can you just talk to us a little bit about where you're seeing growth right now for your vessel classes?
And then also like minor bulk imports to China are up quite significantly year-to-date, which is maybe encouraging, if you could just maybe elaborate on that, just we get a sense of why you guys are maybe optimistic for at least the markets that you referred us? Thank you.
Hello.
Emanuele Lauro
Hello. Hello.
Cameron Mackey
Yeah. I can take that.
Sorry about that. So, look, I think, we all knowledge there is no getting away from either China as a global consumer or from iron ore as a dominating cargo in the drybulk market period.
What I would say again as the flipside to some nervousness about inventory levels as you have record high steel demand, plus steel production part in China last time I checked and where we get tremendous benefit of this is triangulation or backhaul…
Amit Mehrotra
Yeah.
Cameron Mackey
… opportunities for our vessels, so importing to China and then steel products coming back out. So we see a lot of demand for steel cargos coming out of China.
Similarly, you’ve had very positive green harvests South America, North America, are creating a lot of the network of benefits of these smaller ships that you just don't have on the larger ones that are basically A to B traders. So a lot of agricultural commodities, fertilizers, again steel products something that we are focused on because of the premium that they usually pay and the qualification of the necessary specification of many ships that carry these heavy -- very, very heavy cargos is something that we are benefiting from.
And every time if someone asked -- parenthetically every time someone doubts China's ability to manage extraordinary situations, I think they seem to manage that okay. We don't have blind faith in China.
But like I said the level of control that that government has on that economy has seems to continue to amaze us. So we are, like I say, we are cautiously optimistic there.
Amit Mehrotra
Got it. Okay.
That's helpful. Thanks, Cam.
Appreciated guys.
Operator
Ladies and gentlemen that concludes today's Q&A portion, I’ll now turn the call back over to authors.
Emanuele Lauro
Thank you very much for listing to the call. I think the company has nothing further to add, so I would like to thank you all and we look forward to speaking to you soon.
Thank you.
Operator
Ladies and gentlemen that concludes today's presentation. You may now disconnect and have a wonderful day.