Q3 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
I would not much to turn the call over to Q Baker Chief Financial Officer. Please go ahead Sir.
Thank you operator, thank you all for joining us today.
On the cole with cole.
Cool with me or my money allowed ROE, our chairman and Chief Executive Officer, Robert part B, oppressed and Cameron Mackey, Chief operating officer, and James Doyle Senior financial analyst.
Earlier today, we issued our third quarter earnings press release, which is available on our website.
The information discussed on this call is based on information as of today October 20 to 2019 and May contain forward looking statements 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 issued today as well as Scorpio Bulkers SEC filings, which are available at www, Scorpio Bulkers dot com and www Fccs Dot Gov.
All participants are advised to the audio this conference call is being broadcast live on the Internet and there is also being recorded for playback purposes.
Thank God for the webcast will be made available on the Investor Relations page of our website for approximately 14 days.
As well as the cool there will be Oh, we have issue does not bloated and supplemental presentation.
Which is complementary to this earnings press release.
With that I'd like to parse your one two and memory lauer.
Thank you welcome to old and thanks for being with Us today.
The.
Walter has continued to show good progress made in the company. We've continued our active balance sheet management retiring debt and making opportunistic saying just on its where we saw opportunities.
We believe these to be bad you enhancing to shareholders given the current share price.
Despite the challenging started to the year in dry bulk the weakness in rates experienced in the first off of the year was to be bars in the third quarter.
This was due mainly to increase don't mind, you to Chinese buyers being forced to stores agricultural commodities from Brazil, and Argentina, rather than the United States.
In addition, Brazilian minor dollar.
It does your export program pocket of prolong disruption from the failures.
These long term voyages and a significant number of larger blackout to go back to fitting scrubbers.
Asia constrained the supply side and push rates give me some highlights.
We continue to execute on our significance crop at a retrofit programs ourselves.
I still optimizing their balance sheets and liquidity.
Importantly.
And in our conceded view.
This is also the appropriate moment to shed a significant part of the value creation from our opportunistic investment in Spain.
We have talked carefully about how to do this we hope that many sold shareholders. We see the same upside in saying that we continue to proceed but we felt it was rights to start to returning a significant portion of the value creation to our shareholders.
I am confident that Scorpio bulkers would continue to be relevant to the dry cargo space you do its from market position Malden feeds and best in class operations.
Furthermore, as today's moved demonstrates.
We would continue to look for ways to share these returns without investors going forward.
Both of the freight environment and regulatory changes have tested off at times in the past few years.
Given our position in the markets I look forward will be cautious confidence cognizant that that he's more to call.
With this I'd like to tend to go back to Hugh Baker.
Thank you annually.
I would like to refer you all to the supplemental presentation again, which has been uploaded.
With the earnings press release.
In the third quarter. The company made a net loss of $1.9 million a loss per share of three cents. This includes a gain in dividends totaling $1.6 million or two cents a share primarily related to the sting investment.
A 200000 dollar reversal of write down of assets related to the sale of SBR Kuga NSPI, Cuba, and the write off of deferred financing cost so for half a million dollars relating to the refinancing of existing debt.
Third quarter EBIT D. I.
It was $26.1 million and cash flow from operations was 9.1 million goes.
During the quarter, our ultramax vessels have time charter equivalent running sort of $11824 per day, and our kamsarmax vessels had time charter equivalent.
Of 13100 [laughter] dollars per day.
Earnings in Q4, our improved from these levels with a ultramax vessels, earning $13351 per day for 34% of the days to date and our comps mikes questions about $13715.
Dave for 36% of days to date.
During the quarter, we completed the sale of SBR pure much NSPI kuga for approximately $37.9 million, an aggregate generating $16 million of additional liquidity.
During the quarter. We also closed all of our remaining scrubber financings and they'll scrubber Finance program is now completed and all scrubber program is fully funded.
Details about scrubber program can be found in our earnings press release.
Furthermore, during the quarter, we're pleased to have redeemed all of our 70 73.6 million about standing seven <unk> percent senior notes.
As of October 18th 2019, the company had 89.6 million in cash we have no restricted cash and all that cashes freely available.
The company's board of directors declared a dividend of two cents a shot on October 22nd 2019.
Finally.
In addition, as mentioned by my money. The company is paying a special dividend of 1 million shares it owns and Scorpio tankers, which will be payable on December December 13th to all shareholders of record on November 15th.
After the dividend the company will add approximately 4.4 million shares in Scorpio tankers.
With that I'd like to open the call up two questions.
As a reminder to ask a question you will need to press star one on your telephone.
I wouldn't draw your question. Please press the pound key.
Please stand by what we compiled acuity roster.
And our first question comes from the line of Omar Nokta with Clarkson Plateau Securities. Your line is now open.
Thank you hi, guys. Good morning, good afternoon.
Good afternoon on my welcome back home Oh, Thank you happen to be back and a nice to kick it off the Scorpio That's my first earnings call.
Bull market in shipping [laughter] indeed.
Well you know.
This thing special dividend is what I would say as they are clearly a surprise to put it lightly and coming into the call Elvis planning on asking how you view to position versus three months ago.
Clearly the dividend says something a and obviously we've heard a manual his comments I'd be curious to hear you speak about it a bit more listing shares are up 20% since the Twoq earnings call. When you really you know last discussed as publicly.
Sure.
Well as weak as we've described on the Twoq you conference goes or your posts thought we'd said that we were [noise].
No very confident to the fundamentals of the product market.
And that we are.
We look forward to that playing out as we approach 2020 .
Now since that cool.
You know that confidence in the product market has only increased and not only of the fundamentals improve but they know the present earnings in that product market is a really improved and setting up for a very strong early recovery.
This winter so in many ways you know if we were disappointed a total a moment who would be those things only up 20% in the last three months.
So the way we'd be viewing it going forward is that even if you maintained the same momentum.
Related to they didn't know to the stock price is that.
No reason to think that this things dot com be up 50% by the time you know the Salt reports next so that's why we're maintaining.
The lion's share the great majority of the the stock that we own instinct.
Now the same time is in many mills said, we think it's right thing to do especially one way.
In trading and is that in a v. two share you know to to share in that game that.
With our shareholders and with our shareholders, who placed the trust in that original decision that the the company made and they deserve a you know a reward for that so that's what the dividends that pool.
Alright, Thanks, Robert Yeah, clearly, it's worked out very well since the time of investment you know you mentioned, a and Avi and as we think about it today, yes regarding the fleet as it stands you've sold a couple of Ultramaxes recently he did a few cat a couple of times Kamsarmaxes, a couple months ago as well I'm just kind.
Just thinking about it.
With a discount to the Navy should we be thinking more that we'll be seeing a more vessel sales. How do you think about the fleet today.
I think that you did a weaker we've got all the options that I mean, we've we've so far we started off beginning last year. This time last year and through the winter is the dry cargo market. If you remember.
What wasn't that strong in the first part of this year lots of fear is related to you know world trade et cetera, et cetera, and the market was weak and we sold vessels in order to ensure that we could keep this thing trade on.
Then everyone was terrified that we would have to sell those things shares in order to fund our balance sheet, and we sold vessels and continuing to sell vessels through that period.
To better fund that in the last quarter, we sold vessels to freight that flexibility that you're now seeing.
Played out and paying back the dividend.
We intend to.
Maintain that flexibility.
So you know it's a fairly is not a difficult decision to sell vessels at any V. When you're trading below in Navy in order to maintain liquidity.
You know in another trade the going you know very much your way.
You know, we could we could easily repeat we could be for one or two we could repeat next go to what we've done this quarter.
Yeah.
That makes sense, good well I'll leave it there thanks guys.
Thank you and our next question comes from the line of Emmett Mirror O'connor with Deutsche Bank. Your line is now open.
Hi, Good morning. This is Chris on from it. So the first question is just following up on this thing stock dividends in the release you characterize this as a onetime special dividends. However, you still have more than 80% of this thing position remaining I guess, what's the plan for the remaining 80% is the expectation that this position will be wound down in distributed to shelter.
It's a salt shareholders over the coming quarters.
But the expectation is what we said the expectation as we expect to see significant gains in this thing stock.
And if you look what's happened last quarter that market you know there's lots of different ways of looking at this and we're obviously not going to completely reveal that position the beauty of a special dividend. So one way of looking at the law. This is in the last three months is the first question that said this thing stocks.
Going up about 20% and Weve Dividended out just on the 20% to this thing stuff.
No. We will watch now what happens you know maybe this thing stock goes up 50%, maybe it goes up 10% maybe goes up 20, maybe goes up 30, we have a lot of different.
Positions, we can take on this but I think you've seen.
The the clear evidence that cleared change that we've moved that balance sheet from holding position into now.
Wanting to share.
With the shareholders the.
You know, which we are substantial shareholder the the gain to that position I think the beauty of it is is that.
Most of the Scorpio Bulkers shareholders loves things dock too I think people are absolutely thrilled to the receives things shelf stock as dividend to some of them, it's better than cash.
Okay fair enough. So it sounds like a timing in the magnitude of though the dividend. The feature maybe stock dividends are highly flexible and very dependent on you know the sting share price.
Yeah, what to keep up the keep everybody guessing yeah, Okay fair enough and then next turning over to scrubbers. So the spread the for 2020 is looking to be around $250 per ton based on what we're looking out at least on can you maybe talk about I guess one is this kind of the same spread you guys are seeing and what kind of payback this equates to on them.
Size Bokor fleet and then just what does your willingness and then the and ability to lock in these economics and the derivative markets.
No.
This is cam speaking the first part of your question is it the same spread were seeing molded.
The spread is the spread I think you're talking about the differential between via less AFFO and a 3.5 HFO is that correct.
Yes.
Right. So it really does depend whether one wants to use.
That differential or the differential between HFO and M. Geo, which obviously is somewhat higher than the reason one would use that is a the availability in specification to be us Walesa FFO is still very much in question, but be that as it may it's another 50 to $100. So we would argue that spread is somewhere.
<unk>, depending on what method you want to use between 20 215 $350.
As we've said in the past, we don't think enough attention is being given to the overhang of excess HFO going forward, while the global slate of crude will lighting for the world's refiners.
There are still will be much excess HFO and we think the clearing price.
For that a 3.5% HFO will be lower for longer than the market is currently pricing.
Irrespective to the second part of your question. The returns from you know medium sized bulk carriers for $250 spread your IR, it's somewhere between 30, and 70 or 80% depending on other assumptions you use about consumption per day.
Time at sea versus time at Port speed these sorts of thing.
So that type of IR are I think still justifies on almost any basis.
The marginal capital that is being put in and the off our time being put into fit scrubbers on the vessel.
And then maybe just real quick on is there any willingness or ability to lock in somebody's economics in the <unk> market or is it just that hey, you guys think debate the high sulfur prices going considerably lower so you kind of went away that out.
There is that there's certainly ability there is a active derivatives market that would allow us to to lock it in a as a separate matter. What we are doing is making sure that physical availability is there. So we do have contracts in place to secure our fuel on a floating price basis. So.
So the actual physical availability is not in question that price, we have decided for the time being not to lock in.
All right that does it for me I appreciate the time thank you.
Thank you.
Thank you next question comes from amount of John Chapelle with Evercore. Your line is now open.
Thank you quick follow up on the dividend just off the top of my head and using the shareholder registry. It looks like three Oh, the salt shareholders are pretty significant shareholders of staying as well do you have any numbers as to what the overlap is in the shareholder base as we think about desire willing.
In this to hold the sting shares that Youve, given us a dividend.
So if you if you but insiders.
Yeah discounting insiders in insiders and then the next talk to you already close to 60.
Great All right and then and then there are others. The smaller but you can see on all you need to do is take Bloomberg and just cross reference that they fought there've been some people who overlapped imports thing. So recently that would do the only thing.
Things I don't think would have yet.
Yet be showing up as the derivative business thing too, but I wouldnt guestimate I'm certain that the overlap is at least 55, but I would guess amazed that it's as high as 70.
Perfect currently.
The other theme I wanted to talk about a little bit it was a bit noticeable that the off hire days schedule that you've been pretty transparent with since this scrubber initiative was announced was not provided in this earnings release and we've heard a lot kinda anecdotally about delays and whatnot, where do you stand right now.
With off hire time associated with the scrubber retrofitting number of days per ship and has the schedule changed at all any push back into 2020 from what you'd expect it had been done by the starting next year.
No. Thanks, John so.
Our vessels are taking somewhere between 35, and 45 days a to fit scrubbers, which is somewhere between five and 15 days longer than what we are.
Our targeting the good news is that we feel these delays or or in our case. These delays are going to come down because we're using the same yards and the same manufacturer the scrubbers.
And the same design engineers in the same process to outfit chip have to ship. So I'd just purely on the basis of repetition and familiarity we feel the time to up to fit the scrubber should reduce.
As a completely separate matter delays that are being reported in China can come from a myriad.
Causes.
Many of the delays are are happening on the larger vessels, because that's where you get the most critical constrained of shipbuilding or ship repair capacity. So think about the 20000 T U container ships the volley Max's the vlccs all.
The competing for rather limited space. That's one bottleneck. Another bottleneck is purely the some supply chain of the equipment and the parts coming from the scrubber manufacturers and another.
Bottleneck is the pre retrofitting design and engineering work that has to be done.
So there aren't many different reasons why people are experiencing delays.
We can only speak to our experience and again, because we are we're sort of a targeting smaller repair facilities with all our vessels. We don't see that type of extensive a prolonged delays that some of the larger ships or are seeing.
That makes sense Kim and so the number of ships should we just assumed that the based on the last schedule. We've seen the number of ships per quarter hasn't changed we should just maybe raise the number of days per ship by somewhere between five to 15.
I think that I think that's conservative one other point I'd make is that on on the margin, you'll see a vessel or to slip from one quarter into the next that simply not on the basis of delays, but that's on their trading patterns.
Time in Puerto extra options that we give a charter or so that just is is it delay not because of the outfitting.
But rather prolonged trading of the vessel before they go to dry dock. So that's the basis you might see a you know some of the schedule flip of a few weeks or take one shift from this quarter into the next yeah that makes sense. The one last thing I wanted to ask him is the ability to kind of adapt scrubber.
Contracts and once again anecdotally in the tanker market market takes off people maybe want to just read.
Turning their ship as opposed to meeting there. There's scrubber retrofit date I don't necessarily think that's going to happen in the drybulk market, but if that were to be the case, what's your flexibility on pushing back your your slot.
As it were Jim just to take advantage of maybe an opportunity to trade the ship and make more in the very near term.
The answer is it depends so in our case the entire Scorpio group has booked out.
And lot of slots at very few shipyard shipyards, we've done due diligence with over the last two three years. As a reminder, you know we have a number of these ships that were going in for first special survey anyway.
So your greatest luxury is having a long lead time to develop relationships and secure contracts with the yards, where you are a large quote unquote strategic customer with repeat business [noise].
So in our case, we have a lot of a built in flexibility to move around the schedule. If we want in fact, we're doing it now on.
Some of the tanker vessels because the market has gotten so constructive.
Now with others, if you're a single ship owner with one you know aframax or one VLCC well if you Miss your slot the yard has better things to do so so it's a different decisioned, depending on what type of owner and what type of type of scale your.
Scale benefit your preventing to presenting the shipyard.
Totally makes sense. Thanks, a lot for that Kim Thanks, Robert shortly thank you.
Thank you and our next question comes on line of Randy Givens with Jefferies. Your line is now.
How do you gentlemen has it gone.
Great. Thank you Andy.
Just looking kind of about a general market strength, you know clearly increasing iron ore fixtures from Brazil to China, certainly boosting the capesize market throughout Threeq, you and now even into the fourth quarter that said can you point to any specific commodities or regions that are providing most of the strength for your kamsarmaxes and ultramaxes.
Hey, Ryan it stands.
Some particular interesting developments have been increase and.
Exports from Latin America.
Partially offsetting U.S. exports, but this is an increase in ton miles it has to do and price.
Other interesting development or I guess surprises that China is actually up 8% on coal imports. This year. So that's been strong and then we've been seeing some developments on some of the minor bulk and although.
I said catch the headlines you see increased cement production in Vietnam, that's going to China as China tries to reduce it.
Well, Lucia and we might see periods in which they start to import certain certain commodities, but they don't want to have a negative impact on solution.
And that obviously as you mentioned.
We have seen the positive in a resumption of iron ore exports from Brazil, and we've seen some larger vessels than mid size that goes on and off hire for dry dock and scrub rental.
Okay.
Perfect and then switching gears to share repurchases you know in the last call you mentioned, the CLL Ultramaxes, where I guess quoting opportunistic in one way to close the gap between NAV in the stock price that said you know there were no share repurchases in the third quarter. So what is the strategy for share repurchases going forward.
At the moment with chosen to.
While the actual position has been.
Stable in tens of earnings in the first cost because you can seamlessly to deal with that balance sheet and get it pretty strong for what we're doing at the moment. So you know you also saw that we repaid down based on the last quarter too.
And.
We'll see whether or not this dislocation is persistent now that we we're starting to let's say.
You know returned some of the games.
With the we've created interesting position itself.
So, we'll watch and see whether or not the you know as the say that balance sheet now is pretty flexible to do a lot of different things.
And we'll watch and see what happens related to the.
To the gap between a b and stock price.
Okay, and then 10 second question, how many scrubbers have been installed as of today.
Randy four vessels have had a this scrubbers and installed three kamsarmaxes and want to Ultramax.
Excellent. Thanks, again have a similar number in the right now.
Perfect. Thank you so like.
Thank you and our next question comes from the line of Greg Lewis with B T. G. Your line is now open.
Yes, Thank you and good afternoon and good morning.
Thanks, Greg Thank you.
Thank you I guess I want to go a little bit talk a little bit about the balance sheet. So last couple of years challenging say leaves you guys spent a lot of.
Create liquidity you rely heavily on the sale leaseback market now it looks like the cycles kind event and are kinda cyclical upswing as as we think about that I'm curious your thoughts around taking vessels that have been put on sale leaseback over the last couple of years and shifting those back maybe to cheat some cheaper.
[noise] financing and it just thinking about that as we look out over the next 12 months are there opportunities to do that if you kind of put some color around that that will be super helpful.
Greg I mean, I think the first thing to say is that we obviously manage our balance sheet very actively in one of the things we've done in the third quarter, which I think is very significant is to repay 73 minute $73 million of baby bonds now.
That was a very flexible and finance at the time.
But it was seven and.
It was 7% coupon and there was up by far our most expensive piece of debt.
The the sale leasebacks, we announced earlier this year.
Surprisingly a competitive on price one was priced at LIBOR plus 290. The other is priced at LIBOR plus 340.
So what we're seeing a sale lease backs for the right.
Borrowers are actually much more similar to bank debt than they used to be and they become much more flexible. So we're not [laughter], but we're not looking at sale lease backs in the way that we used to we see them as much much better and more attractive instruments now that's.
Said, you're absolutely correct that the plain vanilla bank that is cheaper and as the company.
Develops through 2020 .
And then 2021, we do expect to try to look at our more expensive debt and I'm more expensive debt. He saw its off last have gone straight debt.
We look at as part of it de leveraging we could easily.
You know it could easily become attractive to to address some of the the sale leasebacks.
[noise], okay perfect. Thank for the time.
Thank you and our next question comes on line of Ben Nolan with Stifel. Your line is now.
Hey, guys, Yeah, I I had a question about sort of how to think about the scrubbers in the context to the pools, obviously, the pulls probably contain well as especially initially ships that.
Both have scrubbers and those that don't.
How do you come up with the math of deciding here, just given sort of an unknown spread and fuel prices.
Here is how much extra a scrubber ship or should be you know contributing to the pool or or or how much of the owner of that scholarship should be able to.
Take out relative to one that wouldn't have.
Have a scrubber.
Thank you for that question, Ben it's based on actuals.
So there so there's that theres an estimate that looks forward and then there is a true up at the end of every.
Say relevant period to reflect actuals.
Okay. So it's not just some sort of a pull point allocation. This is.
Real math I guess right. So interested if it's essentially real math that pool points work much the same way a pull point is basically in a an approximation or system of approximation something like a golfers handicap right and then the actual score determines that.
Relevant payouts to each owner or each participating vessel.
Okay. Yeah now that that's helpful. I appreciate that comp and then and then the other thing. It's just looking at the race day, you've booked in the fourth quarter at least relative to <unk>.
Maybe some of the indexes that we see a little bit lower particularly on the Kamsarmaxes and then at least what I was looking for there is there something around that relative to I don't know positioning or scrubbers are something that you would call out.
No. Thank you Ben it's actually both so there were a couple of vessels that were positioning east to west.
With longer than say expected balancing a leg.
And you know what was pronounced during the quarter was quite a large differential between rates that you could achieve in the western hemisphere and those you could achieve an east so as our vessel start to position to dry dock in Asia.
If there are a little early and they're trading around Asia of course, there are experiencing that discount.
And right.
So that largely explains the a sort of the broad Tc numbers that you see there.
Okay perfect I appreciate it thanks, Ken.
Sure.
[laughter]. Thank you in our last question comes from the line of Liam Burke with B. Riley FBR. Your line is now.
Thank you.
You've discussed based on your Renevia your strategy of managing through your fleet is there any particular bias either on a buyer or add or subtract side on which type of vessel.
You would you had managed through [noise].
I tend to think it's just about a values you know that the S&P markets the sale and purchase market is active.
But I wouldn't call it liquid.
It's a variety of different participants with a variety of different biases and so it's whatever presents the best value at the at the time.
Okay and on the on the commodity front.
If you're looking at potential train.
Truce between China, and U.S., how does that change your outlook for the.
The going forward for the next 12 months or so.
Well, obviously, obviously it's positive.
You'd expect a couple of things one is.
Disruption in supply chains.
And rerouting of vessels generally is good for the supply demand balance right. So as vessels were re routed from the U.S. to South America. For example for agricultural commodities, you see a corresponding expansion of ton miles in freight freight is therefore supportive.
Constructive when you unwind that you're going to see two things a short term increase because everything again as to be rerouted and rearranged.
And then you're going to get even though you. The net result will be somewhat reduce ton miles you're going to get corresponding increase in volumes.
So again I.
Longer term of course, more trade is better and better trade relationships or better in the short term you'd expect to see some disruption positive negative.
Sort of netting off to where we are now which is generally a pretty okay. Okay market.
Okay.
Just in this I mean, the simply that Sam is saying is generally anything they promote will trade is good well try growth is good.
Right.
I mean, effectively I mean, the market it has been pretty stable in pretty good.
I guess my other question one of the you're looking past the current market a trade truce over the long term would be about the positive for you make things even better.
Yeah, but I think as we've seen we're managing the company.
On the on the basis that we're not relying on that in a way we'd be we haven't you know we've created a strategy where.
Scorpio Bulkers, the best performing dry bulk stock over the last 12 months, where we're not dependent upon you know the trade positions while default position until further notice is that there is no traitorous because if we know weekend.
You know create value and.
My cash flow in whatever way during that period.
Then if there is a a trade truce.
As opposed to status quo at the moment, then that'll be great.
Great. Thank you.
Thank you and this concludes today's question and answer session I would now like turn the call back to Hugh Baker, Chief Financial Officer for any further remarks.
Thank you operator, we have no further remarks, thank you for participating in the cool.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.