Q3 2020 Scorpio Bulkers Inc Earnings Call
[music].
Thank you. Thank you operator, thank you all for joining us today.
Welcome to the Scorpio Bulkers for cultural Twentytwenty earnings Conference call.
Cool with me.
My money laundering, chairman and Chief Executive Officer.
But the approach than someone Mackey chief operating officer.
James Doyle senior financial Analyst and David Mirage merger director.
Yesterday after the market closed 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 soon as of today Tuesday October 27.
20 may contain forward looking statements that involve risk and uncertainties and actual results might differ materially from those set forth in such statements.
Discussion of these risks and uncertainties you should review the forward looking statement disclosure.
Absolutely.
So we issued this morning, as well as Scorpio Bulkers ceasing Pari mutuel available at Www, Scorpio Scorpio Bulkers Dot com.
The company has he sees itself.
Call participants are advised that the audio this conference call is being full cost libel means though is also being recorded for playback purposes.
Thank God for the web fonts to be made available on the Investor Relations page of our website for approximately 14 days.
In addition to the cold they will be up but we have produced a supplementary earnings press release presentation.
Which is available on our website.
In the Investor Relations page on <unk>.
She presentations.
If you have any specific financial modeling questions. You can contact me later discuss offline now I'd like to introduce nobody knows.
Thank you very much you good morning, and or afternoon to everybody and thank you for being with us today.
On August Threerd, we announced a radical transformation of our company.
Hey, transition, which moves the company forward to sustain it to sustainably higher less volatility and more predictable returns.
This transition is now accelerating.
In the space of 12 weeks.
Weve commenced thought of dry bulk fleet say and continue to refine the most complex aspects of our Newbuilding order.
I'm pleased with the commitment and the energy of the organization.
The wind turbine installation vessel contract signings is no imminent only days away.
And shortly after that we would be able to give more clarity.
On how fast we will be exiting the dry cargo business.
Whilst we are willing and per person purposeful senators.
We're conscious of the responsibility to preserve the enhanced and enhance shareholder value through this process.
Oh, the more as the largest shareholder of the company our states.
The proceeds and de leveraging in a slowly strengthening dry bulk market set the stage for the transition of the company on the prompt foods.
In terms of the focus on wind energy the justification for our people that has only become stronger even accelerating during these periods of significant economic uncertainty.
The United States has targeted 20, a GE got bought by the end of the decade.
And the impact for these opportunities increasingly understood on both sides of the political divide.
As the only U.S. listed wind turbine installation vessel player.
We feel we are optimistic position to bring forward durable solution for this market and our teams are working hard to make this a reality.
The European Union has announced a 750 billion post Cobiz recovery plan with Green energy at its heart.
The stated objective is for wind power to provide half of the E U electricity supply by 2050.
The United Kingdom has announced intention for every home to be powered by offshore wind.
End of the decade these.
This would mean one Terry bindings told every day between now and 2030.
At the same time.
Abstention, new markets are emerging like Ireland, the Baltics, South America, and many Asian countries.
Major energy companies have announced and in some cases have made.
Their very first move into these markets.
Over the last six months to meet this demand new larger turbines have been announced by the major manufacturing.
We believe there is more to come.
Together with this announcement the industry moves to a mid water focus with more consistent wins and greater scale.
These plays to our strength of increasing maritime complexity.
And high quality modern tonnage.
Our new buildings wind turbine installation by says will enable the world to install large modern game changing turbines quicker safer and more efficiently than ever before.
We expect around 17 hours per installation.
With this in mind, we have been finalizing the details of our Newbuilding order.
We expect to announce more information immensely as previously mentioned together with our partners at Diebold in Korea.
We have received warm engagement even at this early stage from our perspective customers, we have confidence that for you in our ability to deliver these best in class vessel on time on budget into a market facing a significant shortage of specialist on edge beginning.
Twentytwenty four.
Finally, I would like to odd the tower shareholder engagement, all impact renewable and U.S.G. funds is just beginning.
Many of you on this call will be new to us as you can see that our company. Please bear these simple truth in mind for the benefit of our generation and the future generations. The world needs Green energy in particular offshore wind energy.
This is no longer controversial indeed, it represents the only way that most national Green policy commitments, many of which are legally binding already can be met.
With this I have ended my initial remarks, and operator, I would like to turn the call to questions. Please.
Thank you to ask a question. Please press Star then the number one on your telephone keypad well pause for just a moment how its many roster.
Your first question comes from Omar Nokta with Clarkson Capital Securities. Your line is open.
Hi, Thank you.
Hey, guys I clearly it looks like you're well on into transition mode, and we spoke about it in August and for the past couple of months, we've been seeing you start to really execute on the on the shift.
And the firming of the contract sounds imminent from what you're saying and then you Ali.
You know that the clearly.
Clearly the offshore wind industry has a strong outlook, especially with a lot of the wind farm projects, we're seeing discussed in Europe here in the U.S. and also in the far east.
Yeah, right now you're preparing to move into the wind turbines installation side of things are there any other parts of the value chain a change you see yourselves getting involved with.
That's a very good question Omar I think that.
We focused on.
The wind turbine installation.
In order to cater for the new turbines that manufacturers are coming up with in the next few years.
However, as we know fortunately or unfortunately, the lead time to build these vessels is a two and a half years and we take these periods of time.
As an opportunity to actually look at each other which other segments of the industry, we could or would get involved with.
There are a variety of assets that are operational on the water, which are perfectly fine assets to provide services to the industry, such as foundation maintenance or others, but they would not those same assets would not be in a position to actually cater for the installation.
The turbines of the future. So with this in mind, we decided to focused on installation and build those assets, which are going to be required by the market. Starting 2020 four maybe end to 2023 and in the meantime, beside allows us to actually look around that which opportunities are we didn't come.
And that's for existing assets in order to differentiate into different segments.
Very good thanks, thanks him anyway.
No.
You guys have gotten some some of this and we've gotten some push back as analysts I'm sure you have as well.
That scorpios embarking on a new industry in which you don't really have much prior experience or activity and you know.
How do you and then the question is are obviously about you know how do you properly manage the operations and how do you respond to that.
I think there are there are different ways to respond I will give it a shot Omar and then maybe my colleagues can can odds to them as well.
We we've discussed in the past we are very realistic we are very well aware that this is a different indices were not talking shipping we've done work for a number of years.
Order to consider these investments prior to actually executing on it.
We are extremely comfortable that the.
We can put together the right team in order to be able to become a first in class in this industry as a matter of fact, we've already be stop our team.
With five individuals which are coming.
Coming from the wind industry.
Some of which have joined already some of which are on the gardening leave prior to joining us.
Clos get out all the opportunities that we were discussing before in your previous question Omar as you know.
We we look at entering this industry and there are a number of players which are either looking for a partner or look eventually to shift away or Josh and this could be the.
Opportunity for us to actually step into somebody else's shoes now we wouldn't do this unless we thought that that was the right opportunity for us in the meantime, we're building organically Walt.
Walt we think we'd become a first in class operation and I take this opportunity as well Omar to mention something the Scorpio group.
His head has been involved in shipping.
For many years in many different asset classes as a ship manager as an owner, an investor and and others.
Since.
The Scorpio group did not have.
In bill its capabilities on these industry on the wind.
Yeah, sorry about installation vessel industry.
What weve decided he used to be that integrated company. So you will see that actually Scorpio bulkers will be.
Be an integrated company with its own management that will manage and cater for the wind installation vessel industry says, but rather than going as we were prior weve a management company outside or outsourcing the managed.
Meant to third parties.
You know I think it's quite intuitive when for example, Scorpio Bulkers. It started its activities. The Scorpio group was managing around 200 vessels today. This quarter peer group is managing around 300 beds. So, but he doesn't have inbuilt wind turbine installation capabilities our knowledge.
And that is specific to the industry. So we started building these as an integrated company.
Thanks, Thanks, and anybody that's helpful color that you've got the organization in place and you know coming with a first class assets are obviously helps attract the right people and build the right operation.
Yeah. Thanks, Thanks, I'll leave it there are many call it that's very helpful.
Sure. Thanks.
Your next question comes from Greg Lewis with <unk>. Your line is open.
Yes, Thank you and good afternoon, everybody and good morning.
Just following up on.
On a more.
As you think about that as you think about.
Building.
[laughter] age.
The company no wonder when or what.
Think about the customer base the company's trying to target you know clearly there are a lot of establish when companies and there's also some more companies that are.
No we're still.
Based on as we think about any kind of color you can give around customers. It is are you largely focused on the existing major when players are you also thinking about working with new entrants into the space Yeah.
So early days, but but I guess as we move forward with the first vessel.
This year, just kind of curious as you start thinking about lining up potential customers for that.
And I might say that it's likely that.
Please.
Hi, Thanks for the question, Greg I mean, we we obviously focused very clearly on the pipeline.
For the vessel delivery in Q1 Twentytwenty pool.
I think one of the great things about this industry demand when he referenced in his opening comments you said you can see a pipeline that's significant investment.
[laughter] coming in from Twentytwenty pool, and it really starts to build from that right the way through to the end of the decade.
The visibility that we have around these projects and the lead time on commitments either intend to financial and governmental.
Israeli unparalleled and that enables us to plan a nationally.
I'm sure that all back into the right.
But its particular fields that are being developed and well positioned in the right geography.
And by the way.
He stage to partner with all prospective clients <unk> in many of the details of the design.
And that partnership is extremely important because what we want to ensure that we've got vessels, which are a valuable.
Oh and highly efficient.
So what do you say you step the entire industry internship fysixteen turbines and the commensurate economic returns for these offshore wind Oh when phones can kinda. So as a result, we have an opportunity without blank sheet of paper to really design. These cycles before capability and ensure that they have a long life.
And are able to deliver best in class service in time, ensuring that our shareholders can see much more predictable higher.
After quality returns or type of multiple yet so.
Yes, you should talk to your question Weve been very Oh, we are pleased with the Guy you can see.
Estimates and the level of detail that they find that they people out in the end.
Helping to.
That's still top buttons on it.
Okay, Great and then just one more for me clearly.
Currently we have but yes, the first vessel.
Yes.
She is for.
Yeah.
<unk>.
Right in the space that just have one vessel you know I I guess you know realized.
Oh moving target like what do we think we need what is kind of like the minimum number of ships.
On that one.
Ladies.
But you think he actually need to be relevant.
So.
Minimum number or is it could it could we just see this company with one vessel.
As it looks to participate in the sector.
Rob do you want to say it sure Yeah, I think the first thing that.
I would say is and we're going to see this increasingly over this next couple of weeks are really really important for us and I think we're going to outline that.
Really really committed to becoming a market leader in this space.
You know and many deals indicated already in his opening position that we're accelerating the second of the Drybulk.
We're going to change the way that we <unk>.
The the Scorpio Bulkers do itself operation that you are not going to have this outsourcing to related party transactions is all going to be brought in house, it's going too much but match the prospective shareholders and the new environment.
We're seeing related to U.S.G. et cetera that that this company is going to be a full front of.
And I think that that is you know because this is this is US building a business. This is not just doing a trade here.
Company is you know.
Yes, the inside the group.
As the largest shareholder has been that you know willing to forgo.
No, it's let's say management.
Positions related to this and be literally the largest investor and that's it and that's because we believe that the opportunity and this is tremendous.
I think when it comes to.
You know what is the optimum size is is a difficult one but I think that you know you've got to really think through this says.
You know for the.
Six to eight as we move through into.
2004 to.
2005, if for no other reason than one of the benefits of this is going to be a change in the quality of.
All that this company has in the sense that the quality of it will be better.
One reason and one thing to improve that even more is that if you have more units you will cover perhaps an operational risk. So if you're only having two units and one vessel for whatever reason.
[noise] goes off hire rule, there's a you know it's still an industrial marine industrial position walking by definition and in the open c.
You know you start to even improve your quality further to the extent that you have more units.
To cover any accidents and the ability also to get deeper into the customer.
Okay, great. Thank you very much.
Your next question comes from Randy given from Jefferies. Your line is open.
Oh, the gentleman who has gone.
Hi, Randy.
Hey, So you know I would tell me last earning call. You mentioned that you were committed to Drybulk has your kind of eldest child, maybe what changed in the last month that you're now guiding to sell all of the Drybulk vessels in the next quarter or two and then with that with the first W.T. I'd now.
I couldn't make between 23, we're not kind of slowly so your drybulk vessels over that three year time frame.
I could answer that let me answer the last question and.
A number of benefits we think.
Doing this the first benefit is we can concentrate.
We can we can completely focus.
You know, it's not quite as extreme as Cortez funding is boats. When he arrived in America, but it's somewhere along that same theme that you get the benefit of absolute focus that all future.
Renewable shareholders, Oh really understanding commitment this company is making to that space to the future. They don't have to start to worry about whether or not the what the dry cargo market is doing they don't need that extra worried that I need to have that extra depth research.
The second aspect it shows the customer that Youre committed I mean, we're literally going to be sitting in front of these customers having in a short time now having awarded the first vessel without them, having to question, whether or not we're really making a business and whether we're going to become a long term partner to them because without that.
They could quite happily question are you really committed to what we want to do.
The next is the lending side, if we if we clear the drybulk position and we have all cash.
From that and we're looking into this the financing side is improving every day in this offshore wind different you see a project's different government sponsored green funds et cetera.
We all know again that it's much easier to model for finance and you're always in a better position to get finance to the degree that you've got.
Clean balance sheet.
Cash and you know unknown non core business with a cool business, then we'll become offshore wind.
Non core business risk the another very important element is the shipyard ship yards themselves whether it's.
The shipyard with now or perhaps if we you know if we move to where natural advantage for us which is going to be the developing American market, which could well really kick off very hard and fast depending on what happens in the U.S. election in a few days time.
You know, we're able to show those yards that we are committed partner and.
And then the last part is is operational.
It's very very difficult to manage responsibly to maintain the quality and under environmental and safety risk if.
If you are running down your operation over a long time and an indeterminate time, it's a tough one internal morale. It's tough on operations you have people who are wondering what they're going to do you obviously reduced show commitment. So there are just so many advantages.
In terms of you know ripping the bandage off as opposed to just pulling it off generally.
Okay.
That's what I thought process and said more than once incruse has been much more from kind of larger blocks IL 456.
Cancers Nelson.
Many or what are you willing to stay on that one.
Oh, there is a variety of interest that the you know the feud the few initial sales are generated.
With the.
Other industry participants so we have received all sorts of.
Interest I would say so yes, you know we have we have looked at or are looking more considering you know block sales as well as individual sales. He told depends on on what suits really but Randy yes. There is interest on on block.
Next as well as individual vessels.
Got it Okay and then one quick question last question on the Devry plug eat how much cash do you expect to need for that let's just assume that the price is going to be doing things like marine and what kind of payments are you looking at here for the next 12 months or so.
We disclose that ER, there are no meaningful payments to be made into 2022.
So you know I would leave it at that for the purpose of disclosing unless a camera and auto Robert one too odd.
Two days.
No other than just to just to show that more detail around the whole of this you know whether it's the you know despite whether it is the disposal jewel Randy all.
Related to you know payment schedules or anything else, we may be able to reveal will will be.
You'd probably be forthcoming oft, we've actually signed the contract which many of them I know said earlier it was a matter of days away imminently.
Got it.
Stay tuned good luck. Thank you.
Okay. Thank you.
Your next question comes from Ben Nolan with Stifel. Your line is open.
Hi, good morning or afternoon.
So I have a couple of questions. The first is related to something that Robert you you I I think were alluding to.
About being involved in the Americas, which for.
From my understanding requires Jones Act.
Compliant equipment.
Could you maybe talk through that a little bit and in terms of your eligibility or or Scorpio bulkers eligibility to participate and the Jones Act and the capacity of U.S. shipyards actually build vessels of this size.
Cameron we got to this.
[noise] [noise].
Thanks for the question, we're not in a position to go into great detail, except to say that number one there are unique set of requirements customer requirements legal requirement.
Around operating in the American market. The Jones Act is only one of them.
And it's our belief that.
You know successful players will be offering unique value added products and services to the customers over here.
It's not so simple to say that the European Cup.
Competitors of the Asian competitors will simply Walton and do great business, it's going to require a lot of.
Collaboration.
In.
Innovation.
And frankly moxy to succeed in the U.S. market.
And so we are evaluating quite carefully UBS.
Jones Act compliant solution.
For the U.S. customers and developers.
We.
Won't go into detail about Jones Act compliant except to say that we're fully confident that we will comply.
And we are already in initial discussions with some customers over here about providing them. What we think is is that.
A compelling solution for their needs here.
Okay.
And and you don't foresee there being any issues or.
Building this type of equipment and U.S.I. I assume there.
At least several spots yep no that yeah no. Thank you sorry, there are several yards. They can do it everything its difficult everything has its own challenges. It's the way you approach to navigate those challenges, which sets you apart which is why we.
Were attracted to the sector in the first place.
So we have.
Some relationships with U.S. shipbuilders or were not afraid of those challenges. We believe we have the competence in the present here and.
And again, the the ability to navigate those challenges. So so more to follow I guess is the way to answer that but I know there are a number of yards that Ken.
Construct suitable vessels for the U.S. market.
Right. That's helpful. Thanks, Kim and then promote from us sort of sticking with a similar topic about the the.
Development of this equipment, it's still obviously relatively in the early stages and one of the things that we've seen historically within shipping is anytime there's a new ship and there's a little bit of a learning curve specifically around the cost and so you know over the course of about a decade or so the cost.
And you see this in LNG applications or other things tends to come down pretty dramatically.
The detriment of early adopters.
How big of a risk do you think that might be here or do you think that already what you're seeing and being offered by the shipyards.
It is pretty.
Efficient.
Maybe I could take a stab at that are you know they just say to.
Two simple components the cost curve one is cyclical.
The the builders of these vessels.
Still overlapped with conventional shipping and offshore assets.
And we are at a very low point in the cycle as far as pricing pressure.
And their margins are concerned to our benefit so from a cyclical perspective, we feel very confident that.
We've gotten a very good.
Deal with the shipyards for our vessel.
Then there is lets call it the more technology sensitive part.
Because at the end of the day. This vessel has a lot of components specialized components.
That aren't so cyclical the jacking system the crane some of the dynamic positioning and navigational equipment for example.
And yes, there is some.
Some prospect that those could decline over the very long term, but we think that over say five to 10 to 15 year period, its not one to two to three.
Again to the extent that there's demand for these orders in the future those two forces the cyclical in the call. It the more secular forces will combine.
And play out, but we're not worried at this point that we're gonna be facing.
A discounted vessel value in 1235 years.
We just don't see it that way based on what the suppliers in the yards are telling us.
Oh, so bad it's not you know, it's not a <unk> <unk> <unk>.
The actual ability actually sizing these vessels that we're building maybe mute.
Generation of turbines babies, but the actual industry itself.
Huh.
15 years old or so.
Right the technological shift happens on the turbines is not happening on the installation by so I think that the installation vessels fiftys on size to be able to accommodate the technological development in the size of the and weight of the turbines.
Right right, Okay, and then last for me and I'll turn it over to Robert you'd mentioned financing Im curious how this differs when when you think about loan to value.
Eat you know anything even the even the lending group I mean, how how how much should we think about it is the appropriate level of financing you know and given the nature that you don't really have contracts and it's a bit more of an opaque market [noise].
So forth. So I think at the moment, it's I think we'd like to hold what you would do exactly think about financing because.
You know the actual financing side in terms of Brazil.
Physician.
It's been really improving quite a lot and [noise].
There's a reason to think that the actual contract quality as we move forward me I may improve well as well I mean, I think David if you'd just like that.
Detailed the speed and the growth of whatever you want to call. It direct financing. This for alternate why it is lets say different from traditional [noise].
Traditional regal traditional should be fine in the future.
Yeah, it's a good point, but I think if you look at the way that that onto your question, though on the on the lending side a lot of these glenda we've been pretty clear into new offshore oil.
[laughter] are applying it technically cashcall triage Nobel you're not looking at Dawn contracts you are looking and you can see that from the guidance. We gave on the last quarter Lucas.
Yeah.
Very decent level of EBIT dollar and very high levels of cash conversion.
And I think on that basis, there's really two things that come out of that one is this asset will deliver a probably could return I probably can tell.
Got you know levels of leverage I could return to equity.
The second thing is that the people using a cash flow break even on the relatively short contract horizon, we still provide leverage without necessarily.
Necessary as sort of a and a b lag upright your LTV upright.
You you back in time, and then I think that that did not add to that is that we are selling the foot Herald square feet leased the green finance.
I think I can be very high pool unexpected, but this is an asset which is.
It was referenced will significantly accelerate.
Ah the transition and as such.
Well qualified for for a lot of that new style nothing like that.
I couldn't you coming into the European Union.
Again, we don't feel that there's a shortage of finance, we appreciate respect, but it's it's gosh, it's especially with that.
Now, we'd we'd be the predictability because like all the cash generation Viasat and the return profile, we think that actually can derive from it [laughter], we say, we're pretty comfortable about the evolution of the capital structure.
All right. Thanks, David.
[noise] [noise]. Your last question comes from Liam Burke with <unk>. Your line is open.
Thank you Robert.
Robert.
Does it concern you that now that you've been now see acceleration of the sale of the bulk or assets that you won't realize the full underlying value of those vessels.
No I mean, the whether or not we I mean, the last people to know it was probably you guys.
I mean, the actual sale and purchase markets themselves or you know.
I knew it alluded a very active I mean, we haven't hadn't had to point to bank a we haven't had to avoid any ship Christa.
Markets just fleet to a mock individual vessels, we've seen all of what we've done so far is.
It's been responding to inbound inquiry in one way or another that itself is a is.
Is it pretty healthy sign related to that I think it's also worth noting that.
The vast majority assets and dry cargo is a huge market I mean, it's a very big market itself.
Oh I see private owners. So it's a it's a very liquid market anyway.
Second thing is that you know they're not so many.
Opportunities out there for people to acquire a you know we'll maintain good quality modern vessels anyway.
So.
<unk>.
It doesn't.
The Mark set in purchase market itself well.
Oh.
We will act exactly the same after this conference call as it did before.
Great. Thank you and on the installation on the wind installation front, there's no matter what seems to be no concern about overcapacity at least beyond the 2023 timeframe.
It's an older industry as I mentioned earlier is it the technological barriers is it the time to deliver the next generation is it talent shortage or what's going to sustain these barriers.
David.
Thank you, but I would add I think that it's actually the challenger that's developing the newco projects and delivering the vessel on time and on budget. It's can be something that that's an as an organization scoop you had significant expertise and.
And that is at least initially a one of the major areas I would say that's just that's common set out here in the cool. The provision. This is that that's a good service business and we're working very hard with existing but didn't meet new entrance into this market and many of whom have announced the participation and their interest and the team.
Good.
Which we think is a very important step and by the way a lot of nice little companies.
Energy companies as they now all our major Counterparties of organization I think as you look into the future and we'll be knowledge Perry is everybody. Our intent the commissioning of new vessels and there will be satisfied areas, but most the pool. If you look at the organization and on what we have at Scoop, yet you know building best in class vessels operating them.
Extremely high standards in Pennsylvania, 30 kids and contraction and we feel that this is an industry on its like Paul and I quite possible that well strength.
Right like free with it to the end of the decade at least in terms of the focus bird.
Great.
Thank you David and thank you Robert.
Q.
I'd now like to the call back over to he Baker for closing remarks.
Thank you everyone.
Your questions I think that some of that ends the call. So thank you very much for listening and we look forward to speaking to you all soon.
This concludes today's conference call you may now disconnect.
[music].