Q4 2024 Scorpio Tankers Inc Earnings Call
Speaker Change: Good day and welcome to the Scorpio tankers fourth quarter 2024 conference call.
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Speaker Change: Please note this event is being recorded.
Speaker Change: I would now like to turn the conference over to James Doyle head of corporate development and I are please go ahead.
Speaker Change: Thank you for joining us today welcome to the Scorpio tankers fourth quarter 2024 earnings conference call on the call with me today are and then you already L'oreal Chief Executive Officer, Robert Bugbee, President Cameron Mackey, Chief operating Officer, Chris Adela Chi.
Financial Officer, Lars tanker Nielsen Chief commercial officer.
Speaker Change: Earlier today, we issued our fourth quarter earnings press release, which is available on our website Scorpio tankers dot com.
Speaker Change: The information discussed on this call is based on information as of today February 13th 2025, and May contain forward looking statements that involve risk and uncertainty.
Speaker Change: Actual results may material.
Speaker Change: 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 as well as Scorpio tankers, SEC filings, which are available at Scorpio tankers, dotcom and FCC Dot Gov. All participants are advised that the audio of this conference call is being broadcast.
Speaker Change: That's been live on the Internet and is also being recorded for playback purposes and archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days, we will be giving a short presentation. Today. The presentation is available at Scorpio tankers dot com on the Investor Relations page under reports and presentations.
Speaker Change: The slides will also be available on the webcast. After the presentation you will go to Q&A because those asking questions. Please limit the number of questions too. If you have an additional question. Please rejoin the queue now I'd like to introduce our Chief Executive Officer, and Meanwhile, anywhere else.
Speaker Change: Thank you James good morning, or good afternoon, everyone and thank you for being with us today.
Speaker Change: We are pleased to report a strong quarter and a 12 year old financial results.
Speaker Change: The fourth quarter, the company generated $105 million and adjusted EBITDA.
Speaker Change: And Doug you made you have a job.
Speaker Change: Net income.
Speaker Change: For the full year of 2024, we've generated $842 million and adjusted EBITDA.
Speaker Change: 513 in adjusted net income.
Speaker Change: Going to 24 was another transformational year for Scorpio tankers.
Speaker Change: Operationally and strategically we have significantly.
Speaker Change: Strengthen our balance sheet by reducing indebtedness by $740 million.
Speaker Change: Finding our revolving debt capacity and lowering our daily cash breakeven to.
Speaker Change: $12500 per day.
Speaker Change: Our liquidity now stands at $1 $3 billion, comprising all $531 million in cash and 788 million in undrawn revolving capacity for clarity this excludes our investment in DHT.
Speaker Change: Operationally, we completed the special Saturdays and dry docking all 54 vessels during 2024.
Speaker Change: More than half of our fleet.
Speaker Change: Following the dry docks are these vessels will operate more efficiently and no longer needs requisitioning voyages solely for their dry docks, which adversely impacted our earnings.
Speaker Change: In addition, we sold 12 vessels at attractive prices, many of which were older vessels and thereby improving the age profile of the fleet.
Speaker Change: We balance our constructive market outlook with the understanding that cyclical downturns in our D. C. Austin III Goodbye unexpected black Swan events, COVID-19, being a prime example of it.
Speaker Change: As a result, we want to maintain financial flexibility and position the company to thrive under any environment that said with a strong balance sheet. We can also opportunistically.
Speaker Change: During the year, we returned $419 million to shuttle days, but.
Speaker Change: 336 million of share repurchases and 84 million in dividends.
Speaker Change: Recently, we increased our stake in the crude tanker company DHT capitalizing on its share price lag relative to improving market fundamentals as rates. We continue to view this as an attractive investment opportunity.
Speaker Change: Our outlook for both crude oil and refined products remains positive.
Speaker Change: With low leverage strong liquidity and a young fleet. We believe we are exceptionally well positioned.
Speaker Change: With this my remarks are concluded and I would like to turn the call to Robert Bugbee.
Robert Bugbee: Thanks, Emmanuel good morning, everybody or good afternoon, I think this morning, what we're going to do is try and Hum.
Robert Bugbee: And separate what we know about what we believe I believe that we have.
Robert Bugbee: Hum.
Robert Bugbee: Conviction about foam.
Robert Bugbee: Say the things that we really don't know what else.
Robert Bugbee: It is more evil hypothetical.
Robert Bugbee: What we know about our company is that on the Q1 guidance. We can see that we are operating cash positive and profitable.
Robert Bugbee: The operating cash remember he's worked out just given two offers shareholders. The operating cash for US is the most important.
Robert Bugbee: Matrix as opposed to yes, we have very strong current liquidity, we have even stronger.
Robert Bugbee: Accordingly.
Robert Bugbee: Finance for years to come and have no new building capex requirements.
Speaker Change: The complete as Emmanuel said, we are completing an extensive period of dry dockings. This quarter, which will result in long ago I got called small on hot days more efficient vessel over the next few years.
Speaker Change: So I think of that in comparison to the last 15 months to go.
Speaker Change: Going forward, we have very low cash breakeven operating cash breakeven everything we will work even to take those lower this is what we have really no I'm sure about about the company.
Speaker Change: So know that we have created optionality to make the best of the opportunities ahead.
Speaker Change: We are very constructive on the product market itself. However.
Speaker Change: We are also cognizant of our inability to either control or they don't even understand right now geopolitical events or various announcements changes in.
Speaker Change: Emotion etcetera or.
Speaker Change: Different tweaks or policy.
Speaker Change: It is not that we do not know not just if you do not know the opposite it is in many cases, but I do not think right now we even know the questions.
Speaker Change: So we see no urgency no necessity to have no to give clarity on capital allocation.
Speaker Change: Other than to say our present thinking is as follows we will not change our dividend policy, we will not pay out an extraordinary dividend, we are not thinking of ordering or acquiring ships, we are ready to.
Speaker Change: By our own shares if we think we should we are willing to invest a small amount of capital and adjacent market company.
Speaker Change: This is not an either or choice, we can see from our balance sheet.
Speaker Change: But.
Speaker Change: You know we could've look we wanted to go to own shares in addition to acquiring them.
Speaker Change: Hum.
Speaker Change: T H T.
Speaker Change: They are different however, the four months.
Speaker Change: Positioning with D. H T remains on the balance sheet osmose. It it can offset and so for US. It's okay to go ahead and do this because it.
Speaker Change: This is an asset we had prioritized very clearly, creating an extremely strong balance sheet with great liquidity.
Speaker Change: And the ability to take advantage of any opportunities. We will continue to monitor the changing policy event and focus on the safe operation.
Speaker Change: Although all vessels.
Speaker Change: Simply cannot trade change in short term sentiment and emotion, but we do expect to be a beneficiary.
Speaker Change: That's the risk premiums in the future come down.
Speaker Change: Thank you very much and I'll pass it back to James in Pitt.
Speaker Change: Thank you Robert if we could please go to slide seven.
As Emmanuel and Robert highlighted the market outlook is constructive.
Today's rates product tankers are generating strong free cash flow.
Speaker Change: <unk> shifts in political leadership, coupled with tariffs sanctions and other geopolitical developments have increased uncertainty not only in our markets, but across global markets.
Speaker Change: This has created a volatile start to the year, but the underlying market fundamentals remain positive.
Speaker Change: Demand for refined products remains strong.
Speaker Change: Global inventories are below their five year average refinery closures are accelerating and our fleet continues to age all of this contributing to a constructive outlook for the product tanker market.
Speaker Change: Eight please.
Speaker Change: Demand continues to grow.
Speaker Change: This year, we expect demand for refined products to increase by close to 1 million barrels per day. We are seeing this demand strength in seaborne exports, which averaged over 20 million barrels per day in January near record levels.
Speaker Change: Furthermore, it's not just the volume of exports that is growing but the distance. These barrels are traveling has also increased.
Speaker Change: Slide nine place.
Speaker Change: Compared to 2019 levels last year ton mile demand increased 15%, excluding Russia, 18%, when including Russia. Much of this due to changes in refining capacity, which had been reshaping global trade flows over the last decade.
Speaker Change: This year 2 million barrels of refining capacity is expected to close and many of these older refineries require significant capital investment to remain operational.
Speaker Change: And this makes it harder for them to compete with newer refineries in regions like the middle East and Asia that have lower operating costs. As a result, we expect more refining capacity to close which will add incremental ton miles as lost production is replaced with imports by.
Speaker Change: Slide 10 please.
Speaker Change: On January 15th Israel, and Hamas agreed to a six week temporary ceasefire in response to Who's These announced a pause in attacks on non Israeli vessels transiting the Red Sea.
Speaker Change: This situation remains fragile and it's unclear how the temporary ceasefire will evolve and how the whose diesel and respond as of now product tankers continue to bypass the Suez Canal and transit around the K Cup good hope.
Speaker Change: Slide 11 please.
Speaker Change: Last week, the U S announced 10% tariffs on Canadian and 25% tariffs on Mexican energy imports, which were then postpone for 30 days, although the U S. As the world's largest producer of crude oil most of its output is light sweet crude while the domestic refineries are optimized for heavier crude plants.
Speaker Change: The U S. Currently imports 4 million barrels per day of heavy crude from Canada, and 500000 barrels per day from Mexico.
Speaker Change: Of this 1 million barrels per day arise the issue and the other $3 5 million via pipeline.
Speaker Change: Seaborne crude imports could be replaced from further away, but it would be difficult to replace Canadian pipeline imports into pad two.
Speaker Change: From a product standpoint, increasing the crude cost for pad two refiners could reduce refinery runs and require additional seaborne product imports to the northeast U S. The.
Speaker Change: The U S. Also imports 260000 barrels of refined products from Canada each day.
Speaker Change: Disrupted imports would likely need to be replaced and come from Europe.
Speaker Change: In addition, the U S exports 570000 barrels of refined products to Mexico, each day, which if diverted elsewhere would increase ton miles Mexico in turn would also then need to replace from more distant suppliers.
Speaker Change: While the final status of these tariffs remains uncertain, they could significantly reshaped crude and product flows by elevated by increasing shipping distances and shifting trade patterns.
Speaker Change: Slide 12 please.
Speaker Change: In early January <unk> announced sanctions on an additional 157 tankers, which will predominantly carrying Russian crude and some refined product in 2020 for China, and India imported 3 million barrels a day of crude oil from Russia, 60% of Russian crude exports and last week Trump.
Speaker Change: And now its sanctions targeting individuals companies in tankers involved in shipping Iranian oil to China.
Speaker Change: These actions are consistent with Trump strategy to put pressure on Iran, and reduce its oil exports.
Speaker Change: Trump's last term Iranian crude exports fell to three interest thousand barrels per day were rising to one 7 million barrels per day under pilot.
Speaker Change: Today, the total fax sanction tanker fleet is almost 11% of the crude tanker fleet and 5% of the product tanker fleet.
Speaker Change: Any reduction in sanction vessels transporting crude and refined products is constructive for non sanctioned vessels and can also accelerate the scrapping of older tonnage.
Speaker Change: Slide 13.
Speaker Change: Since the Eu's February 2023 price cap on Russian refined products European imports have declined from $1 1 million barrels a day to 400000 barrels per day. Nevertheless, Russian exports have remained steady with Africa, Latin America, and the middle East absorbing more barrels.
Speaker Change: 489 product tankers have carried Russian products since 2020 for many of which are older vessels and predominantly loading Russian product. If there is a peace agreement, it's unclear whether Europe with increased Russian product imports.
Speaker Change: If they do many of the vessels, which had been predominantly serving Russia will have a difficult time, serving western markets given their age trading history maintenance and insurance on the patients. The one 4 million barrels of Russian product exports per day could benefit non sanctioned vessels, which had not been trading in Russia.
Speaker Change: By 14 and relevant to this the total addressable market diminishes as vessels age the trading pattern of EMR vessels built in 2004, clearly demonstrate this decline at 12 years old. These vessels carry $3 2 million barrels of refined product per year by the time, they reach 20 years old they carried one.
Speaker Change: Nine barrels per year, a decline of 40% and one could argue that without the Russian volumes. This number would probably be closer to $1 2 million barrels of declined 60% compared to 12 years old.
Speaker Change: By 2027 more than a thousand chips will be older than 20 years.
Speaker Change: Thus, even without scrapping effective fleet growth could be lower than anticipated as older vessels transport west refined product.
Speaker Change: 15.
Speaker Change: While the order book now accounts for 20% of the fleet as the order book is all Archie vessels today, 45% of the LR twos operate in the crude oil market and we expect this to continue given the larger crude oil trade by.
Speaker Change: By 2027, including all of the Newbuild, 25% of the fleet will be older than 20 years.
Speaker Change: Many are underestimating the impacts of an ageing fleet and overestimating the capacity of the current order book.
Speaker Change: Slide 16 please.
Speaker Change: Last year ton mile demand increased 8% and over the last 30 years has increased at a compound annual growth rate of over 3%.
Speaker Change: If all new build out of our two vessels were to operate in the clean market fleet growth with average around 4% annually over the next three years, however, effective fleet growth could be closer to 2.8% per year when factoring in LR twos servicing the crude oil trade and mild scrapping as a proxy for reductions in older ton.
Speaker Change: H.
Speaker Change: Several catalysts such as tariffs sanctions in broader geopolitical developments could further tightened supply and increased ton miles. Nevertheless, even without these factors the supply demand balance is favorable and supportive of our constructive market outlook and with that I'll turn it over to Chris.
Chris: Thank you James good morning, or good afternoon, everyone.
Speaker Change: Slide 18 please.
Speaker Change: This past year, we have generated $842 million and adjusted EBITDA and $669 million and net income on an eye for S basis.
Speaker Change: Our net income for the year includes a $177 million gain on the sale of 12 vessels.
Speaker Change: Most of these vessels were older vintage with 11 of the 12 vessels being almost 10 years of age or greater.
Speaker Change: These vessels were sold at cyclically high prices.
Speaker Change: These results have enabled us to continue to strengthen our balance sheet.
Speaker Change: Using our debt levels.
Speaker Change: $740 million.
Speaker Change: In addition to this during 'twenty 'twenty four we have paid $84 million in dividends and purchased $336 million of the company's common stock in the open market.
Speaker Change: Next slide please.
Speaker Change: During the fourth quarter and thus far in the first quarter of 2025, we continued to take steps to strengthen our balance sheet.
Speaker Change: The chart on the left shows our liquidity profile.
Speaker Change: We have access to over $1.3 billion in liquidity as of the date of this press release.
Speaker Change: This is over $1.4 billion. If you include our investment in DHT.
Speaker Change: This level of liquidity was made partially possible by the recent execution of a new $500 million revolving credit facility, which is secured by 26 of our previously unencumbered vessels.
Speaker Change: While it is currently undrawn debt facility bears a low cost of debt with a margin of 185 basis points when drawn and.
Speaker Change: And a seven year tenure with no amortization for the first two years.
Speaker Change: Through the execution of this facility, we have locked in access to low cost secured financing through February of 2032.
Speaker Change: Chart on the right shows the progression of our net debt since December 31, 2021.
Speaker Change: Which has declined almost $2.4 billion to a net debt balance of just $537 million as of the date of this press release.
Speaker Change: Well, having low leverage is the demonstration of financial strength just capital structure also affords us the flexibility to move quickly when windows of opportunity present themselves to further optimize our cost of capital.
Speaker Change: Our entrance into the Nordic bond market in January of this year demonstrates our willingness to see such an opportunity.
Speaker Change: Next slide please.
Speaker Change: The chart on the left of this slide shows our outstanding debt by type.
Speaker Change: As we've previously emphasize our strategy has been to shift away from expensive low flexibility lease financing into more flexible lower cost bank one thing.
Speaker Change: Moreover, we have sort of diverse capital structure with multiple sources of funding and flexibility.
Speaker Change: As we previously announced we recently issued $200 million of five year senior unsecured notes at a seven 5% coupon in the Nordic bond market.
Speaker Change: A portion of the proceeds from this bond offering will be used to redeem our existing $71 billion senior unsecured notes, which are due to mature in June of this year.
Speaker Change: While these bonds could have easily been retired using our existing liquidity the refinancing of these bonds with the bond issuance in the Nordic markets was a compelling opportunity for us to diversify our capital structure into the Nordic fixed income market.
Speaker Change: Over the past year corporate credit spreads have tightened given developments in the interest rate environment and the strengthening of corporate balance sheets.
Speaker Change: This was all set against the backdrop of a real robust economic conditions around the world.
Speaker Change: The combination of these favorable macro conditions, coupled with a knowledgeable investor base in the Nordic markets opened a rare opportunity for us to lock in unsecured financing at a favorable cost and with favorable terms and conditions.
Speaker Change: This bond issuance was a testament to our efforts on strengthening our balance sheet and credit profile over the past three years as it was well oversubscribed and set the record for the lowest credit spread for any shipping company issuing U S dollar denominated bonds and the Nordic bond market.
Speaker Change: The chart on the right shows a bridge of our outstanding debt through the end of March of 2025.
Speaker Change: This bridge shows the deployment of a portion of the net proceeds of the Nordic bond to redeem our existing senior unsecured notes.
Speaker Change: With the result in gross debt balance of $989 million.
Speaker Change: $353 $7 million of this debt balances drawn revolver debt under our $1 billion credit facility and $225 million credit facility.
Speaker Change: The enhancement of our liquidity position through the issuance of this Nordic bond has given us the ability to pay into these revolving credit facilities at our discretion, which would potentially have the combined effect of keeping liquidity readily available to redraw as needed and reducing debt service costs of both principal and interest to keep our cash breakeven rates low.
Speaker Change: Next slide please.
Speaker Change: Yeah.
Speaker Change: Our debt repayment obligations through the end of 2025 are highly manageable at less than $15 million per quarter.
Speaker Change: This does not take into account any unscheduled repayments into revolving credit facilities that have not been committed as of today.
Speaker Change: Additionally, the company has recently completed the periodic special surveys on over 50% of the fleet throughout 2024.
Speaker Change: Not only does this set the company up for a lighter dry dock schedule for 2025 with far fewer off hire days.
Speaker Change: The work performed during these dry docks is expected to enhance the operating efficiency of each vessel going forward.
Speaker Change: Next slide please.
Speaker Change: The strength of our balance sheet enables us to continue to generate excess cash flow even in challenging rate environment, given our low cash breakeven levels.
Speaker Change: Further to this our operating leverage positions us to benefit from spikes in spot rates that have been commonplace over the past three years.
Speaker Change: Illustrate our cash generation potential at $20000 per day, the company can generate up to $271 million in cash flow per year at.
Speaker Change: At $30000 per day, the company can generate up to $632 million in cash flow per year and at $40000 per day, the company can generate up to $994 million in cash flow per year.
Speaker Change: This concludes our presentation for today. Thank you everyone for your time and with that I'd like to call turn the call over to Q&A.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one touchtone phone.
Speaker Change: Using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: At any time your question has been addressed and he would like to withdraw your question. Please press Star then two.
Speaker Change: Our first question comes from Omar knocked off from Jefferies. Please go ahead.
Speaker Change: Thank you Hey, guys. Good morning, good afternoon.
Speaker Change: A lot of things are happening on the macro front and Robert appreciate your comments about basically you know sticking to the Scorpio strategy. That's been ongoing you know given all the unknowns I guess, maybe just sort of in terms of the sanctions that we've seen you know.
Speaker Change: James was talking about this in your presentation, you know clearly a few weeks ago, a big chunk of sanctions were put in place.
Speaker Change: Especially on that mid size Aframax LR, two segment, which if we count them basically in the gate all the new buildings that deliver this year.
Speaker Change: I guess the question does that mean noticed any change in trade flows as a result of this whether from Russia, or Iran or anything that suggests that there's been an.
Speaker Change: An impact thus far.
Speaker Change: I'll, let lutz.
Speaker Change: The answer to that but the only comment I would make is that all these sanctions so.
Speaker Change: The headline but the actual implementation effect on the shipping rates is delayed.
Speaker Change: But lots of that too.
Speaker Change: Okay.
Omar: Yeah, Good Hi, Omar first of all this is the second round of sanctions right. If we look at the first one we only had.
Omar: 34, 35 ships that were of interest under the first sanctions round and that had a.
Omar: Massive impact on the market.
Omar: And as Robert says it takes a little bit of time as that filters through.
Speaker Change: The second round of sanctions is hitting a lot more ships in particular the ships that are in the mid size.
Speaker Change: And there's no doubt that we have seen you know ships turning around finding other places there is an increase in.
Speaker Change:
Speaker Change: Storage other ships or we roading.
Speaker Change: Floating off for the bench Iranian waiting for S. J S, Turkey, or Brazil et cetera.
Speaker Change: I think also it's gonna be interesting to see the wind down period in particular for.
Speaker Change: India, which has been a kind of a massive effort by all of the the Russian crude how that is going to start to pan out as we move into March.
Speaker Change: There was no doubt that it's a lot of ships that are.
Being sanctioned there's a lot of ships you know I think it's 7% of the entire fleet and well. The Aframax is I think it's probably overall 13.4 per cent sanction fleet and we can see for sure that this as we move into kind of the next phase where suddenly this is being implemented in food that you would start seeing that.
Speaker Change: There is gonna be a constrained and supply.
Speaker Change: In that segment.
Speaker Change: So you know it is wanted to follow.
Speaker Change: We're not really seeing the D b.
Speaker Change: Sure hits on the rates, yet, which did not anticipate that either because it follows kind of more or less the same kind of.
Speaker Change: Why is that the approach sanctions were hit as well so you put.
Speaker Change: The OPEC sanctions on Russia, and you see you've got the Iranian angle you've got all these different angles theres no doubt that no. There's certainly a lot of interest and where this market might be heading.
Speaker Change: Thanks, Lauren Yeah. It makes sense, it's still early in the process and something you know you'll stay tuned on and just a follow up separately are you underwent the dry dockings last year that I think 54 ships, if I recall correctly.
Speaker Change: Hum.
Speaker Change: That's more than I think the 27 that you were planning at least at the start of the year. So it sounds like you clearly brought a bunch forward can you give a sense of what what drove you to do that last year.
Speaker Change: Lost Ken.
Ken: Yeah, I could take that Omar.
Ken: Obviously, there's a fair bit of planning that goes into the dry docking of one of the one of the primary issues.
Ken: Is positioning an asset in the right place at the right time given.
Ken: That.
Ken: You have the Red sea unavailable to us and I'd, rather binary position about.
Ken: Whether we're going to try and drydocking in parts of Europe or head out to China as is our share more most favored position. So given all that planning in the and the collaboration with chartering about the commercial opportunities that exist at the time, we on average we will try to move them up if the if the situations allow.
Ken: And it also depends on our view of the market at the time like 60 to 90 day forward view.
Speaker Change: Okay, I'll like to add something I'd like to add on that I mean, there's probably you know from where I sit.
Speaker Change: In terms of when we look at this forward planning on dry dock, which of course every shipping company has to undertake.
Speaker Change: Yeah.
Speaker Change: Obviously.
Speaker Change: A big undertaking and you know this is probably one of the largest extensive drydock cycle, we've ever undertaken you know.
Speaker Change: Doing 54 ships in 'twenty 'twenty four is a massive effort.
Speaker Change: And you know clearly once you get over that hump.
Speaker Change: Positioned yourself quite well for the future we still have some additional dry docks or in the first half of 'twenty five but theres no doubt that we're steadily.
Speaker Change: Moving ahead, where we are coming to a point, where you know the majority of our fleet is especially by a doctor and and obviously optimize for the future.
Speaker Change: Thank you I appreciate the comments I'll turn it over.
Speaker Change: The next question comes from Jon Chapelle from Evercore ISI. Please go ahead.
Speaker Change: Okay.
Speaker Change: Thank you and good morning, I'm, Chris Robert said in his comments that you're going to continue to drive your cash breakeven lower you've already done a ton of heavy lifting on the expensive lease financing.
Speaker Change: You've taken the new bond in Norway.
Speaker Change: There's cost inflation the business can you help me understand how you get any lower from the current levels from here or is there anything you have to do with the capital structure or is it.
Speaker Change: More along the lines of maybe efficiency of the fleet et cetera.
Speaker Change: Hi, John Yeah, well efficiency of the fleet is one thing I mean, I think you you have to.
Speaker Change: You have to take into consideration that vessels coming out of dry dock or going to are going to operate more efficiently.
But the main thing is really in the financing and I mentioned this that we have over $350 million of drawn revolving credit.
Speaker Change: And some of that is advertising. So we if we take our liquidity position and pay into that we could we could drive down our breakeven even further.
Speaker Change: And I think that's really sort of the area, we would target going forward just on those on those two credit facilities.
Speaker Change: Okay.
James: And then James for you.
James: Listen I understand there's a lot going on right now get your point on on the supply side, maybe being overestimated, but.
James: Rates are lower today than they were last year at this time and basically that's been the same thing for the last six months. So on slide nine you have a nice ton mile demand chart, you know that goes back to the beginning with 19, it's clearly off from the peak. So I guess the question is is that cyclical in the sense that it continues to grind lower especially if there.
James: It is a change in the geopolitical landscape, including Russia or do you think it sounds kind of a higher floor here, where maybe we don't revisit the 2019 levels from a ton mile demand standpoint.
James: James maybe if I do that one so first of all John I think that.
James: You know, we don't even know the outcome for example in Russia.
James: We don't know if they'll be paid swapped for a muddle quite whether that will hold them and indeed, whether only the effect.
James: It's tough to say.
James: There's like a.
James: Russian piece trade is like well, we'll make an assumption that everything goes back to where it was before and that's negative and we don't necessarily you know buy.
James: Buy into that and as I said before we cannot speculate on that Paul.
James: I think that there are you know you're right I don't think that you are going to I wouldn't use a base case would be we're going to get a rate explosion.
James: Super high rates that we have.
James: The two three years, that's not a.
James: The thing that we would have in terms of our forecast.
James: And that's also why we've been so focused on operating cash breakeven, but we don't need when we when we're taking down our operating cash break even so much.
James: I'm doing the things we need to do deleverage the company we.
James: We don't need those rates that we had the cool too to make good money.
James: That's 30000 dollar rate today or 25000 dollar rate today.
James: It gives us much more bang for our Bakken comes off quite in cash that we've done before.
James: So you know people can choose their own assumptions, but I think a wise assumption.
James: Is that.
James: You may get periods, because you know there's no guarantee you will have any piece anyway for example, or even though that's a big piece in one place will be good somewhere else.
James: Have periods.
James: I'll get superior rates.
Speaker Change: That's not a working position you can see that in the time charter market going forward, which is still very healthy.
Speaker Change: But people aren't playing time charter was up and 60 seventies, knowing that a lot too.
Speaker Change: Hmm, that's the way I'd look at it but at the same time the stocking eight two.
Speaker Change: Neither of the other part I think the 18th the much more secure than where they were two years ago intent that leverage.
Speaker Change:
Speaker Change: The prices come off behind that.
Speaker Change: You can't get great returns.
Speaker Change:
Speaker Change: At lower rate.
Speaker Change: Okay.
Speaker Change: Understood. Thanks, Robert Thanks, Chris.
Speaker Change: The next question comes from Ken Hector from Bank of America. Please go ahead.
Speaker Change: Hey, great good morning, and good afternoon.
Speaker Change: Maybe Robert can you are Emmanuel can you talk about your investment in DHT your thoughts on moving into the the crude market, but why them, particularly in terms of your expanded investment is that a view on management is it a view on net asset value on that part of the fleet, maybe just some thoughts there.
Speaker Change: Sure.
Speaker Change: Yeah.
Speaker Change: We know we've seen a period of two or three years.
Speaker Change: The FCC earnings up to speed.
Speaker Change: Well disappointing.
Speaker Change: A lot of hope.
Speaker Change: I'm from and it absolutely you can see on those.
Speaker Change: We've always stated we have stated consistently up until quite recently, but we expect good even some of our smaller them all to outperform.
Speaker Change: That was the case.
Speaker Change: And how is that.
Speaker Change: Historically.
Speaker Change: You'll see sea ray product called Kuwait, especially the big but it can cause if not surprisingly work together in tandem.
Speaker Change: And what we're seeing is the dynamic where the crude market can actually break out that.
Speaker Change: The sanctions are the wrong isn't going to be producing the same amount as it did before and for all the reasons you got an expansion at all.
Speaker Change: The you know back again to the crude oil ton miles and that won't be as an expense to the product market. So we're expecting VLCC rates to lift and get back to you.
Speaker Change: And then we say so that's a good investment and when we look at the H T. M. D. H D is.
Speaker Change: In our opinion are.
Speaker Change: Like a best in class.
Speaker Change: I had a very predictable way of managing things they performed very well commercially.
Speaker Change: And.
Speaker Change: Yeah that.
Speaker Change: That we think is a good.
Speaker Change: We've made good investments in that play and that's what it is it something that's right.
Speaker Change: Alright, and I forgot to say I guess upfront, Chris and team great job on reducing debt. Obviously, we've watched this for years, so somewhat of a different position Robert I want to follow up on Johns question or actually maybe Omar is on on kind of Russian and I get you're not commenting on the news, but yesterday, we we obviously saw Trump hosted calls with you.
Speaker Change: Lansky computing, so I just want to understand if we step back you know maybe can you give us a view on what does change if if piece, it's Russia Europe that Ukraine does that mean, the 15, 17% of vessels that are now in the EMR world and 8% of our two do they come back to the market is it on knowing what happens to have them come back and have some good Scott.
Speaker Change: Like is there just a concept of what anything like this ever happened in the past our history that you can point to.
Speaker Change: No. There's nothing that you can point to but it is highly doubtful that you get a you would come to.
Speaker Change: You know, it's a complete pass and you know in any form.
Speaker Change: That's not a.
Speaker Change: You know its a nice thought T shirts to get everybody whipped up to how well positions or whatever but it's not the real estate is something that we're going to wake up. The next week everything is going to be back into its place just on the actual.
Speaker Change:
Speaker Change: Demand PA.
Speaker Change: As you know, it's a whole host of reasons there is a likelihood that.
Speaker Change: Even if there was a peace treaty that.
Speaker Change: No.
Speaker Change: You can't really imagine that Europe.
Speaker Change: It goes straight back to where it was before and the dependence of Russia I mean, that's.
Speaker Change: That's a little bit hard to T M.
Speaker Change: Imagine and definitely you are not going to have those that dog fleet chugging, so either way.
Speaker Change: Youre going to have a much more muted a response to a new trade route change a.
Speaker Change: Between those two factors.
Speaker Change: But it really is a wait and see.
Speaker Change: A long way I mean, you could make the statement that won't be good.
Speaker Change: Make the statement that you want to build holiday resort in Gaza.
Speaker Change: Long chain of events between the two statements and deliverability.
Speaker Change: Yeah.
Speaker Change: If I could just get one quick follow up sorry, but did you pushed out although drydock questions did you push out dry docks or they go faster than expected at the end there. It seemed like there were there was the expectation for that perhaps even more.
Speaker Change: Delay days, then you add or off hire days.
Speaker Change: No.
Speaker Change: Sorry, if.
Speaker Change: If I make it the timing of Drydocks is driven by classification societies, essentially they're regulated so you cannot extend a special survey is beyond the window.
Speaker Change: You can move them around within plus minus 30, maybe 60 days, but not not belong beyond that.
Speaker Change: Okay. Thanks for the time guys.
Speaker Change: The next question comes from Greg Lewis from C. B T. I G. Please go ahead.
Greg Lewis: Hey, Thanks, Good morning, and good afternoon, everybody I'm you know I.
Greg Lewis: Had a like more of a like a market question. You know obviously you know what's been going on in the Red sea or it.
Greg Lewis: That's been kind of an issue.
Greg Lewis: And you know, it's great for us to speculate, but I imagine that.
Greg Lewis: He's in the drones are potentially there to stay.
Greg Lewis: Longer one and as you have conversations like with insurance companies that have to ensure these cargos.
Greg Lewis: But you know realizing that it's fluid what's kind of the general view from from some of these insurers or are they like chomping at did they have to get back there and start ensuring cargoes through here or is this something that you know.
Greg Lewis: I think some of your guys' comments earlier could have a long lasting impact on that trade.
Greg Lewis: I can give that.
Greg Lewis: Question is shot the insurance market doesn't care that the market is the market and it's been very.
Greg Lewis: You know, it's been very efficient in so far as its responsiveness to different changes in the in the environment.
Greg Lewis: So the you know the insurance market like any market is agnostic there are buyers and sellers of any at any price.
Greg Lewis: That being said you know.
Greg Lewis: A cynical point of view as insurers lifted to handle claims. So there there is a an idea that yes, there's been less volume than they'd like they'd like to increase their <unk>.
Greg Lewis: Our market share through competitive pricing, but.
Greg Lewis: In General you can count on the insurance market is agnostic to to risk.
Greg Lewis: Okay.
Greg Lewis: I think it's also important sorry, Greg Oh, just gonna add here if I may.
Speaker Change: Well the insurance companies also do they LG priced their risk and would you say about the price of risk is equivalent to risk to some extent and the price goes up or down you know all I can say is that generally the price has not come down so that looked like that the risk is still reasonably high irrespective of what your moral conundrum might be.
Speaker Change: Okay understood and then as I think about you know you kind of alluded to it.
Speaker Change: Yeah, Yeah, I guess one of the questions that people are having as you know it if I'm gonna water right and Aframax tanker.
Speaker Change: Why not just coded.
Speaker Change: You know cost me an extra couple of million dollars is and we all see the LR to order book is there any kind of way or have you guys done any work on you know in realizing that's even a company like Scorpio can trade back and forth between product and crude over a period of time with their vessels is there any.
Speaker Change: Kind of way to parcel out you know how much of that LR to market from new builds is its been ordered historically by.
Speaker Change: Crude tanker operators versus product any any kind of thoughts or views around that.
Speaker Change: Yeah that would be a difficult one Greg.
Greg Lewis: No. We don't really have an idea of I think the best thing to look at is just recently over the last seven eight years, you know 70, maybe 80% of our two aframax quarters had been.
Speaker Change: Yes.
Speaker Change: So higher cost.
Speaker Change: You know of the coding is not really that big of an issue in terms of the optionality that it gives you.
Speaker Change: And I think today, 40% of the our two Aframax fleet as LR twos, yet the market for our crude.
Speaker Change: Crude and the aftermarket is four times the size of its 14 million barrels a day for $3 million to $5 million of products. So it's.
Speaker Change: Possible to not have you know some of these these vessels servicing that crude oil trade.
Speaker Change: Okay, great. Thanks, guys.
Speaker Change: The next question comes from Ben Nolan from Stifel. Please go ahead.
Speaker Change: I appreciate it so.
Ben Nolan: Actually I've got a couple of things.
Ben Nolan: It may be calling on both of Craig's questions. So first of all on the crude versus product I know in the past there has been so well actually in the recent past vlccs and suezmax they've traded product any update on that.
Ben Nolan: And then as you think about the Red Sea is there are you know.
Ben Nolan: I know some other classes of ships or are starting to dip their toe into going through there.
Ben Nolan: I don't think that you guys are yet, but any thoughts on sort of how you're approaching that.
Ben Nolan: Ben I can take the second part of your question first as you know you you've probably seen yourself that.
Ben Nolan: There's a lot of.
Ben Nolan: Is on the Red Sea are waiting to see how phase two of the ceasefire evolves.
Ben Nolan: We don't have a window into the negotiation, but I think any.
Ben Nolan: Casual observer of the headlines would say it's highly highly fraught.
Ben Nolan: So you know again.
Ben Nolan: We're not as big as some of the global container players, but I think the industry as a whole.
Ben Nolan: The western industry is taking a very very cautious approach.
Ben Nolan: About resuming transit to the southern let's see.
Ben Nolan: Okay, and maybe you could try another and.
Gerard: Oh, sorry go ahead Gerard as you.
Gerard: No wonder she tickets.
Gerard: So when they elect to market was extremely strong.
Gerard: The beginning and throughout the second quarter or the differential between kind of a lot too from the middle East going west to a B L. T C for similar type of voyage.
Gerard: So substantial.
Gerard: Probably the spread between usually one to the other ship and putting them on three I'll, let choose them one cargo probably had a margin of $20 million.
Gerard: So the incentive to clean up.
Gerard: And take the cargo risk all moving distillate on a VLCC was pretty apparent.
Gerard: Now as the VLCC market has moved up Suezmax is as well to a larger extent and also the <unk> two market has kind of drifted down that margin is no longer there. So in terms of the clean dirty kind of cannibalization that we have talked about in the past there was certainly a data to suggest that that is not happening.
Gerard: That's the point is right now there is the casual change between aftermarket to L. A true from different pockets of different areas, where you could note condensates, but that's at the margin.
Gerard: And then the second part which is also interesting is what happens then with the new buildings that are coming out are there.
Gerard: Chip yards at the beginning of the year, which tends to be the case, where we in the past I've seen a lot of your buildings moving into with Virgin tanks, two cargos moving out of the.
Gerard: North Asian markets, our west or out of the middle East going West.
Gerard: That is also kind of come at a discount relative to the electric general.
Gerard: Quick one here is that for all of 2025, there's only four vlccs being deliberate so that really is not at the market and then you've got the Suez the suezmax market. The suezmax market is it potentially kind of thing.
Gerard: Yeah.
Gerard: Contender on this kind of realization, but to be honest. This is something that we tend to with every single year and it's not something that changes anything in terms of our outlook I think the thing. That's interesting is that there's only four new building vlccs and what that actually kind of mean in terms of supply demand balances going forward.
Speaker Change: Got it appreciate it Lars and then my lets call. It second question well first of all let me say Robert I think in your prepared remarks that was absolutely. The most scripted it I think I've ever heard you be in any environment, but and very helpful. By the way. The my second question relates.
Speaker Change: And maybe this is again for Lars, but Oh, the handy size range that you guys are getting tend to be below what we would see in broker reports and I suspect that's because historically, especially for the ice class vessels. They tend to do a lot of Russian trade and so if you blend that and something that you guys aren't doing then then in Korea.
Speaker Change: It's a little bit of a differential but it can you maybe just talk to how you think about sort of and again appreciating that you don't really know what's going to go on with Russia, but it is that the category that might benefit the most ah if there wasn't normalization.
Speaker Change: I think it's important to say that you know.
Speaker Change: Staying a controlled 14 handy size vessels, all 14 of those vessels were dry docked in 'twenty or 'twenty four.
Speaker Change: There's no doubt that has an impact on the trade ability under kind of the.
Speaker Change: Earnings or potential for the ships with all the dry dock time, that's taken out plus the positioning.
Speaker Change: That was mentioned by Ken earlier on et cetera, et cetera. So you know as we're moving into the second week of February are you now or all 14 chips have now been completed.
Speaker Change: So in terms of where you think the market was what's the ones that I would.
Speaker Change: Did you say that considering the size of dry docks that has to be done for all of these ships, it's pretty good going into the second part of your question is it's quite clear that it <unk>.
Speaker Change: Terms of ice.
Speaker Change:
Speaker Change: Then you know in the past and this is before the Ukraine.
Speaker Change: We did a lot of business out of the Baltic and Russian ports.
Speaker Change: Sports as well. So today, we are kind of constrained with only loading maybe stuff out of Finland, etcetera, and so it's more of the non ice market.
Speaker Change: Yeah for sure. So that you know, there's obviously less earnings potential.
Speaker Change: At the same time and I would also say that there are a lot of ships are in the heart of the market that have ice classification.
Speaker Change: I think the interesting more interesting point on the handy market is if you look at the average age on the fleet is a very aging fleet with very few ships being kind of.
Speaker Change: Introduce to the fleet or for.
Speaker Change: For the segment.
Speaker Change: Yeah.
Speaker Change: Alright.
Speaker Change: Thank you.
Speaker Change: I think that too.
Speaker Change: He loves it.
Speaker Change: She degrees, that's sort of exactly what sort of a place that has the highest restrictions for many reasons related to the operation.
Speaker Change: Hmm mm.
Speaker Change: Who on those charterers like shell BP.
Speaker Change: That's what we're talking about that's the difficulty about boots.
Speaker Change: Assumption a return to the path because the the.
Speaker Change: Operators that we're talking about that where the markets are going at the moment. So they have very very little hurdles for people to get it.
Speaker Change: The.
Speaker Change: Traditional past Europe.
Speaker Change: Uh huh.
Speaker Change: The highest hurdles go wrong in the world to get into trade.
Speaker Change: Right.
Speaker Change: Alright, well very helpful. Appreciate it thank you guys.
Speaker Change: And the next question comes from Chris Robertson from Deutsche Bank. Please go ahead.
Chris Robertson: Hey, good morning, everybody. Thanks for taking my question I know, we're getting towards the end of the call. So I'll just ask one and trying to make it quick here I'm just looking at the European market for a minute not with regards to the sanctions of the vessels trading in the Russian volumes, but just curious on how the fuel EU and U E. P. S.
Chris Robertson: The emissions regulations are having any observable impact on the product trade at the moment.
Chris Robertson: Given this regulatory dynamic though.
Chris Robertson: Now what percentage of the dark leader gratefully would even qualify the trade into Europe, regardless of the greater geopolitical issues.
Chris Robertson: Don do you have any.
Speaker Change: Any idea.
Speaker Change: Yeah, I can take a shot at it if you like which is.
Speaker Change: Number one is it.
Speaker Change: The I think what you were asking about in the second part of your question was to what extent do we anticipate should sanctions ease the dark fleet somehow come and start to compete in.
Speaker Change: In the western market.
Speaker Change: And I harken back to comments, we've made on previous calls which is.
Speaker Change: Regulations are certainly a bar that we have to pass them. We're happy to pass you know cleared that bar, but really in our industry customer expectations are far and away the most stringent.
Speaker Change: Hurdle, we have to clear.
Speaker Change: And when you really look in detail at some of the ships in the dark fleet.
Speaker Change: They are operating beyond the realm of any western standards.
Speaker Change: Whether that is insurance classification Society general.
Speaker Change: General maintenance or repair she fair compensation.
Speaker Change: Compensation and welfare seat so you're looking at assets that have a very very long distance to go and a lot of capex required for them to ever be even considered to trade in the west again, not because of regulations, but because of customers and their demands and their risk risk tolerances, so where sky.
Speaker Change: Nicole that you'll see many of those vessels come back and that's before you get to the age and the relative merits of the type of investment you're talking about.
Speaker Change:
Speaker Change: Sorry, and then your first question can you repeat it.
Luke: Just Luke.
Speaker Change: What the observable impact today is on the product trade with the existing regulations and kind of a step up in into 2025.
Speaker Change: Lars maybe better placed to answer that but what I will say is of course, it's been a big adjustment for the market in general and what you're seeing not just in you know Etfs are fueling U is added degrees of complexity around competition. So.
Speaker Change: This along with other things that have happened in the regulatory environment over the last several years.
Speaker Change: Just makes it harder and harder for smaller ship owners to compete so I would I would above anything say look the market's adjusting but it is it does have a consolidating them.
Speaker Change: Impact.
Speaker Change: And so you'd expect that the bigger owners and operators get bigger and the smaller are really struggling to with the scale and the cost and the complexity of these regulations.
Speaker Change: Got it that's really how can you kind of I'll give you a number here of course, which is quite interesting, but do you have an L O true and you're going to trade it.
Speaker Change: Middle East and you're going to trade it through Europe, including the UK the difference between the EU and not report in terms of what you're going to have to pay.
Speaker Change: She has perspective the $150000.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: I appreciate that alright, I'll turn it over.
Speaker Change: The next question comes from Fred Marc.
Mark: Mark a dolphin Clarksons Securities. Please go ahead.
Speaker Change: Hi, guys.
Speaker Change: Just a quick thought on that.
Mark: Ed.
Mark: Hey.
Speaker Change: On the order book really discuss it but that's a it's an important topic. So the slide on page 16 is great.
Mark: Hum.
Mark: So when I talked to a lot of investors they seem to have.
Mark: Assuming that all of this I love genius had all enter the clean market.
Mark: I think he laid out.
Capello any case that they're just going to be.
Mark: Let's call it switches right. So my understanding is this.
Mark: Crude Aframax order book is just five 9% of candidates in various U.
Mark: Orders in that segment, maybe by owners.
Mark: The <expletive> out all of the crude but the opposite from adolescence right. So the question is really how do you think are.
Mark: This plays out.
It.
Mark: This transition right is this are these two new boats.
Mark: Directly going into crude or do you think there will be some type of crowding out of older ships that then switching to crude.
Mark: So Steve I'll start yeah, Yeah, I'll, just start with kind of some interesting kind of data on that so the time charter market than we have seen.
Mark: Now what was quite busy parts of the year last year end.
Mark: That's been a bit of a resurgence.
Mark: As we move into <unk>.
Mark: Into February.
Mark: And there is no real difference in terms of the charter when he was looking for a after Max if he wants to have a aframax LR too.
Mark: And from an owner's perspective, they are not concerned about taking their L choose and fixing it is an aframax the fungibility between those two market, it's very clear.
Mark: And it's clear in the spot market when there is spread differentials over $750000, but they will start moving from one to the other this is grateful both markets Craig's you know the <unk>. The fluidity that you want the volatility that impacted on both so you know it is very important that if you wanted to look at.
Mark: Two stroke Aframax is you have to look at those in unison. So you know when you look purely at LR twos, and say well they elect to book is huge whatever the percentage is 20 or whatever it is I think you're making a great mistake. If we do not look at this in conjunction with Apple.
Mark: Aframax.
Mark: In particular with kind of the ageing fleet of Aframax is to look at these together.
Speaker Change: Yeah, I would just add marsh is making a great point. So so even today you know.
Speaker Change: There's I think 23% of the Aframax fleet is older than 20 years.
Speaker Change: And you know the Aframax fleet is a lot larger than you are to free, especially as you look at that older tonnage.
Speaker Change: Think what you'll see is maybe some of the new builds trading in the clean market and then have some of the older vessels move into the dirty market, but ours is absolutely right you have to look at them together as as you have as well.
Speaker Change: And when you do it certainly tells the story that there's there's a definitely demand for both assets in a way where the supply growth was substantially less than the 20% It may appear.
Speaker Change: Yes, Andrew. Thank you that's great update my final question is on them.
Andrew: You know the Red Sea a potential reopening I guess do you think this might be.
Andrew: Having a positive impact on this east to the best arbitrage flows which are I think a pair stuff.
Andrew: Somewhat in the past few months, but maybe it could be a positive thing.
Andrew: So I'll start with just making a few points here number one is that if you look over the last few months you have been through a huge.
Andrew: Turnaround in them.
Speaker Change: Wineries in the Middle East.
Speaker Change: That's been completed and then something that you had a more or less sharp diesel odd.
Speaker Change: Over kind of December and the first part of January So there was no real in sentiment or incentive to move cargoes.
Speaker Change: Moving causes west that's suddenly had split with somebody but these lab has opened again and then on top of that if you then add on the Tucson and refinery that is competing turnaround by end of February I would say that you've got a lot of outlets in terms of cargo being produced both in let's see and also in the AG.
Speaker Change: Congress will start flowing in supply.
Speaker Change: This led to Europe.
Speaker Change: Great.
Speaker Change: Sounds good thank you.
Speaker Change: The next question comes from Liam Burke from B Riley. Please go ahead, yes. Thank you Robert in light of your cash flow and strong liquidity position I guess your most recent sale of a vessel with a relatively new L. R. Two are you still looking at opportunistic divestitures or are you pretty.
Much happy with the size and the positioning of the fleet.
Speaker Change: But I mean, we're very happy with the seismic acquisition in the fleet and.
Speaker Change: You know I think.
Speaker Change: Good.
Speaker Change: One on the schools and tie careers, they've been willing to opportunistically sell vessels, if they think they've got them.
Speaker Change: Good value.
Speaker Change: Okay. Thank you.
Speaker Change: James you talked about refinery realignments globally, and the shutting of older less efficient ones. This has been a multiyear event how do you see this thing continuing to play out.
Speaker Change: Until it reaches sort of a normal steady state of heavily weighting refinery capacity in China and in the mid east.
Speaker Change: Oh I think it's it's going to continue so what the best part about the refining story is a lack of new capacity coming online in emerging markets. So everybody is focused a lot on Dan go tell you, but you know that was starting construction are supposed to do in 2013 and.
Speaker Change: It's 2025, and it's still a.
Speaker Change: Not at full capacity.
Speaker Change: So I think that in terms of the longer medium term product train is really powerful and the other side of it is this older. All the refining capacity that that probably should have shut before COVID-19 and then you had the strong crack environment. You know is more of a demand came back and you're starting to see those closures again so.
Speaker Change: During our last earnings call I think we said that we expected 1 million barrels of capacity to close this year now it's too and so going forward I think there's still more capacity in the U S. There's more in Europe, but there's certainly more in China that can be closed and you're going to have to make up that lost production and most of the time, it's going to be carried on a ship.
Speaker Change: So I think it's very constructive going forward, we havent had any necessarily new announcements since kind of the California refineries and Phillips 66 in December but something we monitor closely and something we think that's going to be impactful for our industry going forward.
James: Great. Thank you James.
Speaker Change: Thank you.
Speaker Change: The conflict. This concludes our question and answer session and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.