U.S. Markets open in 8 hrs 57 mins

Edited Transcript of SALT earnings conference call or presentation 20-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Scorpio Bulkers Inc Earnings Call

Monaco Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Scorpio Bulkers Inc earnings conference call or presentation Thursday, April 20, 2017 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Cameron L. MacKey

Scorpio Bulkers Inc. - COO

* Emanuele A. Lauro

Scorpio Bulkers Inc. - Co-Founder, Chairman and CEO

* Hugh Baker

Scorpio Bulkers Inc. - CFO

* Robert L. Bugbee

Scorpio Bulkers Inc. - Co-Founder, President and Director

================================================================================

Conference Call Participants

================================================================================

* Benjamin J. Friedman

Morgan Stanley, Research Division - Research Associate

* Jonathan B. Chappell

Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst

* Noah Robert Parquette

JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello, and welcome to the Scorpio Bulkers Inc. First Quarter 2017 Conference Call. I would now like to turn the call over to Hugh Baker, Chief Financial Officer. Please go ahead, sir.

--------------------------------------------------------------------------------

Hugh Baker, Scorpio Bulkers Inc. - CFO [2]

--------------------------------------------------------------------------------

Thank you, operator. Thank you all for joining us today. On the call with me are Emanuele Lauro, Chief Executive -- Chairman and Chief Executive Officer; Robert Bugbee, our President; and Cameron MacKey, our Chief Operating Officer.

The information discussed on this call is based on information as of today, April 20, 2017, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release that we issued today as well as Scorpio Bulkers' SEC filings, which are available at www.scorpiobulkers.com.

Call participants are advised that the audio of this conference call is being broadcast live on the web and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days.

Now I'd like to introduce Emanuele Lauro.

--------------------------------------------------------------------------------

Emanuele A. Lauro, Scorpio Bulkers Inc. - Co-Founder, Chairman and CEO [3]

--------------------------------------------------------------------------------

Thanks, Hugh. Good morning or afternoon, everybody, and thanks for being with us today.

We're generally pleased with the developments of our company. Our markets continued to improve on a fundamental basis. Rates have improved from our last call substantially. And as described in our earnings release of today, during the second quarter of 2017, we've booked around 58% of our fleet days; on average, 8% higher than the previous quarter. Asset values have increased as well quite rapidly in the last 6 months, and this has prompted us taking the opportunity to dispose of 2 of our assets built in 2014, as we have announced 2 days ago.

Our Newbuilding Program is now fully delivered, and this allows management to focus on operating our fleet. The fleet is the most modern in the industry, and as such, has minimal CapEx requirements going forward.

With our recent sales, we feel we have, to all effects, normalized our balance sheets. This is providing financial flexibility as well as a greater potential for shareholders return and value creation going forward.

In general, we do remain highly optimistic for the dry cargo market recovery, which we feel is gradually shaping up and look forward to further strengthening our position in the market in what is an improving rate environment.

With this, I'd like to turn the call back to Hugh Baker.

--------------------------------------------------------------------------------

Hugh Baker, Scorpio Bulkers Inc. - CFO [4]

--------------------------------------------------------------------------------

Thank you, Emanuele. As Emanuele mentioned, we have now taken delivery of all of our new ships. I can confirm that all of the debt for these ships is now drawn.

I recommend that everyone examines the supplementary information presentation that we've uploaded on our website. It shows detail on our cash position, pro forma for the sale of the 2 vessels, our projected debt amortization and current estimated collateral coverage.

I just like to mention that pro forma for the sale of the vessels, we now have $155 million of cash and our cash breakeven, excluding debt amortization, is approximately $7,800 per day. When we talk about cash breakeven, we're talking about operating costs, OpEx, cash, cash G&A and interest.

Going forward, at current rates, we expect to generate cash to further reduce overall leverage.

And with that, I'd like to pass you on to Robert Bugbee.

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Bulkers Inc. - Co-Founder, President and Director [5]

--------------------------------------------------------------------------------

Thanks very much, Hugh and Emanuele. I actually don't really have anything else to add, I think everybody has covered everything. I think we'll just go straight to Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Jon Chappell with Evercore ISI.

--------------------------------------------------------------------------------

Jonathan B. Chappell, Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst [2]

--------------------------------------------------------------------------------

Emanuele, you mentioned the sales a couple of times, but I just feel maybe in this call if you can give a little bit more detail surrounding the decision-making between maintaining maximum operating leverage in a period when rates are clearly improving versus kind of rightsizing your financial leverage. And then also, how much of this is really a Scorpio Bulkers' specific transaction as opposed to a market call?

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Bulkers Inc. - Co-Founder, President and Director [3]

--------------------------------------------------------------------------------

I'll take that one. So Jon -- but I'll do it backwards. So it's -- clearly isn't a market call. If we felt that the positive view we have to the long-term fundamentals had changed, you would have seen a much more significant transaction than the one that you saw. It -- we have to look at the genesis of the company, the company's balance sheet and across the entire space here. And yes, we're extremely positive of the future. There's been great improvement in both the cash flow and the asset values. But I think it's important to take the opportunity as quick as possible to what Emanuele has described as normalized the balance sheet, because we will turn, as Hugh has described, this company going forward, not just from what it's been in the last 7 or 8 months, which is a highly leveraged kind of option gamble punt on a some kind of appreciation in values to a really investable company that can move forward, deliver EPS, deliver cash flow and be a proper normal company. And one of the things that's important to do is to recognize that, including ourselves, most of the industry has been given moratoriums from lenders and that we think that the right thing to do is to, at the earliest opportunity, which was rational, to right that position to show our lenders that we're -- we thank them, they're being responsible, we're not riding on their back, so any future developments we do on the company is from the integrity of the company's balance sheet and its own earnings and cash flow as opposed to riding on the backs of moratorium. There are offensive and defensive benefits in this. Obviously, when you put yourself in a strong position with the balance sheet that you're in, that does give you various numbers of alternatives as to what to do. You can clearly have a better conversation with your lenders as to the future of the company, the future of the loans. You will be able to much quicker place yourself in a position to either take a strategy of paying back dividend -- paying dividends or buying back stock if we get into a period where stocks are trading below net asset value. And defensively, there's always not too bad to, on your balance sheet to have some form of insurance against a very uncertain world. And it doesn't matter how optimistic we are about the dry cargo market. The world itself could be uncertain. We've seen that in the last 2 weeks. The physical market itself as fundamentals have gone from strength to strength, yet most dry bulk markets companies have sold down. And that's really the reasoning behind that.

--------------------------------------------------------------------------------

Jonathan B. Chappell, Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst [4]

--------------------------------------------------------------------------------

Okay. That makes a ton of sense. And then just to follow up to that then, the debt amortization, you've kind of addressed that, all the newbuilds have been delivered. You've played this kind of offense, defense game now for the last several quarters. What are kind of the next steps as you position yourself for what you just laid out an improving market with some still kind of macro uncertainties?

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Bulkers Inc. - Co-Founder, President and Director [5]

--------------------------------------------------------------------------------

Well, I think that the first thing to recognize is that our debt obligations for the next 3 years, '17, '18 and '19, including all amortization, including the repayment of the baby bond, is actually about what cash we have on hand. So we are -- and we've lowered our cash breakeven now to below $8,000, and we expect that to go lower. There is a written statement in the results that we expect our OpEx to go down in this quarter too. So we are in a very strong position to get answers for that question that you've given, but we have no intention at this particular point of giving those answers. We're rather focused on the next weeks in creating as many different opportunities as we can.

--------------------------------------------------------------------------------

Jonathan B. Chappell, Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst [6]

--------------------------------------------------------------------------------

Okay. One super quick one for Hugh. Sorry, I haven't been able to go through the supplemental information yet, but has there been no debt draw for the Jive in the second quarter? It seems like in the press release the debt total, as you said for March 31 and April 19, so I assume that, that was all cash financed?

--------------------------------------------------------------------------------

Hugh Baker, Scorpio Bulkers Inc. - CFO [7]

--------------------------------------------------------------------------------

We drew down the Jive in Q1. We took delivery in Q2, but we drew down in Q1.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Our next question comes from Noah Parquette with JPMorgan.

--------------------------------------------------------------------------------

Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [9]

--------------------------------------------------------------------------------

I wanted to ask you guys about the Dallas water treatment connection later this year in September. What your views are there? And we've heard that owners of the -- have taken the IOPP certificate and [ gotten away from the special survey ]. Do you think this is going to change how scrapping changes going forward?

--------------------------------------------------------------------------------

Cameron L. MacKey, Scorpio Bulkers Inc. - COO [10]

--------------------------------------------------------------------------------

It's Cam here. I think you have to -- it's a dynamic playing field out there insofar as you have 2 different distinct sets of regulations or standards. You have an IMO standard or an international standard, and then you have a U.S. standard. Now if you do not care about the ability to trade your vessels to the United States at any point in the near future, you don't have to worry about the U.S. standard. However, the Coast Guard has been adopting a very stringent view, rigid view, to implementation of the convention and not allowing for normal extensions or waivers to the installation of the equipment. So I think that to summarize, disassociating or separating your IOPP certificate from your other surveys may not have the benefit that most of the market has been led to believe. And so we still continue to think that there will be a bump. The size of the bump is, say, debatable, but there still will be a bump where the vessels are either forced into trading exclusively in certain tertiary markets or go to scrap, because they simply cannot compete with vessels that have the equipment installed in time.

--------------------------------------------------------------------------------

Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [11]

--------------------------------------------------------------------------------

Would it be a safe conclusion then to say that the vessels that trade, that touch the U.S, say, the Supramaxes would be more influenced by that versus the larger ships? Or do you think it'll be sector-wide?

--------------------------------------------------------------------------------

Cameron L. MacKey, Scorpio Bulkers Inc. - COO [12]

--------------------------------------------------------------------------------

I think it'll be sector-wide. What I think you'll see is, say, reversion to what you know to be the case, which is Atlantic and Pacific markets can trade at a spread to each other and what I would expect you to see is a widening of the spread. So if you have a modern Supramax or Ultramax and you want to trade quality charters in the Atlantic basin, that premium historically vis-à-vis the Pacific, will probably start to rise. And you'll see that across other sectors too.

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Bulkers Inc. - Co-Founder, President and Director [13]

--------------------------------------------------------------------------------

I'd just like to add a supplementary answer to Jon Chappell's question. Look I think when it comes to -- we don't want to be vague about what alternatives we have, and we really are exploring the different alternatives. But the judgment on those alternatives will be really based on what is going to get the greatest return to the shareholder. I mean, this company around 25% of all of the stock is held in one way or another by insiders. We're not interested in being the biggest company. We're interested in getting the best return to ourselves. It is a very selfish enterprise. And I just like to leave it at that.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Our next question comes from Ben Friedman with Morgan Stanley.

--------------------------------------------------------------------------------

Benjamin J. Friedman, Morgan Stanley, Research Division - Research Associate [15]

--------------------------------------------------------------------------------

So -- and most of my questions have been answered, but just a few quick ones, more on the market. So I understand that your longer-term outlook for rates is obviously positive, but I'm more concerned with your view kind of in the interim. It seems as though rates have kind of decelerated in terms of their rapid growth as of late, but how do you kind of expect the rate development to develop over the next few months? And do you expect adverse seasonality to kind of take hold or the -- what seems to be still very high iron ore inventories in China to kind of play a bigger part?

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Bulkers Inc. - Co-Founder, President and Director [16]

--------------------------------------------------------------------------------

Well, we're sort of almost in the public company, we're pretty disinterested in daily rate-to-rate changes or stock price changes. And for us, it really is a long-term movement. I could argue that the pricing of iron ore coming down is very constructive to the long-term fundamentals. I mean, you -- it's going to do 2 things, it's going to make -- it's obviously going to be more beneficial for demand growth. And also, it's going to put further pressure on the -- on those marginal Chinese iron ore producers. So what we're seeing right now may be partly short-term detrimental, who knows. The Capesize market could rip up 5,000 tomorrow if people sit there and think, okay, we found a bottom in iron ore, let's buy the physical, thank you. It's super volatility in the spot market. We tend to actually still be very constructive. So the public company doesn't do it, but the private company is in the market now buying paper on the long side. So I guess that's an expression of management's view short term. But again, for the public company, it really matters to us the long-term fundamental here. It matters much more to us that the stock is up 270% in the last 9 months than it's down 15% or 20% in the last 10 days. It's an investment, not a short-term punt.

--------------------------------------------------------------------------------

Benjamin J. Friedman, Morgan Stanley, Research Division - Research Associate [17]

--------------------------------------------------------------------------------

Right. Okay. And just...

--------------------------------------------------------------------------------

Robert L. Bugbee, Scorpio Bulkers Inc. - Co-Founder, President and Director [18]

--------------------------------------------------------------------------------

Good luck to those people who play shipping with a short-term view.

--------------------------------------------------------------------------------

Benjamin J. Friedman, Morgan Stanley, Research Division - Research Associate [19]

--------------------------------------------------------------------------------

And just one more question. I guess to piggyback on Dallas water, but this one on the IMO. So it seems as though recently more players in the space have at least started to assess the advantages and disadvantages of the scrubber technology and conversations have kind of accelerated to some extent here. Are these same conversations happening on your end? And how do you expect the scrubber versus the -- I guess, it's more of the game theory between the scrubber technology and the low-sulfur oil to kind of play out over the next year or 2?

--------------------------------------------------------------------------------

Cameron L. MacKey, Scorpio Bulkers Inc. - COO [20]

--------------------------------------------------------------------------------

Ben, it's a good question. I think we consider it's still very early. There are a number of assumptions that people are struggling with, obviously. The one that receives the most attention is how refiners will respond and how prices of the various fuels will respond, the most recent study by Wood Mackenzie being the latest example. Getting a grip to that is one element that I think a number of owners, not just ourselves, are dealing with, but there are others. For example, analogous or the biggest lesson from the Dallas water treatment experienced is that regulations change. They get delayed, they get modified. One of the biggest concerns we have about the scrubber regulations is this concept that by virtue of taking pollutants in the air and putting them into the sea, you're actually making the problem disappear. Well, we know that's not the case, and we consider it only a matter of time before closed loop scrubbers become required, not just open loop scrubbers. Another sort of factor people are struggling with is existing scrubber technology and whether it really works well or not. The cruise industry and the ferry industry, for example, have a lot of experience here and we're learning a great deal of -- from our conversations with them. So the short answer, I've given you a longer answer, but the short answer is, absolutely, we're looking at it. There still is time. We're skeptical of the regulatory landscape in light of other experiences in our industry but watching it very closely, and we'll make a decision as we get closer to -- or get our hands around some of these assumptions.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

I'm showing no further questions at this time. I would like to turn the conference back over to Hugh Baker, Chief Financial Officer, for any closing remarks.

--------------------------------------------------------------------------------

Hugh Baker, Scorpio Bulkers Inc. - CFO [22]

--------------------------------------------------------------------------------

Thank you, operator. We have no closing remarks. So I'd just like to thank everyone for joining us today, and we look forward to speaking with you all soon. Thank you very much.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.