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Scorpio Bulkers Inc (SALT) Q4 2018 Earnings Conference Call Transcript

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Scorpio Bulkers Inc  (NYSE: SALT)
Q4 2018 Earnings Conference Call
Jan. 28, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Scorpio Bulkers Incorporated Fourth Quarter 2018 Conference Call. I would now like to turn the call over to Hugh Baker, Chief Financial Officer. Please go ahead, sir.

Hugh Baker -- Chief Financial Officer

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

The information discussed on this call is based on information as of today, January 28, 2019 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 statement disclosure in the earnings press release that we issued today, as well as Scorpio Bulkers' SEC filings, which are available at www.scorpiobulkers.com.

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

Now, I'd like to introduce Emanuele Lauro.

Emanuele A. Lauro -- Chairman and Chief Executive Officer

Thank you, Hugh, and good afternoon or good morning to all. We are confident in the outlook for drybulk. We have continued to buy back stock during the quarter, believing our own stock to be the best investment for excess liquidity. Supply side factors in our industry remain benign, and as such, long-term fundamentals continue to remain positive. However, we acknowledge the macroeconomic factors have put pressure on sentiment and prospects for a short-term market recovery. As I stated before in previous earnings commentary, we must respect the tone of negative macro commentary and the risk of a global trade war, leading to a broader policy-driven short-term slowdown. I do not have much to add in this, except that we continue to be vigilant and watchful.

We were pleased to have the opportunity to invest in Scorpio Tankers last quarter. This financial investment will give some volatility to our quarterly earnings. But it is already bearing some fruits with a near 14% appreciation in value or an unrealized $40 million profit mark-to-market into fourth quarter close.

We're pleased with the fourth quarter operating performance of Scorpio Bulkers, and note that the forward bookings we have provided are higher than the current fixing levels as demonstrated by the current indexes. Fixing on term contracts 13 ships during the fourth quarter has proven to be the right decision in hindsight. Of course, we're not happy about the market correction, but should current market weakness persist, we are well positioned to withstand these conditions for a sustained period.

With this, I will turn the call back to Hugh Baker.

Hugh Baker -- Chief Financial Officer

Thank you, Emanuele. During the fourth quarter, the Company made a net loss of $7.4 million, which is $0.11 a share. This loss included a net loss of $0.10 a share on the investment in Scorpio Tankers and $0.03 a share of deferred financing costs. Without these non-recurring items, we would have achieved a net profit of $0.02 a share.

In the fourth quarter, we made EBITDA of $23.4 million. In the fourth quarter, we earned $13,148 on our Kamsarmax fleet and $12,213 per day on our Ultramax fleet. We are advising you that for Kamsarmaxes, we have booked $12,913 per day for 60% of the first quarter, and for Ultramaxes, we have booked $11,072 per day for 56% of the days in the first quarter. As mentioned by Emanuele, the present market has weakened below these levels.

In the fourth quarter, we booked 13 vessels on time charters that extend into the first and second quarters of 2019 for rates of between $14,500 and $16,500 a day, and as Emanuele has commented, with the benefit of hindsight, these fixtures seem to have been favorable. We paid a dividend of $0.02 a share for the quarter and have declared a dividend of $0.02 a share for the first quarter of 2019.

As at January 25th, 2019, the Company's investment in Scorpio Tankers had a fair market value of $110 million. We are increasingly becoming more optimistic about the fundamentals of this investment. We believe that our own stock is currently the most attractive and accretive opportunity to invest in the drybulk sector, and during the fourth quarter, we purchased $27 million of our own stock at an average price of $6.05 per share. This is not only the equivalent to the value of a brand-new bulk carrier, but more significantly, it represents 6% of the Company.

On January 25th, 2019, the Company's Board voted to authorize a new share repurchase program to replace the previous program. This new program authorizes and allows buybacks to the value of $50 million. As I mentioned earlier, we continue to view buybacks as the most accretive use -- attractive use of capital for the Company at this time.

During the fourth quarter, we announced agreements to purchase scrubbers for 28 of our vessels. These agreements will be part of the Company's overall scrubber program for all 56 of its vessels. This program is well developed, and in our earnings press release and presentation, we have provided full details of the expected scope and cost of this program. We currently anticipate that the installation of scrubbers will cost around $127 million and we expect to install scrubbers on 18 vessels in 2019, 36 vessels in 2020 and two vessels in the first quarter of 2021. The majority of the 36 vessels that we'll install scrubbers in for 2020 occur in the first half of the year. We expect to finance substantially all of the cost of our scrubber program through secured financings, which we expect to announce in the first quarter. As of 25th of January, the Company had $74.3 million in cash.

I'd now like to open up the call to questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions)

And our first question is from Amit Mehrotra with Deutsche Bank. Please go ahead.

Amit Mehrotra -- Deutsche Bank -- Analyst

Thanks. Good morning, everybody. So just first question, I just want to understand the confidence in the drybulk market, particularly with respect to China. Other larger companies have highlighted the deteriorating China market as early as this morning, two large companies have done that. And then also you have the coal headwinds, the BDI is now below 1,000. It was 1,600 in October. You, obviously, have a smaller fleet now, but I just want to see if you can talk about the risks you see in China right now and maybe what your commercial people are seeing with respect to the demand for drybulk commodities. Thanks.

Robert Bugbee -- President and Director

Sure. I think, Amit, that we've been quite clear the present spot market is weak and, obviously, that's further exacerbated not the least of which is we're approaching Chinese New Year, which is traditionally a weak point too and we're, obviously, all awaiting the trade discussions between the United States and China. And the weakness is probably even further added to because you would have had some pre-buying, some getting ahead in the Chinese markets when people thought that tariffs were going to go on, there would have been early buying. So right now, it's probably the darkest. People are worrying about the trade positions there. We're in the middle of Chinese New Year. But we are expecting that, fundamentally, the supply sides here in check as we go over time, that despite the present China slowdown, it is still a growth, that the world's largest economy, the United States, has good positions, a low unemployment, and it would be rational for the participants between China and the United States to try and get themselves a negotiated settlement that would result in a win-win and greater stability, and that's our fundamental position. We're also very cognizant of the weakness, so we are making steps and shortly we'd hope to announce pretty significant increases in liquidity.

And we also do believe that the Company is also discounting in its stock price already a sustained tremendous slowdown in dry cargo. The Company -- the stock is trading significantly below its net asset value, and so that's why we think the best use of proceeds is to -- or surplus cash is to buy back stock. And it also has a big investment. It's the largest investor in Scorpio Tankers, where the product market is just going from strength to strength, and that market in this first quarter will be the highest -- is already the highest that market's been for the last 10 years. And every day, it's getting closer to 2020.

Amit Mehrotra -- Deutsche Bank -- Analyst

Right. If I could just ask one follow-up question. You did talk about maybe what the market's discounting, the risks, that there're a lot of uncertainties out there, but yet you're buying back a significant amount of stock and you're also talking about liquidity levers that you may or may not pull. So I'm just trying to understand -- I mean, I understand in the fourth quarter, when the market maybe took a bigger dip than you would have expected, you wanted to be opportunistic and certainly the equity value was well below NAV. But as you look out prospectively, are you guys going to conserve the liquidity as opposed to spending that much money on the buyback? And the other question I have is that, how should we think about the capacity of the buyback given that rates are still low, you're going to be drawing down significant amounts of debt to pay for the scrubber investment plan, which is a net debit to your capital structure. Just help us out there in terms of what the plug is for the buyback.

Robert Bugbee -- President and Director

Well, I think as indicated in the press release itself and Hugh has clearly stated and we've clearly stated that we are working on measures and sources of liquidity that are beyond that is needed to fund the scrubbers themselves. We're clearly not ready to detail that and we've said that shortly we will detail that.

Amit Mehrotra -- Deutsche Bank -- Analyst

No, I understand. One last quick one from me just on the open-loop versus...

Robert Bugbee -- President and Director

It's with everything. When you are this far apart on your NAV and it's huge, I understand that most analysts look at the NAV of SALT marking STNG with mark-to-market and come up with an NAV of something like $8.59(ph)or whatever. But if we were to use where we think STNG is, STNG's own NAV is, and bring that back into where SALT is, the NAV of SALT becomes, without getting into an accurate figure, is 10 plus.

So when you have this marked to a discount to real NAV, we're going to take nothing off the table.

Amit Mehrotra -- Deutsche Bank -- Analyst

You get discount on a discount, right? Now I get it. Now that makes sense. I get it.

Robert Bugbee -- President and Director

We'd be better off selling assets and you can sell assets that's 10% down and still make an extraordinary position.

Amit Mehrotra -- Deutsche Bank -- Analyst

Yeah. I was just hoping to get your perspective on the -- some of the ports are banning the open-loop scrubbers. I know there's -- obviously, most of the exhaust is created out at sea but are your orders, I guess, hybrid ready -- I mean, not hybrid ready, but ability to convert to hybrid? I think that's maybe coming at a cost of 50% more. Just what you are thinking about the new bans that have propped up all across the place and how should we think about it?

Robert Bugbee -- President and Director

I'll let Cameron --

Cameron Mackey -- Chief Operating Officer

Sure, Amit. Even before IMO 2020 came onto the radar of the general population, you had restrictions in most ports about the type of discharges vessels could make within port limits and the type of fuel they could burn within port limits. So we see this as, say, a natural or a continuation of an evolution that, as you point out, is not material from a voyage consumption point of view and therefore not really material from the point of view of scrubber economics or return characteristics. But will there be a day where the IMO may address open-loop scrubbers in the open international waters? Sure, we think that's years away, however, and there is every indication that that's still years away. So it doesn't really affect our plans or the return characteristics of a scrubber investment.

Amit Mehrotra -- Deutsche Bank -- Analyst

Got it. Okay, that's helpful, guys. Thanks so much. Appreciate it.

Operator

Thank you. Our next question comes from Randy Giveans with Jefferies. Please go ahead.

Randy Giveans -- Jefferies -- Analyst

Thanks, operator. Good morning, everyone. Alright, so like two quick follow-up questions on the IMO compliance strategy. What spread in dollars per ton are you assuming through 2020 to determine your payback period for the scrubber?

Cameron Mackey -- Chief Operating Officer

From 2020, we're assuming around $250.

Randy Giveans -- Jefferies -- Analyst

Okay. And then with that, is the scrubber strategy driven more by economics because of this spread and the likely rate premium or more of an operational decision just because of fuel compatibility concerns for the VLSFO blend?

Cameron Mackey -- Chief Operating Officer

The answer is yes and more. In other words, it's not just those two sort of parameters that you presented, but other ones too. We did a rather comprehensive assessment of a number of things, including the risk of regulatory changes, risk to the technology, movement of the spread on fuel availability, compatibility, all. And this is where we came out, and we are very confident and still quite comfortable with our decision.

Randy Giveans -- Jefferies -- Analyst

All right. And then switching gears, just for kind of a market question. So, obviously, with the tragic kind of Vale dam collapse in Brazil, dozens of lives lost, put things kind of into perspective, but for the purpose of this call, any early thoughts on how this will impact the drybulk market overall, not just Capesizes? I'm sure there will be some trickle-down effect.

Robert Bugbee -- President and Director

Just before I answer that question. If we go back to the question previously to Cam, we do have the perspective also here from the products market and what we are seeing every day from the products market is the customers and the products, the refiners, the traders are taking actions that are very positive toward the idea that low sulfur fuel will be at a premium and that the decisions we made in Scorpio Bulkers with regard to not just the investment in Scorpio Tankers but the scrubber investment themselves will pay off in the sense that those guys are trying to get along the product market every day by taking in charters and they are willing to pay premiums to secure scrubber fitted vessels going forward. And that's pretty important when the actual refiners might be making this stuff going forward and putting their dollars where they're putting their words.

With regard to the Vale position, look, it's terrible and people are assessing the situation at the moment. I think that it's very hard to assess exactly because it's linked into what will the government do there in terms of making them check other facilities, et cetera, et cetera. That's on one hand, and on the other hand, the actual mine itself is a minor part of the total production. So it may not be -- end up being so significant, especially right now in the short term when you're waiting for the big mine to come up, the Samarco mine, and you do have this sort of short-term weakness in the market itself already.

Randy Giveans -- Jefferies -- Analyst

Sure. Alright, well, that's it from me. Thanks for the color.

Operator

Thank you. Our next question is from Jon Chappell with Evercore. Please go ahead.

Jon Chappell -- Evercore ISI -- Analyst

Thanks. Good morning. Good afternoon. Hugh, a couple questions for you. I just want to be clear, the schedule that you've laid out on the scrubber investment, super helpful, but that's obviously for the entire fleet. And you had noted in the press release that there were still options for '18. So as we think about CapEx spend, should we just assume that all those options are going to be exercised and then follow that table that you put in the press release?

Hugh Baker -- Chief Financial Officer

Yes, I think the reason we put the table in the press release is to really make everyone understand our scrubber -- to fully disclose the extent of our scrubber program, and that means put in how much we think it's going to cost and also the dates at which -- the quarters at which each vessels are going to get installed with scrubbers. and it is very much as per the schedule and you should use that to guide you.

Jon Chappell -- Evercore ISI -- Analyst

Okay. And then understanding that there will be an announcement on financing most likely in this quarter, should we still think about financing those, the full program, assuming once again all options are exercised or is it going to be kind of a piecemeal financing where you get financing for maybe the 2019 CapEx and then a different solution for 2020 or it's all in one bucket?

Robert Bugbee -- President and Director

I think, we'd have to wait on that other than it will be excess to the requirement and to know the -- there's two -- and I think we have to leave it at that.

Jon Chappell -- Evercore ISI -- Analyst

Okay, and then Robert, you had mentioned the liquidity levers. Clearly, you've been in the sale and leaseback market a little bit. I'm just wondering if that market is still there and that's an alternative you are looking for or is it straight debt or is it just straight asset sales looking to play the harp(ph)potentially on where the asset prices are today and where the stock is trading?

Robert Bugbee -- President and Director

I think that the Company will look at all alternatives, whether it's the opening up some of the bank finance because the balance sheet itself is strong, the investment, the vessel is a new fleet. So you could do that to a company that is sound and fair and with the relationships we have with the lessors and, yeah, we are going to look at that, and, obviously, as stated before with the op(ph)where it is, you'd be willing to look at sales too. So it's all of the above.

Jon Chappell -- Evercore ISI -- Analyst

Okay. Final one from me. You guys mentioned coal a bunch of times in the press release, as it related to kind of slow down in the end of fourth quarter and even start to the first quarter. There is these import quotas that China has put in. Is there any kind of history that you have with these quotas, are they relatively new? And as far as what your commercial guys are seeing right now, has there been a significant step-back early in the year where we can maybe anticipate a bit more smoothing out of the coal imports in 2019 relative to 2018?

Cameron Mackey -- Chief Operating Officer

Jon, our expectation is it's so early in the year that we're getting up to speed in the short-term weakness. What we expect later on is a smoothing out and so resumption of normalized demand. But right now, it's very early to say. Our experience in the past with import quotas is that they are very unevenly applied in-force from province to province in China, but more to follow probably in the second quarter call, we can go into greater detail about what we're experiencing year-to-date.

Jon Chappell -- Evercore ISI -- Analyst

Okay, that makes sense. Thanks, Cam. Thanks, guys.

Operator

Thank you. Our next question comes from Greg Lewis with BTIG. Please go ahead.

Greg Lewis -- BTIG -- Analyst

Yes, thank you and good morning. As we look at freight rates, clearly, you guys highlighted, obviously, we're heading into the Chinese New Year, rates have come down. I guess, historically, this has been led by Capes, just given China's focus on iron ore -- demand for iron ore, which is more of a Cape trade than an Ultramax trade. But could you talk a little bit about why -- I mean, it looks -- I mean, not it looks, it's happened in the market, the smaller vessels seem to actually be underperforming relative to the Capes. Just kind of talk a little bit about what you're seeing maybe in the Atlantic Basin that's kind of driving this disconnect between where we are today, even though Chinese -- the smaller vessels typically tend to do better in the Chinese New Year?

Robert Bugbee -- President and Director

I think it's pretty -- it's early days because the smaller vessels were largely outperforming in a lot of that period before. So we don't know whether or not people were getting ahead of things as I explained earlier, whereby the rate strength was slightly inflated in, let's say, September, October, November, and now it's down and it's a -- you'll get a smoother balance. So it's pretty hard to look at in such a short data stream right now.

And you simply know in the bigger picture that you have a calendar event of Chinese New Year going on and you have this sort of the more -- the bigger picture of waiting to see and a slowdown related to concerns of the US and Chinese trade. And we are in a position where we'll be able to watch. It's not as if we're going to -- even if we started buying back stock immediately and as soon as we can after this conference call, it doesn't mean we're going to fire off all our balance sheet and debilitate the position. You are going to be doing a process over the next weeks and you'll be able to look -- see. And the first indication will be where will market be a week, 10 days after Chinese New Year and how will the US trade discussions go. This is just real short-term right now.

Greg Lewis -- BTIG -- Analyst

Okay, great. And then, just another question. We're hearing that some of the Newcastlemax or VLOC conversions are potentially starting to be discriminated against. Is that something that you are hearing in the markets or is there anything to that? I'm just kind of curious.

Cameron Mackey -- Chief Operating Officer

Well, I direct you to the widely publicized case of Polaris, a South Korean company, owner of the Stellar Daisy. But that's all -- it's a public information. What is a bit more up to conjecture is how port states and customers may make blanket decisions on the back of that singular case and that company, which we don't really have a view on at the moment.

Greg Lewis -- BTIG -- Analyst

Okay. Alright, guys. Thanks for the time.

Operator

Thank you. Our next question is from Magnus Fyhr with Seaport Global. Please go ahead.

Magnus Fyhr -- Seaport Global Securities -- Analyst

Good morning. Most of my questions have been answered, but just one follow-up on the IMO 2020 as it relates to the economics. I'm sure with more port states banning closed -- or open-loop scrubbers near port that you still have a good margin there. How many days do you currently calculate to use your scrubbers? I think you had said 200 days, but just wanted to confirm.

Cameron Mackey -- Chief Operating Officer

Yes, about 200 days, Magnus.

Magnus Fyhr -- Seaport Global Securities -- Analyst

And has that changed anything with the recent announcements?

Cameron Mackey -- Chief Operating Officer

No.

Magnus Fyhr -- Seaport Global Securities -- Analyst

And you mentioned it's probably years out, but logistically, what needs to happen for the industry to go to closed loop scrubbers with the waste disposal and everything in ports?

Cameron Mackey -- Chief Operating Officer

It would be a big stretch. Bear in mind, of course, there's adjustments that have to be made to a vessel's infrastructure to accommodate so much recycled and retained wash water, and then there is, let's call it, exogenous to the vessel adjustments where you're referring to reception facilities for that waste water or wash water. And it's pretty clear that both of those things are incredibly limited or scarce at the moment. It would take another wholesale change in the industry to get there, something that would take years. So first, if you look at the history of IMO 2020, you're talking about something that took more than a decade to come to fruition. A similar step change with regards to open or closed loop scrubbers, we believe, would take a similar timeline, another 10 years plus.

Robert Bugbee -- President and Director

I think it's also important to sort of understand when it comes to Scorpio Bulkers is that, as Cameron point out, we don't think it's going to happen, but it would be fantastic, if people -- if actually scrubbers couldn't be used at all. And you have to use the low-sulfur immediately from January 1st. And that's for two reasons: one, Scorpio Bulkers has a really modern fleet and low fuel consumption and you'd gladly --- at a increased price for the low-sulfur fuel, you would gladly sacrifice the CapEx that you could have spent on scrubbers for all of that saving relative to the market.

And then on top of that, it's investing in the Company that is going to benefit most in -- or likely to benefit most in shipping from the increase in low-sulfur fuel usage. So there's a little bit of reluctance when we say that the scrubbers at the moment, we're happy with the decision that we've made.

Magnus Fyhr -- Seaport Global Securities -- Analyst

Great. Thanks for clarifying.

Operator

Thank you. Our next question is from Max Yaras with Morgan Stanley. Please go ahead.

Max Yaras -- Morgan Stanley -- Analyst

Hi, yes, thank you guys. The table detailing scrubber installations is helpful. Just wondering if you have estimates on dry-dock days maybe by quarter or year as well?

Hugh Baker -- Chief Financial Officer

Max, I think we are internally, and I stress the word internally, I think budgeting for around, I think we'd say, three weeks for the installations to take place. I'm looking across with a little extra time for those vessels that are going through statutory dry dock. So that's really all I can give you.

Max Yaras -- Morgan Stanley -- Analyst

And then if they have go back in to be converted to closed loop, how long will that be on top of that?

Cameron Mackey -- Chief Operating Officer

We haven't finished an analysis on that. It would take another several weeks at least but that type of further conversion would be years down the line. It would be something we're -- we didn't take this option to come back into dry-docking next year or the year after. This is optionality that we're looking at for the next five to 10 years.

Max Yaras -- Morgan Stanley -- Analyst

Sure. That's fair enough. Just one last question. We focused on Capes and iron ore trade. What is your kind of estimate for what minor bulk trade does in 2019 or what other drivers of growth do you see out there besides iron ore?

Cameron Mackey -- Chief Operating Officer

Well, we're still looking at a global economic picture that has growth in ton miles for bulk generally in single-digit percentage terms and a supply picture that looks at something very low, maybe 1% net. So we still see a very positive supply/demand picture for the next several years.

Notwithstanding that, of course, things have decelerated in the last half of -- last month or last year and the first month of this year. I think as Emanuele said, it's short-term weakness in a broader picture of longer-term pretty good fundamentals for the drybulk space.

Robert Bugbee -- President and Director

And I think that this is something also that's -- in a bizarre way, what's been happening in this last two, three, four months with dry cargo and the fear of the equity capital markets and the constraints on the debt side to weaker players is just further strengthening what we believe can happen in the mid to longer-term here because it's really going to put this continued choke on new building orders. And that's a pretty good part of this equation.

And as Cameron said, as long as we continue to have growth, at some point, it's going to play through into those fundamentals. And so far, even the worst economists that we read, even if there is a -- even if Trump and the Chinese go at each other, we're still talking growth here in the Chinese and the developing countries and therefore growth in trade for the asset classes that we have, and it's really great that you've got this slowdown on the supply side.

Max Yaras -- Morgan Stanley -- Analyst

Alright. Thank you, guys.

Operator

Thank you. Ladies and gentlemen, this concludes our Q&A session. I would like to turn the call back to Hugh Baker, CFO, for his final remarks.

Hugh Baker -- Chief Financial Officer

Thank you, operator. I have no final remarks. Thank you everyone for your attendance on the call and we look forward to talking to you soon. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect.

Duration: 35 minutes

Call participants:

Hugh Baker -- Chief Financial Officer

Emanuele A. Lauro -- Chairman and Chief Executive Officer

Amit Mehrotra -- Deutsche Bank -- Analyst

Robert Bugbee -- President and Director

Cameron Mackey -- Chief Operating Officer

Randy Giveans -- Jefferies -- Analyst

Jon Chappell -- Evercore ISI -- Analyst

Greg Lewis -- BTIG -- Analyst

Magnus Fyhr -- Seaport Global Securities -- Analyst

Max Yaras -- Morgan Stanley -- Analyst

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