Scorpio Tankers Inc.
Q1 2013 Earnings Call Transcript

Published: 29 Apr 2013

[Operator:]

Hello, and welcome to the Scorpio Tankers, Inc., First Quarter 2013 Conference Call. Today’s call is being recorded. I would now like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead, sir.

[Brian Lee:]

Thank you for joining us today. On the call with me are Emanuele Lauro, Chairman and Chief Executive Officer; Robert Bugbee, President; and Cameron Mackey, Chief Operating Officer. The information discussed on this call is based on information as of today, April 29, 2013, 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 Tankers’ SEC filings, which are available on our website www.scorpiotankers.com. Call participants are advised that the audio of this conference call 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 on our website for approximately 14 days. Now, I’d like to introduce Emanuele Lauro.

[Emanuele Lauro:]

Thank you very much, Brian. Good afternoon or good morning to all and thank you for attending this first quarter earning call of Scorpio Tankers. You may have read our press release and I believe that the first quarter results of the company are a confirmation of the value of our operating platform. We’ve been building the platform since inception and now, it’s showing its results. We also believe actually that the earning potential of our company is still to show its true colors. As you are all well aware, the majority of our equity is tied up into our newbuilding program, which as we stand today we’ll see 38 vessels delivering from this summer 2013 into the third quarter and fourth quarter of 2014. So, buying seasonality to which we are not immune obviously we will start to see the true earning potential of the company as we take delivery of our newbuilding program. There have been a lot of discussions on why we have invested so much capital into this new eco-ships, eco-vessels. And I would ask Cameron Mackey, our Chief Operating Officer to walk you through the main reasons giving you material to actually or the reasoning why we have invested so much of our shareholders capital into this type of vessel. So, Cameron, up to you.

[Cameron Mackey:]

Thank you, Emanuele. Thank you. First of all, I want to apologize to everyone a short presentation that we had prepared is not available right now for your review to follow along with my comments. But, rest assured it will be posted on our website shortly after this call for you to verify or circle back on the things, I’m about to say. Secondly, just want to describe for a minute that the scope of my comments are not purely technical in nature. I think we have done a great deal of explaining people of how fuel efficiency works on our newbuilding vessels. What I want to do now rather is to discuss this rather significant spread between how our newbuildings are performing and the results we reported and your standard ship. The issues of course are how should we think about this spread, is it sustainable, will it expand, could it become more narrow? And secondly, when we talk about savings, we are talking about saving savings versus what? What baseline are we using and how can our investors or the market follow along and have some transparency into how our ship should perform vis-à-vis different benchmark rates. So, first of all, as you know from our press release. The owned vessels outperformed the rest of the TC fleet by about $4,200 a day. One note of interest is that of course our time charter fleet does include some very modern assets, including a fuel-efficient type ship. But just for the sake of simplicity we drew that distinction. So people would understand, how these ships are truly performing once they are on the water. If one looks at a comparative set between how these owned ships are performing against other ships in the Scorpio pool, you strip our any distortions that come from the time charters i.e., the delivery voyages, the palm oil voyages, these sorts of things and you get to a very similar spread of about $3,900 a day, that’s an apples-for-apples comparison between ships that are on the spot market competing with each other in the hands of Scorpio, Scorpio management. Now, we’ll say right now that there are a number of say reasons or drivers behind this discrepancy, but by and large the biggest is the fuel consumption of the new ships. And we’ve been asked to offer proof or different types of verification that these consumption or the consumption data that we’re relying on is in fact real. In the presentation that you’ll see on our website, going forward you’ll see some samples of the type of independent verification we receive. Before any of you on this call ask us, whether these claims can be supported, you should know that our counterparties, our partners, various regulators are keeping an eye also on our consumption data. So, there is no question about what is real or what is illusory. We undergo third-party surveys, third-party verification, independent bodies that administer bunker consumption data. For the simple reason that it’s such a high value item and it’s often a term in charter-party contracts. That being said, fuel consumption data is quite noisy. There are a lot of different factors that can affect consumption data ships on a day-to-day basis. For instance, things exogenous to the vessel like weather, current, sea state, even the depth of water. Obviously, the quality and the properties of the fuel affect the consumption data of the vessel and of course the condition of the ship itself, whether it’s imbalanced, whether it’s laden, also people talk about the idea that ships can get fouled with barnacles or sea weed that are in the water or stationary for a long period of time. By and large this doesn’t affect the dataset that we’re comparing, because most of you may know that ships can have their holes and propellers cleaned while they’re in service to avoid this unnecessary cost of friction or drag on the whole. If one choose to look at economics of fuel savings and how it works in practice. What one would have to do and again there is an example of this in the presentation. One would have to look at different benchmark voyages, a like-for-like comparison between a fuel efficient ship and a say historical design ship. There because we all speak in, say capital markets or analysis, in terms of TCE you actually have to go back to the voyage calculation, which starts either at a world scale rate or lump-sum. From there, gross revenue is calculated and then you have standard deductions of a voyage, such as brokerage commissions, port costs and bunkers. And this difference in bunkers is what drives the difference in TCE across one ship to the next. If one were to do this calculation for example on two ships, the Scorpio currently manages, such as the STI Garnet, and another ship in the Scorpio pool, what one finds on a standard TC2 voyage which is Rotterdam to New York, a round trip with 37,000 tons of cargo, a difference of approximately $3,400 a day. But there are other base lines we can use to use as a point of comparison, because we know the market uses different sources of information. We went back and looked at how at Scorpio new building vessel would do against Clarkson’s and all the different MR rates that it reports every week in its Shipping Intelligence Weekly. And there you find differences in TCE based on this fuel savings of between $3,200 and $4,200 a day for each voyage. This is our presentation of why you see this type of earnings premium across fuel efficient in older assets. Now, when one wants to ask what’s going to ask happen to the spread going forward? Because typically we get the concern of, well, it’s the price of the barrel collapses, won’t this eliminate your fuel saving advantage. And we would say maybe it does, but I would look very carefully first at what’s going on in the market for marine fuel, otherwise known as bunkers or residual fuel. And here we would make four observations. The first observation is that, marine fuels or heavy fuel oil are a very unattractive product or output for refiners. If one were to look at crack spreads for heavy fuel oil, you would see that this is a very unprofitable business. There are people that can profit in that area, but in general if refiners didn’t have to produce it, they wouldn’t. This means that the pressure is on to produce less of it. Right now, of course there is ample supply of fuel oil predominantly because other forms of shipping, such as dry bulk and containers are in such a mess. However, over time we expect that as refining capacity improves in its sophistication that this type of heavy fuel oil will be harder to come by and have a natural bid under it, because it’ll become scarce. In addition, there are many say, toxins or other undesirable components of fuel oil that make it very, very sensitive to quality and also make it the target of regulators. Here we’re referring most directly to sulfur emissions and the quantity of sulfur that is in fuel. So, point number two, observation number two, is that as regulators hone in on reducing sulfur in fuel, this acts as a significant tax on the price of fuel and acts to complicate and fragment the market for fuels. How does this work? Different parts of the world, just like different parts of the United States impose different standards for the quality of fuel. This increases the complexity of the supply chain for fuel and increases pricing and increases the difficulties of different owners with different ships of managing their source of fuel so that they can burn the cheapest type of fuel regardless of where they are. Observation number three is that there are different cause of removing sulfur from fuel that sulfur for example has one tries to remove it from fuel it interferes with other catalytic processes and refining. Sulfur is a natural lubricant. So it places stress on a ship’s lubrication or an engine’s lubricating system and increases the cost of lubrication, which shows up in our operating expense. And marine fuels are generally difficult to transport and store. All of this is providing support to the idea that fuel will be expensive for ships and the spread of fuel efficiency will stay where it is or grow over time. The last observation building on this point is that the correlation between marine fuels and the barrel is breaking down over time. They aren’t necessarily highly correlated or as correlated as they were in the past. Different parts of the world will start to impose or more parts of the world will start to demand that ships use gas oil, which comes at a significant premium to fuel oil in order to clean up both sulfur and other regulated materials like particulates or nitrous oxide. Finally, I want to refer some comments to critics or other skeptics of fuel efficiency, and walk through a few of these for your benefit. The first thing we hear is that the dataset is too small to thoroughly analyze and form conclusions on. Our view is that for us, the dataset is quite noisy, but is – by no means small. We’ve been in this process, in this game on product tankers since the first contracts we signed for these new buildings, it’s quite a matter of course to see this benefit accrue to us every day. We are just delighted now to be able to show this benefit in our quarterly results to our shareholders. The second skepticism we hear, are that the ships are somehow underpowered. Now, this is quite amusing, because anybody who has studied power transmission or been on a bicycle or flown a kite knows that if a system’s efficiency improves, the power necessary to achieve the required output goes down. So, what you have here is ships that are now narrower in form, more efficient in consuming fuel and more efficient in applying that rotational energy of the tail shaft into forward thrust by a propeller. All of this is improved. So therefore, the engine power necessary goes down. This is exactly what fuel efficiency is about. It is a bit of choose to suggest that this makes the ship underpowered, because we’re not wasting energy and drag our friction, we’re not wasting energy and not consuming most of the fuel in a cylinder or we’re not wasting energy by having an undersized propeller. It’s a matter of semantics really, but it’s rather silly. The third skepticism we hear is that slow steaming negates the benefits of fuel efficient design. Now, we’ve not had to in the course of the last four years, five years resorted to much slow steaming. So therefore, we can’t conclusively comment on this. There are lots of very, very able and well respected competitors in the cape size market or in the container market who would differ with this field. However, our view is that so far charter party rates have – charter party speeds have only declined about a knot or knot-and-a-half since 2008, specific depths or the worse shipping trough in the last 20 years, we have not seen slow steaming take hold in product tankers, in the product tanker segment. As an aside, really two things have to happen for slow steaming to take hold in our view, one is you need the customer and the shipper to agree on a lower rate to transport their goods. And the second thing is in the ballast leg where the ship is unemployed; you need a level of transparency forward to incentivize owners to slow steam. And in product tankers, largely because of the way the market is developing, the variety of cargos and ports and also the amount of volatility that’s been sustained in the rate structures throughout the last couple of years, you just haven’t seen slow steaming take any meaningful effect at all. The last criticism we hear about fuel efficiency is that it all looks very good on paper, but let’s see when the results come in. And we hope we’ve addressed some of that today in our earnings report, in this presentation that you’ll see later on. What we would say is look designs and talk among people with – either without the means or the capability to invest today, all that is very cheap. Quality ship, building capacity, quality commercial and operational execution and the equity of our shareholders is extremely dearer, which is why we are taking these investment decisions so seriously. So, we suggest that – of course, we’re talking our own book. We’re living our own book. And you’re too. So, we suggest you ask motors of either economists or other observers of the market who do not have real information at their hands. Why they do not want fuel efficiency to become a meaningful part of the shipping market. With that to conclude, we would say that the fuel efficient product tanker is here to stay. If one could anticipate sustainable savings of $3,000, $4,000 or even more per day for fuel efficient ship off a relevant base line. In addition what I haven’t talked about very much is the cost advantages of operating a fuel efficient ship, which largely come from savings and lubricating oil and also savings on insurance and other claims, which naturally come as a virtue of only modern ships. And of course, haven’t spoken about intangible benefits, because customers and other industry participants now favor greener ships with a lower carbon footprint. In either event, we are expecting to see the savings persist for at least the next several years based on constrained shipyard capacity. And with that, I’ll hand it over to the moderator for questions.

[Operator:]

(Operator Instructions) We’ll take our first question from Doug Mavrinac with Jefferies.

[Doug Mavrinac:]

Thank you, operator. Good morning, guys. And first off, congratulations on a very strong first quarter results. And then secondly, Cameron thank you for that detailed analysis of fuel efficiency. I mean, first off its saving you a question, because I was going to have a question on that. But then second, I think in summary, the proof is in the results. I mean, what you guys earned first is the chartered-in fleet is very, very impressive. That off of the way, since your last conference call, I guess there has been a couple of other parties out there ordering new LR2 carriers. And now we’re seeing those delivery dates stretch out into early 2016. My question is how is that affected asset values over the last month or so? And then, how does that also affect the optionality premium on your newbuild options that have delivery dates in 2015?

[Rob Bugbee:]

Okay. Doug, its Rob Bugbee. I think that it’s pretty clear that first of all in general terms we have had a movement up in the yard prices over the last week and a movement out in terms of time, in terms of birth availability. And this isn’t really coming just from the product market it’s coming from the container market and the dry bulk market. You’ve had some pretty strong orders into those Korean major yards into Japan too. And so, the prices in the yards are moving upwards. I think that in general, owners of the eco-ships themselves are very strong. And that they themselves – the industry, the lenders have seen now confirming data probably four weeks, five weeks before you guys are seeing it now. And so U.S. starting also to see a widening spread between eco-ships and non-eco-ships. And I think that eco-ships have been moving up in price in recent sales and purchases done in the non-eco-ships have been flat to best. What does this mean for us, overall fleet, generally I mean, we don’t comment on asset values in detail, but obviously asset values are moving up for us. And obviously, our options are almost 100% in the money and in some cases, quiet a reasonable amount in the money and I think that one thing I would add to Cameron’s presentation, it does come back to the shareholder, it comes back to the shareholders return on equity. If you’re using spreads between operating costs and actual time charter revenue of somewhere around $5,000, $6,000 a day. Europe, that’s equating to somewhere between $1.8 million and $2.2 million a year. You are starting the day 15% to 20% return on equity at any point better than your existing competition, that’s pretty good.

[Doug Mavrinac:]

Right . That’s 100% right and Rob that’s why I was so impressed to seeing those numbers jump off the page math. The first thing we noticed for 1Q and then obviously the implication for the rest of the investment and then the thesis overall. My second question is kind of giving all of that, can you just simply provide us an update in terms of Scorpio’s fire power in terms of being able to, continue to take advantage of, what’s going on in the refined products tanker market?

[Rob Bugbee:]

Sure, I think, two areas we got. We have got plenty of time charter fire power. Obviously, our outlook going forward as we get confirmation of these spreads and these earnings potential and continued conformation that the underlying market is firming. Your self-generated fire powder is increasing every day.

[Doug Mavrinac:]

Right.

[Rob Bugbee:]

I think it’s a little bit early to go into exact details; we ourselves are surprised about how well the second quarter is started. Now if you take the amount, first four weeks or so are pretty darn similar to the first quarter, which is pretty surprising. So we continue to be pleasantly surprised on that part of things. And we – our fire powder also is depended upon our credit size. We announced before that we are fully syndicated the 267. We’re now in the process of upsizing that credit facility from 260, we’re not in a position yet to say what that position is, but we are very confidence that that will come the conformational of that and the exact number will come shortly to you. And then we are – we’ll shortly follow with a second new facility after that. So, we’re very happy that the debt side as well is improving.

[Doug Mavrinac:]

Got you. And then, just – thank you for that Robert. And then just the final question, talking about your fleet depreciating in value and your newbuilds being in the money and then, all the fire power that you have to continue the growth. I guess one thing that’s surprises possibly during the quarter was the announcement of the dividend. It happened a little bit sooner than we were anticipating. And so, I guess my question is kind of given that your cash flow is ramping up now, you have a lot of this growth that’s going to be really – the growth trajectory is going to be accelerating. How should we think about that dividend in terms of, how are you thinking about it? Is it something in terms of way to return cash to shareholders, with your cash flow ramping up, should we expect it to increase, I guess what are your thoughts on that, because I don’t know if that you guys will address in a public form, since it’s been announced?

[Rob Bugbee:]

Well, I think the first thing that we would say on dividend is that the management and board have united the dividends of any form must be paid out of real EPS, can’t borrow the dividends, you can’t pay dividends, unless you’re making annually EPS. The second aspect is we felt that we had set them many months, years that the company would when it feels that it has in its own mind, a view that the market has to turn this quarter, they thought you can get sustained profitability that we would insert a nominal dividend as soon as we could. We have a number of existing shareholders that like some form of income aspect, and we have a lot of people that have been unable to acquire our shares so far interested in having some form of nominal dividend. At this stage, that’s about where we’d like to leave it. We obviously have a very high return on equity investment at the moment. I mean, if you were to just take simply what those MRs have earned, $20,000 plus, they’ve been returning something like ten, I mean don’t know exactly what the calculation is, but they’ve returned basically 10% of their equity in the first quarter of the year, that’s pretty good. So that’s the kind of equity returns that we know are opportunity for equity is. So you’re not likely to see in the coming, in the next quarter or so, moving up the dividend, regardless of how well we do, because we want to invest shareholder’s capital at the moment. But clearly, over time and especially as we start getting into next year and we at some point our future curve of CapEx declines as opposed to and revenue increases, we expect to have plenty of opportunity to raise dividend.

[Doug Mavrinac:]

Got you. Perfect. Thank you very much for the time.

[Rob Bugbee:]

But, at the caveat we’ll do what we did to OMI, which is if the market isn’t giving us what we think is right in its forward assessment, well then we’ll probably buyback stock instead of buying dividends – issuing dividends at that point.

[Doug Mavrinac:]

Got you. Got you. Very clear. All right, great. Thanks a lot of for the time, Robert. And congratulations once again on both a very strong first quarter results and then also confirmation on your thesis of investing in these eco-ships. Thank you.

[Rob Bugbee:]

Thank you.

[Operator:]

We’ll take our next question from Herman Hildan with RS Platou Markets.

[Herman Hildan:]

Hi, guys. Just a quick question. You talked a lot about fuel savings on the MR tankers, is it too early to say anything about how much potentially you can save on the other three vessels?

[Rob Bugbee:]

Herman, thanks for the question. I think that the best way to put it is we’re – we don’t go investing our shareholders money without having a very-very clear idea of what the payback on that equity will be, okay. So, we have a pretty good idea. We’re not prepared to put it out there at the moment, but given our discussions with the yards along the development of these new designs, given the track record or the experience with the MRs, the best guidance I can give, it would be something similar based on say the size of the ship, if you pro-rate to the size of the vessel, okay. However, I’ll add one caveat to that is, in MRs we have the benefit of a largely homogenous asset class. The dimensions of the ship and the current capacity of an MR has been the same for 20 years. It’s not likely to change very quickly. This isn’t true on Handy’s and LR2. So while I’ll tell you that we’re going to be very delighted with the amount of fuel we’re saving on these ships. Again, it gets back to the sort of pedantic conversation of what are you measuring that against, are you measuring against say LR2 out of a greenfield yard in China that was spit out in 2008 or you measuring it against a smaller Korean design that’s incredibly competitive. But has a smaller hope from anyway, it gets more into say confusion or technicalities on the baseline discussion. But we’re extremely, extremely positive and confident that the return will be at least as good as it is on the MRs.

[Emanuele Lauro:]

I think I’ll add one more things that determine, on the LR2s, you’re going to spend more – the chances are you’re going to spend much more of the percentage of time in sea. Therefore, you’re likely to capture even more on dollars that they benefit whatever that differential is.

[Herman Hildan:]

Right. Exactly that was my kind of follow-up question. Okay. And my next question comes on the – sorry did you want to add anything?

[Emanuele Lauro:]

No, no. It’s okay.

[Herman Hildan:]

On the chartering side, I mean, we’re seeing year-to-date chartering activities about half of total fixtures that we sold last year and it’s getting close to the total fixtures in all of 2011 and rates year-to-date are close to 20 (inaudible) and but still it seems that the charter market is kind of not really moving off a bit. Could you add some flavor to why you think that is?

[Rob Bugbee:]

Yeah. I think that you’ve still got some weak players out there who feel that they have to get time charter coverage because their loan to value is probably too high still on existing MR fleet and they are not getting the working cap requirements has been quite high with fuel where they are. Though, you’ve still got a supply of people who need to have that security just to stay in the game or they are going to have to hand the keys over or come up with new equity to give to the lenders. But I think that more importantly than where the rate is, the forward curve is higher and the most important thing is, if you could think customer, one customer after another, just continue to go along the market. I’d actually wouldn’t mind this to carry on for another two months, three months, four months, because every time you get one of these weaker hands fixing out the ship on time charter and giving it to a major trader or a stronger owner. You got a form of consolidation of the market at the operating level. So, I think what you are going to see in the time charter land is, you’re just going to see it going along like this and at certain point, it’ll hit an inflection point and then move forward. The other thing is, you got to like a two-tier marketing time charters at the moment, because it’s quite high to anticipate. For example, you are going to take a ship on time charter that’s going to go into the years of 2015 and 2016 and it’s a non-eco ship. While who’s going to pay for the retrofitting of that of 2008-2010 build ship? What’s going to happen? Who is going to keep the vessel compliant? So, this is another area that is going to give a little bit of a grey area even if you look at the dockets of OSG, you could see a shift in who pays for what in terms of retrofitting of – for time charters older vessels. So that also is keeping a little bit of a lid on the ability for the non-eco vessels to command any short form of price increases at the moment.

[Herman Hildan:]

Yeah. And also, you briefly discussed about ordering activity. We saw – I think it was mentioned, a few orders for late 2015, early 2016 delivery. I think, that was at the yard that actually well soon after bankrupt. So, my question is, if you go through say a court to yard, ME4 et cetera, and you don’t have any option, what’s the likely delivery schedule for a new one?

[Cameron Mackey:]

Herman, it’s Cameron. I think that if you go to established yard with a track record, depends on the size of the ship, let’s just make an arbitrate distinction between small ship capacity and larger ship capacity. The smaller ship capacity you’re looking probably into the middle of 2015 at the earliest, but availability is quite spotty because large amounts of capacity been booked up already on competing ships from very large credible customers like Shell for example. On the larger ships, there is also very spotty availability but for different reason which is the larger credible yards will always prefer to build long series of higher margin vessels like your container ships or your offshore facilities or gas carriers, and this sort of thing. So, really they are as a matter of choice doing as little as possible on conventional ship types. And this is also what’s driving the price. In either event, we’re seeing new building prices up somewhere in the 8% to 10% range, at least.

[Rob Bugbee:]

I just want to like to add something in general in this from an operating perspective here. I mean it is what we are – we’re not pleased with $0.08, we know that that’s going to be – and can be improved on et cetera. But, what is really pleasing is the company is profitable with so much of its equity stuck in a shipyard somewhere and the vessels that we are going to get delivered over this next 18 months or so have better margins, they have lower breakeven points, younger, fitter, their fuel efficiency likely can be better. So for us, what’s very important at the moment and what you device should do out there is simply just put in, just for 10 we had that fleet in the first quarter and you’re going to have a company that is throwing up pretty good profits, even where the market is right now. That’s the basing point. Then, on top of that, it is impossible as what Cameron is putting out in terms of new building. It is really impossible for anybody to replicate this fleet within two and two and a half years. If they can’t order that first ships still third, fourth quarter of 2015, that’s a long way for a competitor to start to be able to replicate the position. And even if they can replicate it in size, they’re not going to be replicated in price and breakeven levels. So, maybe we’ll take the next question, it’ll be great.

[Herman Hildan:]

Yeah. Just my last question on the options. Is it possible to say anything about how many options you have or what kind of asset class its tilted towards?

[Rob Bugbee:]

No, not more than what we’ve got it to at the moment.

[Herman Hildan:]

Okay. Well, thank you very much.

[Rob Bugbee:]

One-two, we’re kind of got our lead. We’ve given our position to everybody. We are giving information related to the eco positions, but at the same time, we are playing in a market against competition. You don’t necessarily want competitors or yards or anybody to know at the moment. So, this is going to be a little bit of – taken us from after at this point.

[Herman Hildan:]

Okay. Thank you.

[Operator:]

We’ll take our next question from Urs Dur with Clarkson Capital Markets.

[Urs Dur:]

Hi. Good morning, everybody. Do you guys hear me?

[Rob Bugbee:]

Good morning. Yeah.

[Urs Dur:]

No, I’m sorry. I appreciate the discussion on the eco-ship, I just see the price slide presentation now. I didn’t have it up before. And you mentioned about the physics of the matter that the ships are under powered because they’re designed in a manner that makes them more efficient and therefore they need less power to produce the same propulsion. One of the arguments, and you have mentioned it, so I’m not trying to aggravate anything here, just get a little bit more color. One of the elements that people who criticize eco-ships is that they can’t handle heavy weather. Given – or may not be able to, let’s put that way. Given your experience with the ships to-date which is now as you point out – you guys are on the leading edge of that and frankly have a lot of data. Have you experienced weather and headwind and have you had any issue whatsoever with speed and performance that would somehow not meet charter party standard?

[Rob Bugbee:]

I’ll let Cameron give more details on less flippant answer, but the first quarter – with the first quarter as with the vessels trading primarily in the Atlantic, the North Sea, the Atlantic, the U.S. East Coast and the Baltic is known for its kind weather in January and February and March. But I’ll let Cameron to give more detailed look at it.

[Cameron Mackey:]

No, I’ll give you a sort of more say thorough answer or there’s a couple of things going on. One is weather is a form of provider, form of resistance or drag on a ship as it’s trying to propel itself through the water, okay. And as everybody knows, the power curve is actually a cubic function i.e., as the power demands on a vessel increase; the amount of power to meet those demands goes up as a cubic function. Okay.

[Urs Dur:]

Sure.

[Cameron Mackey:]

So, naturally, any inefficiency you have in your system is exacerbated at higher speeds.

[Urs Dur:]

Right.

[Cameron Mackey:]

So therefore the difference if you want to put it that way between what an eco-ship can do and what a legacy design can do is wider, the spread is greater as the ship either tries to go faster or as it hits certain types of increased drag or fiction in the water, okay. There is as a academic point, there is a choice that an owner can make of whether or not or how much to reduce the power on a ship, this choice has always been there, been there with old design and new designs will continue to be there. And a lot of it has to do as the speed or the optimum speed that the owner feels his ship will be asked to go. So this is why we’re not in the container business for example, because that choice on what optimum speeds the container ships will be going forward is quite a complex decision and affects greatly the amount of power that one installs in a container ship. With tankers, it’s quite easy. You have through the worst markets over the last 25 years-30 years, you have charter party speeds not dipping much below 30 knots. So we know the optimum speed. We don’t anticipate a world in which charter party speed get above 15.5 knots. So we have relatively easy time in choosing the power acquiring from the ships and how to tune and optimize the ship around those speeds. So the short answer to your question is, no. We haven’t seen anything or we don’t have any evidence to suggest that ships are unpowered. And if anything we challenge any older ship to a drag race across the North Atlantic to prove the point it’s – we’ll go back to the days of the C cloud, it’s no problem. We’ll get to San Francisco around the cape faster than older ship. But as an academic point, it’s rather ludicrous to suggest as the class of ships to these vessels are underpowered. That being said, someone can go find a design. Ship designs are passed back and forth around shipyards and around market participants all the time. So a pundit could easily say, ships are underpowered based on something they’ve seen from a yard that’s never produced one.

[Rob Bugbee:]

I think, I would add again and simplify positions here. It didn’t go to Scorpio sort of doing this. I mean, there’s a lot of people who have seen or taken out, and we have a reason to share things with friends or whatever and like in customers. But look at what the customers are doing. The customers are ordering these eco-ships. Shell has confirmed orders. Shell has confirmed options, Valero, Whitall, BP, Total are trying to charter these, vessels like this. It’s across the line that the customer is also saying this is what we want. And that should bring a lot of comfort to you as well as anybody else who’s not actually seeing the data like we are.

[Urs Dur:]

Right. Right. Now, I see what you’re saying is just more to give you opportunity of a little bit more color of that. The other question then heads towards the barriers to entry if any question because it makes as much sense as you say it does and we’ve generally been believers as well. So, it’s not a – this is not availed question in anyway, but it is the yard space at high quality yards now pretty much booked through 2015 or 2014 and into 2015? And what’s the potentiality of yards that haven’t previously build? This quality of ship, this style of ship, this eco spec ship, what’s the possibility of other owners mimicking the design and doing it at yards that haven’t done it before and what are the limitations there, if any?

[Rob Bugbee:]

Okay. First of all, the yard space it has – 100% across the board gone in 2014. So, that’s in a relevancy. In the top yards, we can clearly see that it’s pretty well thought from a couple of first booked out through to third quarter, fourth quarter that Cameron is talking about. Even – top quality company like Teekay is having installed a newbuilding program starting with a couple of ships coming in 2015 and the balance in 2016. It is not just the products that are competing for these yard spaces as we said before, it’s the cases, the containers et cetera. A whole country is being taken off the table with the reviver of the interest with the dry cargo, which is Japan, which is predominantly booked out until the end of 2015 anyway and it’s dealing with new mini strike cargo requests. And China is a long way away from – let’s say sustained quality, and the willingness of people to go in there.

[Cameron Mackey:]

It’s came up for say two things, one is as a general matter on the demand side, the balance sheet of shipping as a whole is under incredible pressure, so you’re.

[Urs Dur:]

Absolutely.

[Cameron Mackey:]

Right, so this is going to keep a lid on inquiry for some time, but similarly the income statement of the ship building industry looks broken as well. If you look at how ship builders and (lithos) that are publicly listed are doing, you see incredible problems with their profitability and you still see contracting yard capacity. So of course if the market, if any shipping segment were to take-off in its profitability, of course you would stimulate ship building demand. But what you have now is a window where the amount of money that it takes for a yard to be profitable building an MR tankers or above where newbuilding prices are still even where we’re talking about today, which means that new inquiry of struggling yards or second tier yards is not sufficient to be profitable and therefore these yards are going to have a lot of trouble booking any significant capacity. They will not get the credit support in order to carry on our loss making operations if their balance sheet is already screwed up.

[Rob Bugbee:]

Without going too much details, you can see in the press, the trouble that even one of the former top Korean yards is having right now at these price level.

[Urs Dur:]

Right. No, no that’s helpful. And then I guess my final question is, what does the charter end market look like? You’ve had a lot of very attractive ones over the last year to charter in. Obviously, now as to what the ships are earning and clearly these are large legacy designed ships. But what does the charter market look like? Are there still a lot of owners out there that are very interested in locking in cash flow for the next year or so? I know you typically look at one year or so, what does it look like, the deals coming?

[Rob Bugbee:]

I think they’re getting – notwithstanding what I said before. There are less opportunities. Our capability of time charting ships has increased. But, and our interest is still there, but you’re seeing even in this conference call, we haven’t announced new chartering of a vessel. So, that telling you something that is, that market is starting to get less opportunities, that healthy sign going forward that is tightening up. I mean, it’s had 12 months of weak tonnage going to strong hands. And it’s starting to take the column out. One in the lack – in less opportunity to time chartering from weekends with options and secondly in its consolidation itself from another customer in the operating side.

[Urs Dur:]

Thank you very much.

[Rob Bugbee:]

We will continue to try and find opportunities where we think there’s value. So that’s it.

[Urs Dur:]

Great. Yeah. Now, I got you. I believe you. All right. Well, thank you very much for your time. That’s all I have got.

[Emanuele Lauro:]

Thanks.

[Operator:]

We’ll take our next question from Jon Chappell with Evercore Partners.

[Jon Chappell:]

Thank you. Good morning guys.

[Rob Bugbee:]

Good morning.

[Cameron Mackey:]

Good morning.

[Jon Chappell:]

Robert, you mentioned the two facilities. While the potential upsizing of the $267 million one that you’ve already announced and then your efforts after that one’s upsized to move on to another one. I’m obviously not expecting you to give us any specific numbers around that, but when you think about the potential, what you can get from these two facilities and how that matches up with your CapEx program, does that fully finance the 38 newbuilds that you’ve committed to already?

[Rob Bugbee:]

Well, I think that our plan when we are doing finance would be between now and end of the summer or whatever would be – being not to just fully finance the newbuildings that we have, but to also provide finance for anything else that we may not have.

[Jon Chappell:]

That leads my follow-up then. When you think about the options and I won’t give us the number, but what’s the timing on exercise or exploration of the majority of those options and then when you think about...

[Rob Bugbee:]

Again, we see the commercial importance of that is too high at the moment. It over weighs the wish to always to be transparent on that.

[Jon Chappell:]

Okay. But we think about – as we think about equity, don’t need any for the current newbuilds, but you were to exercise options, is that kind of the next move that you think an equity raise would be required for?

[Rob Bugbee:]

Well, if you look at options, options by definition are option. So you don’t have to do anything. We definitely don’t have to raise any equity, we don’t think for our present commitments. As I explained to Doug earlier, with our improving outlook, maybe let’s say a better outlook on the present balance sheet. But you’re at that point where you really, you obviously you would like to exercise auctions that are in the money, but you’re not going do that all costs. So, you’re now in let’s say the more luxury position that you a) don’t have to exercise an option, b) you’ve got the premier fleet already. So, you’re going to be at issue equity at your own ledger. You are certainly going to pass on any auctions even if they’re in the money, rather than doing equity offering that is a weak offering and your requirement for equity as a ratio of any capital expenditure that you would need would be less, because your ratio of expected cash flow is going to be higher in your auction time period, your delivery time period for the ship is going to be later. So, the answer is that, of course to the degree that you’re getting sensible pricing that it’s accretive and whatever you would and you wanted to do something substantial, you would issue equity. But do you have to know? Are you willing to pass on options that are in the money? Absolutely, if that means that you protect the positions there are at the moment. So, I would think that anybody hanging back hoping that they’re going to get shares in a public offering, that’s not really a good strategy, especially as many people only seen that there has been an offering at the time that we’ve actually already done it.

[Jon Chappell:]

Understood. And one more from me.

[Rob Bugbee:]

And finally, you’re getting much, much closer as you go through this period and you have that world of EBITDA coming next year, you start opening up different avenues like the bond market and whatever. So...

[Jon Chappell:]

Yeah, understand. Last one, G&A down sequentially first quarter about 10%. If you think about, you taking on delivery of 38 more ships and Emanuele mentioned earlier the platform that you build, can you operate that fully delivered fleet with the current infrastructure in place or should we expect to see some G&A ramp in 2014 as the bulk of the deliveries come in?

[Rob Bugbee:]

You’re going to see G&A go up, one because the fleet itself is much bigger. The company itself is much bigger. And we haven’t had any – we haven’t asked our board or disturbed any pay rises or bonuses up until the 2013. So, hopefully what we think we’ll be making in 2014, hopefully we’ll be paying the staff a little bit too. That’s just – you would expect G&A to move up with a combination of an expanding company and hopefully increasingly profitable company.

[Jon Chappell:]

Okay. Thank you.

[Rob Bugbee:]

I know that hasn’t been the norm, because you normally have to file to get bonuses. But --

[Operator:]

And we’ll take our next question from Omar Nokta with Global Hunter Securities.

[Rob Bugbee:]

Omar?

[Omar Nokta:]

I’m sorry about that. Can you hear me?

[Rob Bugbee:]

Yes.

[Omar Nokta:]

Yeah, sorry. Just have a quick one, on the LR1s, I noticed that the charter rate came in a bit lower than the other LR2s and MRs, were also lower versus last year. And I’m just wondering what do you attribute that to? Is there – are they trading in a completely different lane and say the LR2s or is it sort of a Q1 type of event?

[Cameron Mackey:]

Omar, it’s Cam. I think you have a couple of things going on in the LR1 sector. One is of course, the results reflect both trading and dedicated clean markets and also few other markets, when you see sort of counter seasonal or short-term weakness in those markets, driven by such things as a) say significant reduction in refining capacity and AG that we expect to turnaround heading into May. But also reduced fuel oil movements in the Atlantic basin, largely because some of these movements are cannibalized by the crude market, which as you know is on its knees and other factors. We don’t expect these to be say long-lived, largely because of the refining capacity question, both in the U.S., Gulf and the AG starting to ramp up. But, sure it is a factor. It’s not as much of the factor on the LR2s if that’s your next question, simply because the customer base in the natural trading roots is slightly different than they are in the LR1s. You haven’t seen the same type of dynamic there.

[Omar Nokta:]

Okay. Thanks a lot. And then just one more thing, Robert, you had mentioned earlier in the call that so far the first four weeks of this quarter have been off to a – surprisingly strong start similar to what we were seeing in Q1. Is there something in particular that you’re seeing this sort of – this shoulder season that’s different than say last year, that’s allowing for rates to be much stronger or is it just simply from your either firmer supply demand dynamic?

[Rob Bugbee:]

Well, I think of firm supply and demand dynamic and you’ve got a market that is more balanced. So, it’s reacting to refinery, altitude, changes, dislocations such as what’s going on in Argentina. But primarily, it’s being dragged along by really just the firming demand side. And I think this is something that’s pretty important is that we’re also surprised that we did generally surprised that the market is being bit strong and is resilient now for four months or five months now and we keep sort of saying that. And obviously, we would like to have more ships on the time charter 12, 13 a day. We didn’t anticipate it would – we felt it would get stronger, but it keeps surprising us. And there’s so much more to this year and the next sort of 18 months, we still haven’t had the full effect of U.S. Gulf exporting (inaudible) coming up. We’ve still got to come, the Saudi Arabian refineries and the next phase of the expansion to the Indian refineries. And every day, we get the forward future good news, such as potential closures of refineries in established countries like Australia et cetera. And we get incredible ancillary demand good news. I mean, if we look at the expected export growth of vegetable oils from Argentina and Brazil or palm oils from Malaysia and Indonesia. These are long – a lot of these are long voyages and the export growth figures are pretty high. And that combined with more growth than general economic well being in the product side. I think is leading to these more positive demand environments. So, I mean it’s pretty exciting, because we’ve got two things that were commented, that they – our present earnings the discounting, they are discounting the not only the fact that we’ve got 38 ships in shipyards, which is more than our entire fleet including time charters that we had in the first quarter in operation, but also the market is discounting on the demand side the continued good numbers on demand. And it’s discounting what can happen when we get to 15 when you have the combination of the low sulfurs combined with the new environmental regulations and potential retrofitting of old vessels. It’s just – but right now, it’s just pure demand.

[Omar Nokta:]

That’s interesting. Well, thanks Robert for that backdrop. That’s all from me.

[Rob Bugbee:]

Thank you.

[Operator:]

Thank you. We’ll move onto our next question from the Fotis Giannakoulis with Morgan Stanley.

[Fotis Giannakoulis:]

Yes. Hi, gentlemen and thank you. Cameron, I would like to clarify a few of the numbers that you mentioned earlier at your presentation. You said that the premium of the eco-ships is estimated around $3,000 to $4,000. I just want to ask is this on a time charter equivalent basis or it’s on the steaming base of the ship?

[Cameron Mackey:]

No. Thank you very much for that Fotis. First of all, I think Urs mentioned earlier, it appears that presentation is now up on our website. So, people can sort of look through the discussion point. It’s on a time chart – the answer to your question is, it’s on a time charter equivalent basis. So picking your baseline, whether it’s a Clarkson’s vessel or your Clarkson’s average MR results published weekly. The saving should be somewhere between $3,200 and $4,000 a day TCE. But typically our utilization of our ships one would count as 360 days out of the year.

[Fotis Giannakoulis:]

Okay. Thank you for that. Just further clarification. Given the fact that even existing vessels they have some fuel consumption differences, is the comparison – what is the comparison based upon, and I’m just trying to understand an existing let’s say Hyundai Mipo like the once that you have ordered versus a vessel that was delivered in 2008, like other public companies like Capital Partners or arbitrage owned. What would be the difference on these types of vessels?

[Cameron Mackey:]

No, we – Fotis, thank you again for that. We stand by our previous statements that we made late last year that it’s around seven to nine tons. But remember that like we’re trying to clarify in this presentation, that’s on main engine consumption. Other consumptions, there are other type of fuel. There are natural delays of the ship as it tries to churn itself around in port. So there are a lot of different variables that translate that main engine consumption into a TCE and this is the purpose of the presentation. But the answer to your question is – again, operating these types of ships in our pool and on time charter in, we have very good data on what those ships are consuming. So we’ll stand by that comparison we made late last year.

[Fotis Giannakoulis:]

Okay. Thank you, Cameron. I appreciate your answer. One more question regarding the value that we can apply to this fuel efficiency. And also, if there is any high price arbitrage right now that one can take advantage given the fact that you bought some fuel efficient vessels at 36.5, five-year old vessels are selling lower. Where is the difference right now this $3,500 or $4,000, does it create any arbitrage opportunities and for which type of vessels which age?

[Cameron Mackey:]

I think absolutely it does. If we weren’t public and did not have to disclose all this, obviously we’ll be out time chartering in the eco-ships of others that either don’t appreciate or don’t believe in the savings. You’ll note that we already have one fuel-efficient Hyundai Mipo type on time charter in, which is one-fourth form of arbitrage that we were lucky to capture. But we don’t expect that type of opportunities to continue too much.

[Rob Bugbee:]

I mean the other arbitrage is out there, again it’s very difficult to do. If you could take the present valuations on lot sales of five-year MRs and brand new proper eco-design vessels like ours, hey, you would go long that index on the ecos and shortly five-year old one all day long, just all day long. Unfortunately, all you have as an investor is the opportunity to do along Scorpio, because there is not, that’s the way it is.

[Fotis Giannakoulis:]

I mean, this is the only public company anyway, that is product tanker. So, this has cleared the option. What I want to understand is that a five-year old is $25 million, MICO Ship is at $36.5 million. Is there a five-year old, do you think it’s an expensive vessel for you to make an acquisition or the fact that you could...

[Robert Bugbee:]

I think, I understand the question. I think it’s a little bit more complicated than this because a five year old MR at whatever price you’re putting it in reality gets worth financing terms on the debt side than on an eco vessel. And, there is a big contingent liability in there. You don’t really know how much you’re going to have to spend once the environmental rules start coming in 2015 or whatever, you have no idea. So, is it really costing you $25 million or is it really costing you $25million plus $2 million, you have to forecast into 2015. It’s an unknown quality, one of the great things with these new vessels, in the eco design vessels, we know what our cost structure is, and so did the lenders, there is now obsolescence risk for the lenders at this point, whereas if you’re looking at the non-eco’s, you just do not know what your cost structure is. You have no idea.

[Fotis Giannakoulis:]

Is finally...

[Emanuele Lauro:]

Finally counting Robert, Emanuele here. I actually think that, we have the duty and the responsibility to show our shareholders, how we invest their money and to show them the performances of their investments, but if other people are still so reluctant and want to buy old assets, be our guest. I mean we’re not going to force them to invest in new eco-ships. If they want to buy second hand tonnage, at the end of the day it will only benefit us. So, they should go ahead.

[Robert Bugbee:]

Yeah. I mean I totally agree with that. We’re sort of setting out our store. The best thing for our investors is to invest in the eco design. We have seven non-eco design ships, that we can’t have our cake and eat it, we know that we’ve got issues with these ships that once we get into the 15 area. But obviously, one effect is that much, because we got so many new ships delivering.

[Emanuele Lauro:]

We may change the matters in the other – in the next conference call, actually saying that, eco-ship do not work to have people actually starting to believe that and stop investing.

[Robert Bugbee:]

This is pretty much going to be the last, this is – we put out the data, it’s empirical data. And it doesn’t serve us as Emanuele says strategically well to keep having to explain why it is that we’re doing the good thing. We’re happy that other people as Emanuele says have a different view.

[Fotis Giannakoulis:]

No, clearly, I’m not challenging your strategy, but...

[Robert Bugbee:]

And I also...

[Fotis Giannakoulis:]

Do understand there is a value?

[Robert Bugbee:]

I also frankly believe that, look obviously it matters in the first quarter. Doesn’t take a rocket scientist to work out, actually all of our profit came from the eco vessels plus the time chartered in fleet in our existing vessels actually didn’t make much in the first quarter. But as the market improves, it is impossible and where we think the market can go to that you actually make great money on non-eco ships. The market can’t go that high. It’s just that your return of equity which is going to be probably 15% to 20% less than ours.

[Fotis Giannakoulis:]

Just to ask that – given that this big difference in time charter rate that you demonstrated, what do you think that is going to be the order book beyond 2014? Do you see this order book increasing and especially about 2015?

[Robert Bugbee:]

Sure. I think that you would expect that – I mean 2013 and 2014 are two of the lowest order books that is on record and they are back-to-back for the product market. And you would expect that once 2015 is finally booked it probably going to be a little bit higher than 2014. But it’s still going to represent one of the lowest years excluding 2013 and 2014 in the last 2012.

[Fotis Giannakoulis:]

And my last question...

[Robert Bugbee:]

I think that’s a great point that we’ve got three years ahead of us here of a historically low actually individual years order book. Not along the three years together.

[Fotis Giannakoulis:]

I just want to ask also about the overall market we have seen some the closures of refineries in Australia helping a lot the Pacific market. Can you give us an idea of what is the situation out there and how many cargos this refinery closers have added to the market – and just to have an understanding of how many are the cargos every month in the Atlantic and in the Gulf of Mexico and how many new cargos they have been added because of Australia?

[Robert Bugbee:]

Okay. We don’t track things in that way. We take it in terms of where the trends are going. I think you yourself at Morgan Stanley doing great work on the specific refinery space. It’s not useful to us in terms of tracking it in that sense, because you’re not 100% sure, which cargos are going to be taken and also there is always a multiplier on top of the arbitrage as well. But something like Australia, is extremely valuable to have increases on refinery imports, because it’s stuck in the middle – Australia is stuck in the middle of nowhere. It’s a long way to get to Australia from anywhere. And, you’re just seeing it’s continued theme of demand being in places that are long way from the refineries such as South America and Africa. But the data unfortunately, you would only be at track it in reverse. I mean like right now, we’re only right now getting the cargo liftings, and the cargo data for the fourth quarter. It will be two or three months before we get real accurate assessments of the first quarter.

[Fotis Giannakoulis:]

Can you add – do you see any cargos from India primarily going to Europe right now or this is something for the future to come?

[Cameron Mackey:]

But one of our vessels is on such a voyage right now, but I don’t think that’s answering your question about the trends of these flows. We obviously expect them to increase, because we continue to see pressure under refining capacity in Western and Northern Europe. Have we seen it in say volume of cargos, gradually it’s not moving quickly. But we’re seeing gradual, as we’ve seen it through the last couple of years to slow, but very-very steady almost inexorable progress.

[Robert Bugbee:]

This really is. I think Cameron has put it right. What’s so exciting about this for us, is this is just a slow and steady grind upward and that’s fun.

[Fotis Giannakoulis:]

Thank you very much Robert. Thank you, Cameron. Thank you, Emanuele.

[Robert Bugbee:]

Thank you.

[Cameron Mackey:]

Thanks.

[Operator:]

We’ll take our next question from (inaudible) Markets.

[Unidentified Analyst:]

It’s (Nikolai) from (NYSE

[Robert Bugbee:]

Well, obviously right now, we know that there – despite a lack of profitability to eco vessels, they’re still creating, they’re still creating positive cash flows, we still think the market is going to improve. And you’re not going to do anything with these vessels at present. But by the time you get, you can think of read between the lines, what we’re saying here is that, we believe we have unknown expense, unknown risk on these vessels even if you were to retrofit them, that’s still not going to be the customers’ first vessel of choice. And right now we still have 38 new buildings to come. So it’s not a decision that’s going to be taken I think this year. But it’s sort of a decision that’s going to be taken as we get into 2014 with the newbuildings delivered. But you got time, if someone wants to throw us a great price on the a conversion project in between or someone trying to – I mean, we don’t know, we have time. But it’s obviously not there in the long-term strategy of the company. This company wants to get to full eco along as – along the way as fast as is practical.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

We’ll take our next question from Chris Snyder with Sidoti & Company.

[Chris Snyder:]

Hey. Good afternoon guys. My only question is on the Handy’s. They had a really strong performance this quarter. I was wondering if there is anything in particular on the demand side that was driving that and those dishes where you think that they can continue to operate during the seasonal stronger periods?

[Unidentified Company Speaker:]

Yeah. Hi. This is (Chris). It’s – as we’ve explained in some of our other disclosures, the Handy’s are a more regional asset and because of their regional trades, they’re more susceptible to seasonality. So naturally you would expect Q1 to be say the high point of their earnings year. We’ve seen notwithstanding that there was a mild winter here in New York. You still see tremendous weather disruptions because the natural trading legs are shorter, they’re further north, they are more prone to ice, weather disruption and more say pure trades or distribution assets that this uncertainty in perception and risk is what drives up your premium at this time of the year, even if you don’t have a lot of ice out there or a lot of say, cross-met movement. So, the answer to your question is yes, it’s a seasonal – it’s a certain seasonal uptick, but I would also refer to Robert’s earlier comment that Q2 has started very strong, the winter in the Baltic last – at least until May, if not end of May, so we have seen some very, very positive numbers and demand on these ships.

[Chris Snyder:]

Thank you. That’s it from me.

[Robert Bugbee:]

I’d just like to add one thing to the previous questioner’s call is that obviously, if you ended up now selling the older, non-eco fleet of early 2015 delivery or end 2014, it would create liquidity that obviously would allow us to invest more into the eco-vessels.

[Operator:]

And at this time, I show that we have no further questions.

[Emanuele Lauro:]

Then we’ll end up the conference call. We apologize again for the technical issues on the presentation and reiterate that now the presentation is actually posted on our website. So, if anybody has any question on the presentation, we are happy to answer them offline once you’ve reviewed the material. And otherwise thanks for attending and look forward to speaking to you all soon.

[Operator:]

This does conclude today’s conference. We thank you for your participation. You may now disconnect.