Eneti Inc (NETI) 2013 Q4 法說會逐字稿

Hello, and welcome to the Scorpio Bulkers Incorporated fourth quarter 2013 conference call. Today's conference is being recorded.

At this time I would now like to turn the call over to Mr. Hugh Baker, Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Thank you, all for joining us today. On the call with me are Emanuele Lauro, Chairman and CEO; Robert Bugbee, President; and Brian Kerr, our Financial Controller.

The information discussed on this call is based on information as of today, March 4, 2014 and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release that we issued today as well as Scorpio Bulkers' SEC filings which are available at www.Scorpiobulkers.com.

Call participants are advised to the audio of this conference call is being broadcast live on the web and 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 Robert Bugbee.

Hi, good morning, ladies and gentlemen. First of all, welcome to our first conference call. Really appreciate your time, we know how packed it is with companies on the road and reporting, so we really appreciate what I can see from the screen is a really high turn out.

Just like to say that we're focused right now on executing our plan. We have high very spec new buildings from top quality yards, so we're confident in our expectations that they will deliver on time and have great specifications for our customers.

We have avoided technically deficient second and third tier yards that are both technically deficient and have scheduling challenges. We are listed on the NCY now, and we expect to pay a dividend once we start to obtain those deliveries, and give us the necessary EBITDA to do that, and we will do that as soon as we can.

I'd like to make an observation before I pass it back to Hugh. I don't think in any of the companies that I've been involved with that I've seen such a tremendous dislocation between the paper that the stock is trading at, i.e. the value of the stock price that Scorpio Bulk is trading at compared to the actual physical markets themselves.

In the last two or three months, the physical markets have continued to strengthen, and there's now quite a severe dislocation between our paper and what we view the asset prices to be out there or the market reflected in time charter rates and the paper markets that are all-in contango and have been strengthening along this process. We aren't a management that complains. Later in our development, we would do something about it.

At this point, we would just like to make that observation that the physical markets themselves are ahead of all our expectations and showing great strength and optimism in the future. At this point, I'd like to hand it back to Hugh Baker.

Thank you, Robert. I would like to briefly mention and discuss what we are proposing in respect to financing the vessels. We have 74 vessels on order, and currently, 26 of those vessels have received committed offers of financing totaling close to $400 million.

In addition to that, we are currently in discussions and negotiations on two additional financings for a total of six ships in the amount of $140 million in total. Furthermore, we're also in discussions with export credit agencies in relation to a large number of ships which is may total in excess of $500 million in total loan amount.

We mention all this because we would like you to be aware that we will be expanding our financings over the coming two quarters, and we expect to make announcements over the second and third and fourth quarters which will help us achieve our objective of financing the entire fleet within this year. We are very comfortable and confident that we can achieve that objective, and we're making good progress in getting that. Back over to you, Robert.

I think that's about it. Let's go straight to Q&A if we can, because I know that everyone's time restricted.

Okay, thank you.

(Operator Instructions)

We first go to Jonathan Chappell with Evercore.

Thank you, good morning guys. Hugh, if I could start with you on the financing side and just to run through those numbers again and then think about fully delivered basis, you said you have up to $400 million financing already in discussions for another $140 million and then the [exenbanks] possibly $500 million separately, so that brings you a little over $1 billion. As you think about the entire 74 vessel fleet and your ideal capital structure, what would the total debt capacity look like on a fully delivered basis, and what leverage would that equate to?

Jon, let me answer that by saying that we are approaching the individual financing on the basis of achieving approximately 60% against the contract value of the assets. We may look at 60% against fair market value, and we also are happy to consider lower amounts.

Debt is not easy to come by in this marketplace, and contrary to what other companies may tell you, getting 60% is not easy. The money is there, it is possible and, we're very confident we can do it.

We are not seeking the highest possible leverage. Our business model is essentially a low leverage business model, so we're very comfortable just looking for around 55% to 60% against each vessel, and again, on that basis, it's pretty easy to achieve it with senior term loan debt. I believe that answers the question.

So to think about that in one of the first comments that Robert made about eventually paying a dividend, when you start taking delivery of the owned vessels pretty aggressively in 2015 and 2016 and the operating cash flow starts to ramp, you think about your total fleet, would you want to invest more in the business? Would you want to use that operating cash flow to keep that leverage down especially as you're mostly spot exposed or move quickly to the dividend? How would you prioritize operating cash flow as it starts to ramp?

I think maybe I could answer part of that to start with. I think that when it comes to would we -- 2015 and 2016, would we get more assets or whatever, I think that if we look at Scorpio Bulkers itself, if Scorpio Bulkers did nothing, it would still have the largest dry bulk fleet out of any publicly traded dry bulk company there is out there measured on dead weight terms. So I don't think we're going to be worried about operating leverage when we get to 2015, 2016 and you've got 70 odd ships in the water.

I think that we enter this with a very new fleet that has very good EBITDA differentials, and they have lower cost compared to the average of the fleet, and they are going to obviously earn higher being these Eco vessels. So our anticipation is we're going to have pretty good EBITDA or very good EBITDA or extraordinary good EBITDA. And when you enter as Hugh says with reasonably good amortization schedules, in historic terms a moderate leverage, you really can go to that dividend position almost immediately, very similar to what's happened in the sister company in STNG.

Okay, understood. Finally and then I will just turn it over, what's your appetite for more time charter in tonnage as you bridge that gap between today and taking the delivery of your own new build vessels?

I think it's a question of getting value and optionality. I think that we -- you could probably see without giving -- I guess on conference calls we can say pretty well what we want, but you could see five more added within the next couple of weeks that may reflect negotiations that have been going on prior to today.

We don't really want to go into details at this moment, and it's difficult out there. We're conscience on getting value and optionality, and the actual physical markets that you've seen in paper and you've seen recently especially in the Capes and starting now in Kansas is moving upwards. So it's more in terms of the weight, so maybe we have to stop now for a little bit, wait until there's another weakness in the market and then go from there.

That makes sense. Thank you, Robert, thanks Hugh.

And we next go to Justin Yagerman with Deutsche Bank.

Hi good morning gentlemen.

Good morning.

Hugh, I was just curious as you think about building out the debt side of your cap structure, are you able to control the cadence of how that debt comes on so that it matches with the delivery of the vessels and you're able to mitigate any negative cash flow impacts of that? Or are you just more concerned with locking up those commitments and how they come on is less of a concern? And then I guess just in terms of supplementing anything you're doing in the bank debt market, I was curious how you guys are thinking about potentially bonds as part of your cap structure.

Justin, to answer the first question, we are absolutely not thinking about the carry. I want to make it very clear, we have ordered ships, and we have an obligation to our shareholders to get them financed as quickly as possible so that we aren't taking any risk of having them uncommitted in respect of finance.

So we are moving ahead swiftly and purposefully to finance the ships, and we're aware some of those ships don't deliver for quite a while, but we think it's prudent and the right thing to do to get them financed as quickly as possible. In respect of other capital aspects to our capital structure, I think we remain flexible and open to ideas, but as a general point at this stage, I think it's -- term debt is the appropriate way forward, and that's probably what we're going to be looking at for the immediate future.

Got it. Robert, while you've obviously shown a preference for new builds in terms of building out the fleet, I would imagine there are at least some higher quality later model secondhand vessels that could be attractive, and I think you've alluded to the fact in the past. How do you feel about those as asset values are quickly moving up, and do you think those will end up being part of Scorpio's strategy, or do you think the market's moved too much at this point for them to be interesting?

I think that's a great question, and it really is down to this value. This market is moving very fast. 10 days ago, you'd pretty well out of the major brokers think that a modern Cape non-Echo conventional design, somewhere around 2009, 2012 built would be printing with a valuation of $52,000, $53,000. And then in 10 days the Cape time charter market is moved up into the mid [$20,000s] and that is -- you almost are going to have an automatic change in that valuation so [$52,000] is yesterday's price.

Then you saw another unbelievable event last week. In terms of whether or not Echo ships are going to get paid by the customer or whether or not Echo ships work, this was to us as important as the discovery of the double Helix.

When the Cape America gets fixed at $34,000 a day, which is the equivalent on normal to slightly bigger around $33,000, and then if you think that values for Echo ships at that point were trading at [$59,000 to $60,000], where do you now trade those positions? So you're in a market that both sides, the secondhand market and the new building resale markets are moving fairly quickly, but directly to your question, there are -- this market rise isn't just going to be exclusive to Echo ships. They are obviously going to be the best beneficiary in EBITDA and value propositions I've just explained before, but you buy a well built, modern, good specification Cape that's had a good owner, that's going to make you a lot of money too.

So yes, we're looking at that. We're also looking at resales that are coming a little earlier than our deliveries, and it would be valuation whether you buy a ship delivering two or three months that's secondhand non-conventional or whether you buy a resale from a yard that delivers in nine months time. As we said before, if we did nothing else on the new building position, we would be in great shape, and if we can find assets and deals that bring forward our EBITDA average, we will do that.

So it's really an opportunistic decision depending on what you see in the market?

Yes, I think it's pretty significant what's happening. These charter rates and dry cargo is very transparent, there's a lot of them. It's not like some of the other markets in shipping.

Time charters are done every day in high frequency, you've got a paper market that's very active too, and that's where you get this almost immediate translation into ship values. And look, obviously if you could buy a good quality Cape at yesterday's prices, [$52,000, $53,000], it works if you've got $18,000 or $6.5 million, $6 million of pre-finance cash flow when your forward curve is in contango. It probably works at [$55,000, $56,000] too.

Fair enough. Last question, you guys are now operating chartering vessels, you've got it sounds like a few more in negotiations right now. Where are you in terms of building out your commercial ops, and what are the plans as we get closer to the end of this year and into 2015 where you're starting to take delivery of your own vessels?

Justin, Emanuele here. I think we are developing the operating platform as we discussed and as we said we were going to do at the end of last year. We're happy with where we are.

We have people sitting both in our London and Singapore office. We are looking at expanding, getting ready for all of the deliveries, because most of the deliveries, are coming in 2015 as you know, and comfortable with the team the way it has shaped up so far.

So looking at growing it, but we're selective and we're not going to pick anybody. We're just, we want the perfect fit hopefully.

And I would think if you look at the dynamic, I mean what a great place for a trader, operations, a technical person to come and work. I mean we've got great CVs, as Emanuele says, you've got to integrate its people, so you have to do it in a proper manner.

We're totally confident we're going to do this and really, our best comparators shouldn't really worry about whether we're able to do it. They should worry about whose people have given us CVs.

Well, you've got the shiny toys to attract people I guess.

Yes.

Okay, appreciate the time guys, thanks so much.

Bye-bye.

Next we go to Ben Nolan with Stifel.

Hi guys. Following on Justin's last question, where do you stand with respect to the development of pools for the various type of assets? And originally, that was the discussion to follow the similar format as you have done on the tanker side. At what point do you feel like you will have a meaningful collection of assets to be able to have a decent fully efficient pool?

Ben, Emanuele here. I think we've started operating last month, or actually six weeks ago. The pools are in operations, the ships that we're taking in on time charter are trading within the pools.

Having said that, we have only one pool partner so far on the [komzermacks] which has committed a ship to the komzermacks pool but we're just starting, right? So you will see the true colors of our operation realistically, during the last quarter of this year and into 2015.

You're in a building period. You're taking delivery of ships all over the world, and we're building it out. So it's not exactly as we're going out marketing for people to join our pools when we are more focused at this stage into getting the right people, have the right set up and make sure we can deliver to our shareholders rather than chasing the odd ship or what not.

I think to echo Emmanuel, and it's very much like this field of dreams. If you build it, they will come so it's again -- you've got the critical mass.

You've got 25 odd ships without the charters in each of the key segments that you're operating in, and you will by definition start to attract those pool members as you just move forward in this process. And as a market leader, I do not think building a pool is going to be anymore difficult than creating a strong trading platform on operation.

And the people that we have hired bring in on the commercial side, as we've discussed in the past on the technical and operational side, the team was already in place. Also for dry cargo.

As far as commercial operations were concerned, instead we felt we needed to beef up and really have a proper set up. And the people we've hired have brought in quite a bit of context, know how, knowledge, access to cargo, relationship with existing owners.

So as Robert is saying, it will not be difficult for us to build the pool platform at all. We are very confident on that.

The other thing I would add is as important if not a more important question is what really again -- so many things are exciting about SALT, but one of the really exciting things is the way the customers are dealing with us. Without going into details, there are, we may be joint venture charter arrangements.

The customers themselves really like this idea of this high quality fleet, the strong balance sheet in a non-counter party that they can visibly see and is transparent, and that itself, they will feed on each other. It's like a virtuous circle. You have the customers, the fleet and the partners, and slowly as Emanuele says you will see it release itself and grow.

Okay that's helpful. And then secondly, as it relates to some of the vessels you've chartered and are maybe looking forward into some of the ones that you potentially would do in the coming month, a number of the very recent ones did have pretty favorable extension options on the back in which my opinion is absolutely mispriced capital.

Can you maybe walk me through what exactly is a dynamic in being able to secure those? Are you having to pay up a little bit more relative to otherwise market conditions without options, or how is it that -- ?

I get it. The answer is historically options have been mispriced in shipping related to options in other markets, and obviously you have to pay up a little bit if you want it in a curve that's in contango to create an option, but not every company in this market has the balance sheet that we have. Not everybody is equal.

Some owners view things in a different way, so let's say you have a owner that has a good balance sheet. He may simply say -- I'm one of the lucky ones.

I bought this ship well, I don't have much debt, I've got 30 odd ships, I don't mind if I have a couple of ships fixed away with a great market and a rate that's positive EBITDAR. If the market goes up like I think, fine, and if the market goes back down or some silly world event happens, at least I've got some revenue coming in from a good credit.

And then there's the other side. A guy whose been holding on all through these last two or three years, waiting -- just his equity is bottomed out, his banks are reaming him every week to pay his interest costs. And then, we have great contacts as Hugh is pointing out through the lenders, and every now and again, that lender will ring you up and say there's an owner there, if you tap on their door, pretty sure if you give them a year or two of security, they will give you an option.

Okay, so that's helpful. So some of it is structural and some of it is just market related I guess?

Absolutely. But what we are focused on is you don't take in ships on time charter for the fun of it. You take in ships on time charter because you think you're going to make money.

We believe in the strengthening of this dry cargo market going forward, we believe that the forward curve is correct in its shape. We believe it could go substantially higher than its present position, so therefore for us it's fantastic if you can take ships in with options.

Right. No I absolutely agree. It doesn't cost you anything to, or not much to include them, so why not? So that does it for my questions. I appreciate it.

Next we go to Urs Dur with Clarkson Capital Markets.

Good morning. Most everything has really been covered, but we've seen some nice move in freight rates lately, and that's been pushing up the term charter rates. Maybe if you can get a little bit more micro on the term charter rates, that's great, and we've seen as you pointed out an Echo ship getting a premium, and that's great. And you have a massive fleet coming, but it's not yet on the water, so it's not fully relevant, but at least you have some ships chartered in.

What do you see driving rates a little bit more micro for the next couple of quarters and fourth quarter and any commentary on the Chinese iron ore inventory ports versus what might be at the mills. I know there's a lot of little stuff, but any micro commentary would be great, Robert.

We don't deal with the little stuff in this position. I think that any improving market is going to be choppy. You've got great volatility. You saw that in August, and you saw that in November.

I think that the other great thing is this market is coming out to the Chinese position. I think trying to handicap these things on a quarter to quarter -- and I'm trying to give you here, I know you're asking for the micro thing, but I'm trying to give you the philosophy that we're seeing a market that is balancing, that has less deliveries related to scrapping, so it has a slower supply growth going forward and a demand growth that is clearly intact.

It's not interesting for us to try and handicap the individual quarters, especially the next two quarters. We aren't making this trade for a two quarter position. What we have is the market that has shown for the last six months that the risk either way is to the upside, so trying to handicap minutely within a quarter what is going to happen on Chinese iron ore is a little bit difficult and a little bit more fool hardy.

Yes, I agree with you on that. I'm just trying to see what your feel is simply because you did talk about the macro, which I agree with the macro, just trying to see if you had any feel.

The market and stocks do move with the freight rates. It's just interesting to see, that's all.

Well I understand, and I think most of our shareholders and myself would wish they would move with the freight rates because our stocks hardly moved in the last six weeks, and the freight rates are going up.

And assets are too.

So yes, I agree with what you are saying, but I think we are going to be in a generally constructive position. I think that daily freight rates are very, very weird place for people to trade off.

I understand that they do, but we're saying the risk at either point is to the upside. The last two or three times that people tried to short dry cargo expecting either a seasonal or back in November when they were shorting the capes because it rallied to [30] was not a good place to stay short.

Right.

Shipping markets take a long time to turn. The dry cargo market took a long time to go from its top to crashing and falling out, and now we're seeing its turned. But once they turn, they tend to follow a trend for a little while.

I tend to see what you're saying, absolutely. I just was looking for a little micro, but totally see what you're saying. Very much appreciate your time, and --

Yes, we don't want to really discuss the micro on the basis that we don't want to encourage necessarily that behavior.

Fair enough, and I think that asset value story is really the bigger play. And I agree with you, I just wanted to--

What we have said implicitly our view to the next couple of quarters earlier by saying we would expect maybe to taper off this time chartering in because we can see rates moving away at this point.

That's fair enough, thank you for that. Thanks for your time.

Next we go to Alma Donohoe with Marathon.

Hi guys, sorry. I'm not sure if this question was answered at the start of the Q&A, but can you give some indication of the average margin over LIBOR that you achieved on the debt facilities that you have secured? And then the second question would just be briefly around how the ship build has been going at the various yards, if you can just give some insight into if you think you're on time, if there have been any issues or indeed if you think you're ahead of time for some of the new builds.

Hi, Alma. I will answer your second question first, and then I will let Hugh answer the margin cost on the loan question.

I think we are extremely satisfied with what we are seeing from our ship builders. First of all, we tried to lower the risk of delays or defaults from ship builders by going to the very top of the list in every country where we've built both in Japan, Korea and China. So we tried to minimize the delay risk by choosing the best and eventually paying a little bit more than what we would have paid if we went to second tier yards or lower quality yards.

Our supervision teams are on site where the construction has started; in quite a bit of yards actually the construction has started because 2015 will see the delivery of the majority of the fleet, and we are very satisfied with what we're seeing so far. We don't foresee any issues, and we are confident that we will be able to overcome issues if they will present themselves.

The teams are extremely professional. We had to -- given the spread the number of vessels and different yards in which we're building, we had to also go to third party companies, and we've screened them, we talked with them, we've integrated their team with some members of our team sometimes, and we're very confident that things are going to go well on that front.

Okay. It's Hugh Baker. In respect to the terms and conditions for the debt facilities, I can say that all of the debt facilities that we're in discussion about follow the basic terms that we agreed in our first committed facility.

And I can confirm to you that all of the discussions on all of the facilities are pricing below 300 basis points. And again the advance rates are looking reasonably consistent around 60%, and most of the loans have a loan profile of between 12 years for anything with a credit agency tranche to 15 year repayment profiles, with most maturities between 5 to 7 years and up to 12 years for the export credit agency transactions.

Those are the main criteria that we're looking at for our debt, and I think we're very comfortable that we can maintain those terms going forward for financing the rest of the fleet. We're not seeing a lot of resistance on some of these key issues, and therefore, we do think that the bank finance is available at around these terms.

Perfect, thank you very much.

Thank you, Alma.

Next we go to Herman Hildan with RS Platou Markets.

Good afternoon guys. My question relates to what Robert mentioned earlier about the Cape being $34,000 a day from a yard where you're also building new builds. So I'm wondering would you be willing to look in that rate for a year to secure [25% to 27%] free cash flow to equity and leverage of some of your assets to make -- free up some equity to pay some larger dividends?

Well you can't pay the dividends until you've got the cash flow, but the simple answer is no. Because we think at this point we just think the market has just begun to turn.

I mean this, is it's very hard to describe to you guys who are looking at data that's either published or like in the past in the rear view mirror, but the physical positions at the moment are looking very promising and very strong. There are multiple customers looking to get along this market, and the bid offer is widening, has widened since this position on Salem Purchase, etc, so here this is great.

This is in a way the first bird singing in spring. It's a confirmation that the customer is willing to pay for Echo, and it's a confirmation that the market is moving upwards. So it's just the equivalent of [$25,000] or so on a ordinary Cape, and we think that market when our ships are delivering is going to be higher.

I understand that 20% or whatever is a big number in the financial terms, but we bought these ships in the lower point in the market, and historically shipping markets -- they are going to give greater returns than 20% once you've been buying in that low area. It's a bit early.

Okay, so even though we can look in the very good cash return compared to where you bought it, you're bullish about the markets for the year, you prefer to sit on that position for at least a year or two before you would leverage up and call it a bigger return of capital to shareholders?

That's the idea.

Especially as Herman, your question was related to a one year period, so why would you look in today the next year which is like--

A customer Herman, a customer has just told you on that ship that they think the market is going to be above [33%, 34%]. Right?

And that was multiple bid, so your customer has got more information than you on micro, macro, or whatever, and more than them have said Scorpio, the market's going to be higher than [33%, 34%] a day for your ships. Well, I think we will stay on their side of the trade at the moment.

Yes, I totally agree with you. It just seems that you're able to capture the full or at least a very significant portion of the charter.

Okay, but that's like saying in the last cycle, you should have bought, I don't know, it's a tanker stock, but you bought front line at whatever it was, NOK10 wow its gone to NOK16, and I should sell my stock because I'm locking in a 60% profit. And I think it was, I don't know, it went up 20 fold from that point.

It would be like in the last cycle. The moment the dry cover market turned in 2003-2004, let's fix my ship out that I bought at the low point for a 20% return.

I totally agree with you.

Historically the shipping markets don't work in that way, and the customer and multiple customers are telling you the market will trade higher than [$33].

Well, I agree.

I mean, shipping I think is about -- there's enough risk so you must at least play for your reward, and you play to win. And the defense part of it is the moderate balance sheet and the fact that our assets are such high quality and efficient around EBITDA.

Well that's good. It's more a question of whether you're comfortable of having the entire fleet spot if you can lock in some stable cash returns from part of your fleet.

Yes, but we don't see that. We have the benefit of the good EBITDA. We have the benefit of the solid financing and first mover advantage of getting the low capital prices. So that calculation doesn't come in.

And you have multiple aspects in dry cargo. I am not saying we're going to do that, but you have multiple aspects in dry cargo like actual physical cargo or paper that if you feel that you have to lock in freight going forward, you just can load the book full of cargo, at that point where you think the market is turning on you.

But this is a long way from that discussion. I mean literally, think. We're only nine months ago when the whole dry cargo market basically looked as if it was on an irretrievable death spiral, and you have a bankruptcy left, right and center.

The market has turned, so you should not having made this investment on behalf of your shareholders, take away that upside that the customers are broadly so clearly showing you.

Effectively what you're saying is it's way too early.

Yes, as a management if you feel like that, you're better off just putting the Company out for sale and letting someone else deal with it.

Yes, I agree. Okay, thank you very much guys.

Pleasure.

It appears there are no further questions in queue at this time. I'd like to turn the conference back over to management for any closing or additional remarks.

Thank you for joining us today. I don't think we have any further remarks, so I think we would just like to say thank you for calling in and we look forward to speaking with you soon.

That does conclude today's conference. We do thank you for your participation. You may now disconnect. Have a great rest of your day.