Eneti Inc (NETI) 2014 Q4 法說會逐字稿

Hello and welcome to the Scorpio Bulkers Incorporated fourth-quarter 2014 conference call. Today's conference is being recorded. I would now like to turn the call over to Hugh Baker, Chief Financial Officer. Please go ahead, sir.

Thank you, operator. 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, March 4, 2015, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release that we issued today, as well as Scorpio Tankers' SEC filings, which are available at www.ScorpioBulkers.com.

Call participants are advised that the audio of this conference call is being broadcast live on the Web and is also being recorded for playback purposes. An archive of the webcast will be made available on the investor relations page of our website for approximately 14 days. Now I would like to introduce Emanuele Lauro.

Thank you, Hugh. Good morning to all and thanks for joining us today. As most of you are aware, we would like to dedicate most of the time spent on these calls to Q&A and today would be no exception. Myself and Robert will make a few opening remarks and then we will open the floor for questions.

We are not proud to be reporting disappointing results in what has been a very challenging quarter. As I have outlined in our last earnings call three months ago, we have made mistakes in the way we have positioned ourselves last year. We have realized we had taken some wrong decisions and since, we have taken prompt, corrective actions and we continue to do so.

Management has taken significant steps to improve our balance sheet position, but the work is not over. The market we are facing has been the most challenging dry bulk market for the past 30 years. Whilst we did not expect this, we are working hard to turn it around. Management is not working under the assumption that the market will significantly improve in the near future. We are not adopting a hope strategy. To the contrary, we continue to do things in order to improve our balance sheet and we believe we will be successful doing so. I wish at this stage we could be more specific and detailed on what exactly we are doing and we look forward to continuing to communicate with you on our Company-positive developments.

With that, Robert, I would like to turn it on to you.

Good morning, everybody. I think what I'd highlight and stress what Emanuele was saying is that the assumption we are working on is to continue to strengthen the balance sheet in every way that we can, the liquidity of the Company and also to minimize the cash losses as a result of weak spot markets. We are 100% committed to this. As management insiders, we have a significant investment in the Company and we are aligned with you guys to do this.

Some of the stuff we have been doing is reducing the time charter-in book. For example, from December 14, we had -- or September, we had exposure of 24 time chartered-in vessels at a notional value of $264,000 a day and this has been reduced to $241,000 with 20 ships in time charter at the end of December, the quarter that you are seeing now and right now, that is being reduced to 14 vessels with $168,000 of notional value -- or notional commitment and we will continue to take that down.

At the same time, as you have seen with the first capesize vessel that we had delivered that we chartered that vessel out. You would expect to see more charter-outs of vessels as these not only create a more predictable cash flow stream, but also the rates are above the present spot markets. On a cash flow basis, they work very well for working capital.

We have initiated various delays or change-of-yard payments and delaying a delivery schedule, which is helping the liquidity of the Company tremendously and you have got a new updated CapEx table on that. We have converted and we have sold vessels. As we have stated before, we don't think there is really any more conversion opportunities, but we will continue to sell vessels. The fundamental asset that this Company has is the best fleet that is out there. It is a great spec fleet, it is a modern fleet and combined with the fact that we are pretty well 95% fully financed on the debt side, we have very strong asset coverage over liabilities. We have a net asset value that is above the present stock price. So the best thing that we can do is use everything we can to secure not only that net asset value position, but also strengthen liquidity and selling vessels is an extremely effective way of doing that.

We will leave no stone unturned in the financing either. We are presently exploring some sale leaseback alternatives that are actually fairly competitive as we have left this after when we have raised equity and sold vessels, so the balance sheet is reasonably visible to those people entering into that. As Emanuele said, we have had great support from the lenders and this is what we will continue to do. Some of this work, all of this at any given point is in progress. Some of it will be finished sooner than later. We are, at this point, negotiating with third parties for the sale of the capes that were transferred into LR1s. We are doing that in a patient, constructive way. There was no urgency. It would have been nice to have had that done by this conference call, but as some of you may be aware, the product market itself is strengthening. It is a strong market, so the best thing to do to create value for SALT is to let that take its natural course.

With that, we would like to throw it over to questions please.

(Operator Instructions). Jon Chappell, Evercore ISI.

Thank you. Robert, you were pretty clear on the steps you were taking, but I just wanted to get a little bit more clarity on the financing side. It seems from the press release that there is five ships that don't have commitments in place today. Number one, is that the right interpretation of it? And then number two, how soon do you think you will lock that up?

And then as a second part to that question, I assume that, as in most cases, the terms of financing are a certain percentage of the purchase price or market value. As market values seem to be coming down across every age class, are there any financing shortfalls potentially as they kind of mark those to current market value as opposed to purchase price?

So in the first question -- so which was the first question on that one?

It was just am I reading it right there is only five more that require outside (multiple speakers)?

We have obtained a paying term sheet and obtained offers on those particular vessels, but as you can observe, the balance sheet is moving around a little bit. When we are selling vessels, we are taking them out of existing credit facilities, which can allow space in those credit facilities. So the first of those vessels doesn't deliver till the end of this year and the balance in 2016. And the best thing to do right now is to leave that slightly open until we decide whether to take the offers that we have got on the table for those or to drop them into -- or whether it is financially better for us to drop them into other credit lines that could open up through sale of assets.

A lot of our loans are pretty mixed between a drawdown of contract value. Some have market value, but we have tested -- and then the actual loan-to-value clauses in those can be around the 140% range. So the way we have tested this is on pretty low prices. Worst-case positions even lower than they are today and we are happy in the ratios that we don't have to plug that really into 2015. We have done some discussions in other loans where we have shifted the market test away from 2015 on delivery to just being the actual value of the ship on delivery and then 140% of value after that.

So if you can imagine if you took a capesize that was bought at 55, 56, you at getting 55%, 60% of that on delivery and then the market test comes in at 140% over that position. So comfortable is probably not the right word, but you are really okay. We have tested this internally down to around $40 million, $41 million for new capesizes this year. That is not to say we think we will get there, but that is the attitude that Emanuele was stressing that the Company is taking. It is taking no [hope]; it is just working through and grinding this position and securitizing the position we have.

That makes sense. Just wanted to talk about two other arrows in your quiver. First, on the asset sales, it seems like the bottom probably has not been reached yet on asset values and you're not going to do any more conversions where the market may be a little bit more optimistic on the tanker side. What is your pain threshold as far as taking losses on asset sales or do you feel that maybe at this point those have to be put on hold until the market stabilizes?

No, I think that you are in a position now where a lot of the hard work has been done with the equity raise, the initial sales, the restructuring here. So you don't have to sort of panic in a situation. But I think there is the factor -- even if you take prices down pretty hard from where they are today, you still would be on an equivalent sale base trading significantly above your stock price in terms of net asset value.

So when you have such a huge gap like that in -- that you are doing -- you don't really think of it as a pain threshold because you are just securitizing what you have at a higher level, though you are very open to doing those sales because they immediately create value. This is a company with a lot of operating leverage and a lot of ships, so selling a few more ships does not really impact the upside leverage to a recovery, but when you have -- we don't give details to net asset value, but when you have a very large gap between NAV and stock price on a fantastic fleet that has got its bank financing intact and it has great asset coverage, it is a very sensible thing to do and at this stage, it is not really taking pain; it is just securitizing value and maintaining the optionality of the Company. I mean this is what SALT is; it is a terrific option. There is a recovery of the dry cargo market, so what we have to do is make sure we keep that option intact as an option, create some time on that option and not deteriorate the upside of that option too much.

And that is a great segue into my last question. You mentioned the new charter you put on, charter-out and to look for some more of those going forward. How much charter coverage do you want? Is this going to be kind of like a front-end-loaded, early delivery? Is it 2015, just to buy us some time through 2015 or would you look to do significant time charter coverage and then potentially take away some of that optionality (multiple speakers)?

I think you are going to look at it as a -- up to one year, 13 months, 14 months type charter and as you get deeper into this, six months out, then you might shorten those to seven, eight, nine. But the reason those things are attractive right now is you saw the charter of our cape. Our cape was chartered out at $13,800 a day, which is significantly above the present spot market, one. Two, when you charter a vessel out, it is the customer that pays for the fuel, so it is very good on your liquidity and you are getting the cash upfront. And in a situation where you are dealing with a weak market, you are creating some visibility on it.

In the sense that we would see this as sort of a six-month to 13, 14-month kind of bond portfolio, the right thing to do is where possible is just to keep these charters ticking along, especially when the charter market is so high for one year compared to the spot market. But we are not planning, as we have said presently, for a recovery, but we do believe that with the dynamics that are in place with almost historical record scrapping going on a starvation of capital from the dry cargo market and very few new buildings, plus conversions, plus delays in delivery, plus a world that is being stimulated by low commodity prices, low interest rates, fundamental commodities like iron ore and oil that are down and countries like India that are growing crazy. At some point, the harder it is at the moment, probably the quicker it comes. The dry bulk market will recover, so we do not want to give away the recovery of the market by going out further than we think is necessary.

All right. I appreciate the comments. Thanks, Robert.

Gregory Lewis, Credit Suisse.

Thank you and good morning. Robert, you touched on, or Emanuele, it might have been you, you touched on the ability to potentially do sale and leaseback transactions. And I guess if you could provide a little bit more color around that in terms of the appetite or the potential lessors that would be interested in doing that because that kind of dovetails with extending the optionality for when the cycle eventually does turn. It has definitely been used in other industries; it is obviously used in shipping. If you could just provide any sort of color and maybe timing around what we potentially could see around the ability for you guys to potentially do some sale and leasebacks?

We will give what we can. The potential -- generally always the potential at a price for a company to do a sale-leaseback but is rather like a bond. It is not just the idea of doing a sale leaseback. You have to do it at terms and effective borrowing costs that make some form of sense. So there is no point in doing double-digit sale leasebacks in the same way as there is not much point in doing double-digit bonds because they just choke your ability and you just die a death of 1000 cuts.

But we are -- it is something that is in progress, which I am reluctant to give too many details around, but in progress means that we are further along than just indications, further along than just passing pieces of paper across and you are coming down to actual details and you are somewhere between a commitment and closing and we would -- our timetable is to be able to show a different way. Our timetable is to show the greatest visibility we can to the market on our first-quarter earnings call, which will be somewhere around April 27, 28 and by that time, we would expect to have the lion -- really the big lion's share of what we have been doing accomplished, whether it is further delays, whether it is sale leasebacks, whether it is sales and have the full financing in place.

Okay, great. It sounds like you kind of answered my next question, which was, as we think -- probably there's not much -- we're in March already; there is probably not much you can do to the 2015 delivery schedule. But as we look at the middle, second half of 2016, is that where you think potentially we could see an update either in the Q1 or the Q2 earnings call?

We have done a reasonable amount in the 2015 schedule. Once you guys have a little time, I know today was really crowded and unfortunately, through some mechanics, we released fairly late this morning, but if you see the actual CapEx for the yard payment schedules and have time, you can already see it being a reasonable shift in some of the 2015 deliveries as well. And in 2015, a three-month shift is a pretty significant and meaningful period on vessels when the spot market is so weak. So it is a mixture. But you are correct; we will provide really a lot of details over this next two-month period.

Robert, Emanuele, thank you very much for the time.

Ben Nolan, Stifel Nicolaus.

Thanks. Just I guess continuing to drill down on a few of those things, Robert, you said that, when looking at the possibility of selling assets, that at least it sounded like the way you guys are thinking about it is sort of on a small or maybe even a one-off basis just as needed without really making monumental changes to your own order book. Is that how we should be thinking about it two, three, four vessels or are you --?

I think that is how you should be thinking about it. There is no one thing that we are doing at the moment is a silver bullet. But if you add up all the things that we are doing at the moment and combine them with what we have done, you create a pretty solid position.

Right. And the one thing that just to clear it, the one thing that I didn't hear mentioned anywhere is the possibility of further equity issuance. Is it fair to assume that given where you believe your NAV to be that is not an option that is on the table for you guys?

You are never, ever going to get or you shouldn't ever get an executive to discuss that. But we have been very consistent saying that we are following what we call the self-help methods and all of the methods that we laid out earlier in the conference call are self-help methods. For us, the combination that we are determined to let's say take the easy route, which is to try and securitize your gap between NAV and stock price at the moment. So that would infer that at this point we are much more willing to sell assets than we are to raise equity.

Right. Yes, that was my thinking. And then I appreciate you not being able or willing to kind of codify it, but it doesn't seem like it is the most expedient solution.

It is not, but you are never going to get us to do anything. I mean we do live in a world and what we are saying is that, over the next two months, we are doing a tremendous amount of things and hope to do a lot of things, but who knows what we could wake up to in the world tomorrow if you have like a September 11 event for example.

Right, absolutely. And then the last question that I had, and I think I know the answer to this, but obviously you are allowing your time charter-ins to roll off, but is there any point at any level where you would consider maybe adding to that position or is that just no longer part of the strategy?

At this point, any point is a big, big phrase, but at this point it is clearly not the strategy to do because if you have a stock that is substantially trading below NAV and has negative cash flow, and a market that has charter rates higher than spot rates, it is the exact opposite of what you want to do. The last thing you want to do is take in vessels that are above the market. You want to preserve cash, preserve capital as much as you can.

Sure. Yes, absolutely. I guess the thinking on that was, in talking to a number of shipowners, there is some thinking that perhaps the longer-term time charter rates might actually come to parity with the spot market at levels sub $10,000 a day, substantially sub $10,000 a day and I didn't know if there would be any appetite at all for that sort of thing if it were to materialize.

I think that, as we have explained before, we are really not spending much time in the market curve. We are spending all of our time trying to securitize the value of the Company and increase and extend the optionality that this fleet has in the market. All I would say at the moment is that there is not a sign that the time charter market is coming into -- the long time charter market is coming into parity to present spot rates. It is above that.

Right. Okay. That does it for my questions. Thanks a lot.

Amit Mehrotra, Deutsche Bank.

Thanks so much for taking my question. Just wanted to follow up on your last comment with respect to proactive things you can do to extend the liquidity runway. If the moves like you said are sort of largely incremental as opposed to transformational, how is it that the business plan does not rely -- or how is it that you guys are not relying on a significant improvement in spot rates? Maybe you could just elaborate on what rate assumptions you are using or thinking of and basing your restructuring actions on?

We are using pretty low assumptions, lower than the one-year charter rates. We are using -- obviously they are far more in line with spot on our time-chartered fleet or vessels that our time-chartered and we are using asset values that are below where the curve is right at this particular point. And I think that the question is that it is not as if the Company -- when these things -- there are a lot of incremental things that all add up here and it is not as if the Company has done nothing. We raised $150 million of equity. We have sold -- we created another $100 million plus in the sale of the converted LR2s. We have already said that we are negotiating for the sale of the LR1s, which is another $60 million plus. We have shifted the yard deliveries forward, which obviously improves your present cash flow. We have adjusted the charter book and we are still doing further enhancements related to what we discussed earlier on the call, including sales. Plus we have been working and had great support from our lenders whereby you are less likely to trip any covenant clauses, etc.

So I know that you have this view that we have too little to do that is too late, but the reality is we have done so much so early, so ahead of most of the market here. I mean we really bit that bullet and as Emanuele said, did the mea culpa way back in November and have been working really hard since and we are alluding that on this call you should absolutely rely that the present disclosures on what we are doing or what we are doing are not correct, that we are actually further ahead than even what we are implying on the conference call. You just have to keep adding things up.

That is fair. I just wanted to ask maybe one additional question with respect to sort of the liquidity runway. I would assume that the operating outflow will increase significantly in the first quarter obviously just given where spot rates are and the delivery of additional ships, so could you just give us some --?

Why do you make that assumption? You have said increasing dramatically. I have already explained that you dropped your charter book down by $100,000 a day from December 31 to today. You have -- actually your first-quarter liquidity isn't looking too bad when you have that in combination with the use of proceeds from sales.

Right, I was just looking at the operating cash flow, which is a 4X --.

I understand, but you can't just look at something; you have to look at the combined position and you have to look at the total and you have to look at the actual work that is being done. Every month, every two, three weeks, you get a step somewhere. You get the banks closing on the debt side and you get the movement to the positive in the total part of the cash on the balance sheet.

Okay, got it. Just one last question if I may.

You have been so far pretty behind on that curve, which I understand, but --.

Let me ask you one last question with respect to the 10 vessels you have under contract to be sold. Pro forma for the sales, if I heard your comments before, it is $160 million of net proceeds. I understand the --.

No, no, no, no. That is not correct. What I said was the vessels that we had sold, the actual conversions from capes into LR2s and then the LR1s. In addition to that, we have sold an Ultramax and we have sold a Kamsarmax.

Okay, great. Thanks very much.

Herman Hildan, RS Platou Markets.

Good afternoon, guys. Robert, just a follow-up of -- (inaudible) on the covenants either. The covenants will not (inaudible) delivered. That is when you kind of draw down the (inaudible) and ask the (inaudible) to do the (inaudible) test.

Herman, I think covenant testing is done after each quarter. We are not using our projections and basing our own information in terms of the initiatives we are taking and the self-help that we are doing, we are not anticipating any breaches in covenants this year.

Okay.

Let me be clear, this year or next.

(inaudible) just (inaudible) self-help method (inaudible) you've sold vessels, you've redelivered vessels, (inaudible) delays (inaudible) deliveries from the yard, but so far (inaudible) contributed (inaudible) kind of the big delta there in the final solution.

I think that the lenders have contributed. They have put up commitments, they have closed on lots and there has been some adjustment in the position to the positive of the Company. But the great thing is that the companies are needing lenders to do anything. The most important thing is that lenders too like to see companies do proactive positions. So I think that it is a very positive sign for the Company that it is doing all this in an environment where it hasn't had to ask a lender to change a covenant or make a waiver, etc., etc. The Company must start by helping itself before it goes to others to help it.

Herman, we have 23 lenders currently lending to the Company, which is a pretty large amount and all of them are very closely informed as to the Company's projections, the Company's liquidity position and the various self-help initiatives and they have all been very supportive. It is very clear banks are nervous about the dry bulk market, but we spent a lot of time last year and a lot of energy developing our bank financings and I think that has paid off because we do have a very supportive bank group who are very, very confident about the future of the Company and very supportive.

Okay, thank you. And then just another in terms of having a final solution in place (inaudible) by Q1 you expect to come up and give a full detail (inaudible) of all the actions that you have taken and looking at that, we should be much more comfortable --?

What we have said is that you would expect by the Q1 conference call, which is April 27, 28, to have had the vast majority, the lion's share of these initiatives put in place and us able to be very transparent about that. Right now, obviously, we can't be as totally transparent as we would like to. That is simply because you are in negotiations, you are in discussions and commercially, you have to be a little bit protective at this stage.

I fully understand and appreciate that.

Even to the timetable, which is why we say you shouldn't rely on whatever you think as where we are at the moment.

Just finally (inaudible) obviously like your fleet, not so much your balance sheet. In terms of M&A, obviously that is an easy way to solve this. Could you give some comments on how you view the potential for M&A, if there has been any approaches to the Company, etc.?

I can certainly tell you that there have been quite a few people who have kind of smiled at us or winked at us across the bar. We have had a couple of drunkards who have come along thinking that they could get away with a really cheap deal, but that is -- we are happily carrying on getting on with our life and obviously we have a fiduciary duty to our shareholders, but nobody has come with a sober, sensible offer to make us sit down at the table with them. There has been a lot of talk.

Thank you very much.

You are correct in identifying there are a lot of people who would like this fleet.

I will look forward to the Q1 call then. Thank you.

Sal Vitale, Sterne Agee.

Good morning, gentlemen. Just really a clarification, on the five vessels for which you do not have bank financing secured, what is your expectation as to when you actually finalize that?

What I explained was that we are happy with the idea of finally financing, though we had some offers on those vessels, but we are, as I explained, we have a moving balance sheet that involves sales, involves sale leasebacks and things, involves taking some ships that would be sold out of existing credit lines. So we will spend the next few weeks determining what we would do, whether we take separate new commitments or whether or not we include them in other things or even whether or not one or two of these ships may be the ones that are sold. So it is not a question of not being able to get the finance; it is having be finance options but deciding which is the correct option to choose.

Sal, just to add to that, we have under certain of our credit facilities, we have the right of substitution, which means that we can obviously substitute the unfinanced vessels into these facilities and so that gives us additional flexibility to take a more relaxed position.

Okay. Thank you for the clarification.

It appears there are no further questions at this time. Mr. Baker, I would like to turn the conference back to you for any additional or closing remarks.

We have no further closing remarks. Thank you for joining us today and we look forward to speaking to you all soon.

This concludes today's conference. Thank you for your participation.