Eneti Inc (NETI) 2015 Q2 法說會逐字稿

Hello and welcome to the Scorpio Bulkers Incorporated conference call. This call 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 all for joining us today. On the call with me are Emanuele Lauro, Chairman and Chief Executive Officer, Robert Bugbee, our President, and Cameron Mackey, our Chief Operating Officer.

The information discussed on this call is based on information as of today, July 28, 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 Bulkers' SEC filings, which are available at www.ScorpioBulkers.com.

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

Now I'd like to introduce Emanuele Lauro.

Thank you Hugh. Thanks, everybody, for taking the time to be with us today. We appreciate it.

I'd like to start today from where we left it in mid-June during our offering. So we issued 133 million shares in the middle of June. We felt that it was the right thing to do, the right move, in order to ensure visibility for the Company going forward.

We feel we have placed our sales team in position for a long-term recovery. Usually markets that break 30 years low take time to recover, and in the first half of this year, we have experienced breaking the 30 year lows. It is more likely that we will experience bumps along the road rather than a straight-line recovery. This is at least what we expect.

During our offering, the rates projected by the Company, the marketing material and of course in the financial projections, were quite conservative at $6,000 a day for Ultramaxes, $7,000 for Kamsar and $9,250 for Capes. These projections were until -- these rate projections were until the end of 2016, and only a realistic improvement is projected in 2017. We feel they are conservative, but this is what we feel comfortable projecting at the time. The eco-premium which we apply to these rates on average across the three classes of vessels is $1,000 a day, which, again, may be seen as a little bit conservative, but that's what we have in our projections.

Since the offering, the market has improved quite substantially. It's difficult to say whether this improvement is the beginning of a sustained recovery or just a spike. As I said a few seconds ago, management intention has been to really position the Company for a long-term recovery. We would welcome a prompter recovery, of course, but we have planned for a long-term one. Otherwise, we kept executing on the sales which were agreed pre-offering. And we can look at the strong fleet of 60 units at the end of our newbuilding program.

With this, I know Robert has something to add, and then we can go straight to questions.

I don't think I really have anything to add to that other than, yes, Emanuele is correct that, at present, we are experiencing quite strong improvement in rates, in addition to that an improvement in values. And in some categories, the Capesize and the Kamsarmaxes, that value improvement has been quite substantial. I think that's partly coming about as the major industry players on the private side seeing through and seeing through what they expect to be a recovery, that shipping markets do that. That's what we saw in tankers and products, and they have to get ahead of that curve combined with a very important thing that has happened is that present rates are now above OpEx and interest. So companies like ourselves are no longer bleeding every day from their NAV.

And then the other thing is, in other areas of the shipping industry, crude and products, those markets have very strong and private owners who have mixed fleets, crude oil tankers making tremendous positive cash flow. So have felt more confident to step in front of the dry cargo in an absolute buy-and-hold strategy.

I think just with that, we'll turn it over to questions.

(Operator Instructions). Jon Chappell, Evercore ISI.

Good morning or good afternoon, guys. The first thing I wanted to address was the post--offering kind of liquidity situation. I think that's by far more important than earnings or really even asset values right now. If I just read the press release correctly, Hugh or Robert, it says you have about $855 million of remaining credit facilities pledged for all but the four ships that haven't been financed yet. If I read that correctly, does that assume based off contract values where we may have misinterpreted things in the past? And if so, can you give a sense, and I have my own estimates, but could you give a sense for where that number might be if we were to use actual market values as the shipbrokers are presenting them today?

Thank you Jon. That's a very good question. I think it's very important to make clear that the $854 million of committed finance as of July 27 is just that. It is committed finance, but it is not necessarily the amount that will be drawn down on delivery of the ships. We all have to understand that the majority of our loan contracts are based on a market value at delivery mechanism whereby we are borrowing a percentage of the market value at delivery. Therefore, the actual amount that we can borrow upon delivery of the remaining ships is -- could be much lower than that $854 million number.

Now, internally, maybe one way to look at that is to look at some basic math. If we have a Capesize vessel that is ordered for $55 million and we finance it at 60%, then we are going to borrow $33 million. If that vessel is actually worth $45 million, then we are going to be borrowing $27 million.

Now, we've obviously done the sensitivity analysis ourselves. We are very comfortable that the amount of leverage that we can -- and commitments that we can get out of these facilities is going to be sufficient. Depending on where you put, you place values, you are going to come up with different numbers. But essentially basis the sensitivity we are using, we're going to get slightly less than $800 million. And you can do your own versions of that math, and you will probably come up with similar numbers.

Generally speaking, we are fully aware of the values of ships right now. I would also like to point out that the valuations of drawdown are based on appraisals from brokers and they tend to be a lagging indicator. So we tend to be getting slightly higher valuations from brokers than the actual -- perhaps the actual market value of the assets. A good example of that is the recent SBI Montesino, which is financed under our $240.264 million credit facility mentioned on Page 3 of our release. Again, we borrowed just over $27 million against that ship basis evaluation of $46.25 million as of two weeks ago. Now, that obviously is not -- you've seen recent Capesize sales perhaps coming in at less than that.

So, we are very comfortable with the amount of money that we can borrow under our facilities, but it's not going to be $854 million. You can certainly do the analysis and I'm very willing off-line to help any of you do that analysis with you. So, we certainly expect to borrow less.

The other thing I'd like to --

If I could just add one thing on that clarification is that the weaker prices that Hugh is referring to are the deals that were done weeks ago at the bottom. And we ourselves sold Capes at $43 million, and that's what we are modeling for. That was the purpose of the raise. The models there were based off no improvement, neither in rates, as Emanuele said, or in values from that $42 million, $43 million.

Right now, Capes are most -- modern resale Capes with the recent sales and deals that are being negotiated at the moment would be valued at around $46 million, $47 million. It's just very simply that we in our models are not relying on that. We are comfortable that the market could go back to where it went, where it was at the bottom in two months and we would still have runway through 2016 into 2017.

Can I ask about the -- you mentioned in the press release that there's four ships that still have not had financing yet. I think those are Japanese built ships, so good quality. It seems like you have been talking about those for a little while. Have the conversations with the banks changed at all, for better or for worse, in the last three months, maybe post-the equity raise, post kind of this little upturn in asset values that Robert has been talking about, and when do we start to see some clarity around that financing?

We expect to close the financing on all four vessels before our next conference call. The answer to your question is very clear. Yes, we have seen a huge turnaround from the banks, and that's very much related to the actions the Company has taken in achieving liquidity. The Company has, as we know, we've reduced our forward commitments by $673 million. We've raised net proceeds $197 million from the sale of the 20 vessels, and that in combination with the equity raise has made our banks extremely supportive of the Company. We have offers in place -- and I'm sorry, I have to correct that -- proposals in place from four of our lenders. The proposals amount to approximately $50 million, which is approximately a 50% advance rate against current market values for these Japanese built assets. And we are very confident that we can execute these facilities in due course over the quarter.

I would like to say that the bank market generally is -- for financing bulk ships is pretty terrible. I don't think it is possible to get financing for bulk ships really under any circumstances. And indeed we have been talking about these ships for over a year. And it tells you something that with a company with our -- we have very strong bank relationships and we have been finding it very difficult to do something. We found it pretty easy to finance 76 newbuildings, and the remaining four have been very difficult indeed. So, I think the overall market for finance is very difficult, but there is nothing like raising equity and being very proactive about dealing with issues to get support from the banks.

I think in general -- so look, and Hugh is quite right. As a general principle, the banks are feeling the pressure, as you can imagine, in the dry coverage space.

When it relates to SALT, the banks are very confident and are there to strongly support the Company and we will see that, as Hugh says, in various things going forward that hopefully we will have templated in stone by the time of the third-quarter release, and maybe even before. The banks are looking at this very simply. We have a new fleet that the modeling of the Company to the bank is going to withstand pretty tough acid tests related to the next 18 months based off these low trough models. And also they are really confident in the actual governance aspect of the Company in the sense that this company took appropriate measures when faced with the potential of potential solvency issues, and they were strongly encouraged by not only in terms of number of the top 12 shareholders but the actual majority of the percentage of shareholders in actual number of shares owned, all came along in support of this transaction.

Just to add to that, we have over a dozen lenders. And there is an element of them rewarding us for our behavior by providing this financing. They have been very supportive to the Company.

And the terms and conditions of the finance are relatively favorable. The advance rates are not high, but everything else is very favorable. So we now are in a position where the Company expects to have financing on all 60 of its vessels. Every single facility is essentially a plain-vanilla standard debt finance. There's no leasing. There's no balance sheet obligations. We've been very fortunate that we have been able to get secure bank finance for all of our ships. And all of that financing is priced at LIBOR plus 3% or less. And we've managed to hold the line on terms and conditions and pricing, and our banks have been very supportive of that. So we feel that our capital structure is well taken care of.

I think that's a very, very important point, that we have now in SALT, as you have this sort of -- we have a brand-new fleet. We've still been able to extend some of the deliveries. You have very -- you have a very clear balance sheet at the moment. There is no leasing. There is nothing. So you literally have an option to the recovery of the dry cargo market that retains its strength in the option even at very low numbers, even a step back in the recovery of that dry cover market. And that should -- that is a comforting thing to all of the capital providers to the Company.

Can I just ask one more and it's more strategic and it relates to all of this? So two months ago, not even, there were concerns about solvency. You took the necessary medicine, as painful as it was. Now if I look at these numbers and try to do a market value analysis on the remaining debt, add your cash balance, look at your remaining CapEx, it looks like there's a buffer in excess of $200 million even before you get the financing for those other ships. We are clearly in a place where you're not bleeding cash on a daily basis anymore. So just over the next six months or five months as we go into year-end, how do you think about maybe the cash buffer that you've generated right now? Are you still in defense mode and we're just going to hold on, make sure this isn't a seasonal blip and that there is some sustainable recovery? Do you start to look to offense a little bit? How do you think about the buffer as we go through the next five to six months?

I think what the Company -- the best thing at the moment is just to watch and execute on primarily what Hugh is saying, closing down these bank positions, taking the benefit of other things that the banks maybe had held in liquidity and liquidity with. So it's focused on that certainly at this point. That, yes, is probably -- it's an interesting thing that the market really is showing some signs of recovery here. You don't get this -- and you have this continued big spread which will probably then widen between NAV and the stock price. And you then go into theoretical surplus liquidity. Well, you've got to do something about that as management.

But at this particular point, the focus is going to be executing and crossing the I's and -- I mean dotting the I's and crossing the T's on the actual finance. I think, as Emanuele has pointed out, it's not yet clear whether this is just a seasonal blip. There are still some headwinds related to demand, even though the dynamics are set with ships being delayed, scrapping, low interest rates around the world, low commodity prices, for an eventual stimulation of demand. But right now, you wait and you watch, and that is probably a conversation that's more appropriate in let's say the next earnings call. Right now, it's about making sure we close and get the benefits of the goodwill that we have from the lenders to improve our liquidity further.

Good. Thank you Robert.

Gregory Lewis, Credit Suisse.

Yes, thank you and good morning. You touched on something, and I would like a little bit more color on that. So we've taken delivery of some vessels, so now we have a couple handfuls of vessels on the water. A lot of companies that are sometimes facing solvency, liquidity, however you want to frame it, have actually used the sale and lease-back market to hold onto that upside. It doesn't sound like that is something that you guys are at all interested in. If you could just elaborate maybe why that wouldn't be a path that you could go down to on some of your vessels as it looks like it would free up a fair amount of cash.

Okay, a couple things. Firstly, we believe we don't need to do that at the moment. We have adequate cash. We have adequate liquidity. And as we have indicated, there may be ways to even improve that further of the financing side.

Secondly, sale and lease-backs are pretty expensive trades to do. I mean there are no dummies on the other side of that trade, and in real cost terms, they're going to come in in double-digit values.

Secondly, it is a sale of that asset. That's what it is. And you base the actual sale to start with on market values. So, it doesn't necessarily free up that much cash when you take into account the much higher steeper interest rates penalty, the increase of your overall breakeven point to a market.

And the third thing is it makes the balance sheet more complicated. It's not as clean as a straight sale, and it's not as beneficial as commercial loans to your breakeven. So sale lease-backs traditionally have been used in shipping when really you've got no other choice. It's one step away from doing some massive, exorbitant high-yield, super-high-yield bond.

Okay. Thanks for that, Robert. And then just one other question. I realize you are not in the market in terms of looking at adding tonnage right now, but how is -- what's the depth in the sale and purchase market right now for drybulk as we try to find the bottom? Are we at a point now where we are not really seeing potential sellers in this market, which (multiple speakers)

At the moment, as Emanuele alluded, you've got gap-up trades in values. And there isn't actually that much out there to buy in terms of resale. And it's also expressed in the time charter market itself, that there's not that much ability for people to let's say take, for example, one option, one option one year. So both the time charter market and the S&P market are showing a fairly high degree of resilience. And there's been a (multiple speakers)

Okay, perfect. It looks like maybe we've gotten through the worst of the drybulk market here. Okay, guys, catch up with you tomorrow. Have a great day.

Amit Mehrotra, Deutsche Bank.

Thanks a lot. The first question is for Hugh. That $197 million of cash proceeds from the 20 sold or held for sale assets, I think you mentioned net but I just want to confirm that that is a net number and we don't have to subtract anything from that. Is that right?

Let me talk you through that number. On Page 2 of our report, we talk about $197 million in aggregate cash proceeds and a $673 million reduction in future CapEx. That number refers to all 20 of the vessels that we have sold. Now, 16 of those 20 have actually been sold and fully sold insofar as we've actually received the proceeds and the sale is -- they are essentially completely off our books. The remaining four vessels, three of them we expect to close in August and one we expect to close on its delivery in September. Just to make you understand that number, you can actually go back to Page 8 where you've got the assets held for sale of $74 million on the balance sheet. We've also got a related party payment which is a deposit from Scorpio Tankers which -- of $31.2 million, and again those funds have largely been received. And we've also got, if you look at the proceeds from asset sales in [1991], again, that's in the cash flow.

Now, we obviously sold seven vessels in July, and we've received the proceeds from those. So, the way that $97 million number looks is that is essentially covers 16 out of the 20 vessels. The four remaining vessels I can advise you have limited cash proceeds, so we are looking at cash proceeds for the remaining four vessels of under $5 million. So the majority, vast majority, indeed over $190 million of that $197 million, has actually been received and is included in our current cash position.

So that $448 million includes $192 million of that $197 million?

Approximately, yes.

Okay. That's helpful. Thanks Hugh. And then one other housekeeping item is what was the period end share count?

That is listed on Page 8. It is three -- I'm also looking at the number here -- it's 335,310,465 shares outstanding.

Okay. Thanks. And then one bigger picture question for Robert if I may. The current rate environment, if it's maintained, the Company I think could be reporting their first ever sort of positive EBITDA in the third quarter, which would obviously be nice. I'd just like to get some color from you, Robert, on if you are seeing anything from the trading, the physical trading perspective that either maybe encourages you or makes you a little bit more skeptical of the mini-rally that we've seen quarter-to-date.

Obviously, as we are going to repeat, this company is planning for the worst. But if you were to let's say put a more constructive position on this, you would see a number of things that are encouraging -- is that in some of the sectors, actually the rates today are higher than where they were at this point last year. That's the first thing that's pretty encouraging.

The second thing is that time charter market itself is hardening up. The traders are in there looking to get tonnage. It's not just the owners that have tightened up their side of the trade. It's also the customers too.

The other aspect is clearly the first step of this -- we've had this strong a market for a few weeks now, and the first step would have been to have absorbed all that idle tonnage that was sitting around really almost in semi-layup, and particularly in the Cape market. So that's an encouraging sign that the actual demand in there has managed to -- you managed to absorb not just the tonnage that was in that market at that time, but then some of the surplus markets (technical difficulty) semi layup and it's continuing. Those are very favorable signs.

The second thing that is very encouraging in the asset side is that, by and large, they are really quality buyers that have been stepping in. This is real deep-pocketed private money with a lot of experience in that dry cargo side. And they are not going to get shaken out of their trades, and they are fairly -- there are vessels that previously would've had been lucky to get one or two people inspecting, and now having 10, 12, 13 inspecting. So, that doesn't mean that rates can't go back down. What that means is there is most likely to be still maintained a bid under the assets, even if rates were to fall a little bit. Those are the really encouraging parts of it.

Does the current inflection change at all your view in terms of how you want the balance the chartering strategy of the business?

No, I think we got to -- as I said earlier with Jon, this is -- we've seen what we are doing where we've been willing to take less than one-year duration charters that are fundamentally positive over interest and operating. That's the easiest way for us to -- you know, let's stabilize this. So it has such a tremendous upside, it's discounted -- it's trading at a discount to its NAV and everything. So let's just do the simple stupid things for a few months, and using the fact that our interests are so low with no leases or funky stuff in there, get to that positive EBITDA that you are talking about as quickly as possible.

Got it. Thanks very much. Good luck guys.

Omar Nokta, Clarksons Platou Securities.

Thank you. Very helpful calls, as expected. I just wanted to touch on a little bit of the earlier questions, kind of where we are with Scorpio in its lifecycle. Robert and Emanuele, you guys have been pretty vocal, at least as of the last earnings call, about being sellers in the market. And just not put words in your mouth, but do you view SALT today as not a seller? Has that kind of idea been put on pause, like you're saying you're evaluating how the market is shaping up?

I think that idea -- previously we were a seller to obtain liquidity, much-needed liquidity. That has now been achieved. And as we alluded to earlier, right now, it's about closing down those financing positions and watching. You may have become a seller, not because you don't think the market is going up, but just simply because you maintain a huge spread, negative spread, from your share price to NAV. But you're constructive in the market. Insiders would not have bought into this deal in the way that they did if we didn't feel in the long-term you can get a multiple return on the actual investment in the first place. And as we've seen, or this new generation has seen, is that things turn fast in you've got a massive upside operating leverage still in the Company with a down side that's protected and known. And it is a very big financially operated leverage play to the upside in the dry cargo market.

If you stop getting 10% increases in asset values and you move the Company from a cash negative into a cash positive, and then you move it into underlying profitability, you should be one of those first movers to do that because you've got the new fleets and because you've got a low interest burden. This company can in a very quick time, like you have seen on the tanker side, except in this particular company it would be like on steroids, this big thing can be [three or four bagger] in a couple of years time.

Indeed. Thank you. That's very helpful. Also I just wanted to go over just the numbers again with you. I did have just a question on those four remaining vessels. So as I understand it, the first 16, those have essentially closed, they are novated, and then the final four, you're expecting to close on the three Capes in August. Once that's closed, that's also going to be essentially novated as well with the final Kamsarmax in September being the only one that you are on the hook for making payments until it delivers. Is that correct?

Yes. I think there is one more payment on the Capes before closing, but that will sort of come out in the wash. So yes, the three Capes in August have been novated. The September, early September delivery, Kamsarmax is being sold by MLA, and we are obviously making payments until then. The next payment on that is actually delivery anyway.

Got it. And then one final just quick modeling question. You put the table in the release showing all the remaining CapEx. I just wanted to get the exact number if you could share of what the installments that were made between July 1 and the 27th.

I thought you would ask that. $74 million.

Thank you very much.

I apologize, $76 million.

Got it. All right. Thank you.

Ben Nolan, Stifel.

Just to apologize, Ben, this will be the last question, too.

Just made it in. Good.

You saved the best for last. You always do that one.

I have a few, hopefully that works.

We have just a clutter of one-on-ones to go through.

Hugh, you mentioned that you have received some proceeds from the sale of the vessels in July. Sort of along the lines of Omar's question and how much you're paid, how much have you received in July? What was that number?

I'll actually step back and just say we've received -- going back to our earlier answer, we've received over $190 million of the net proceeds that we are anticipating from the sale of all of the assets.

Okay. And so then I just back out --

You can back out because we've got the other numbers written up in the balance sheet, cash flows.

Is that it, Ben? Hello?

His line disconnected.

Okay. That's unfortunate. Okay, so I think we're going to thank you very much. Really appreciate it.

In summary, the way that we view this is we've got a very strong option on the recovery, long laid option for recovery in the dry cargo market -- that any recovery is going to flow immediately through to the benefit of the Company either in asset prices due to leverage to that, and NAVs, or straight through into EBITDA and ultimately earnings because we've managed through this process to retain very low breakeven points through with regards to the clean balance sheet and the transparency of that balance sheet. And the fact that it's predominantly (inaudible) in commercial loans. There's no converts in there. There's no security that is being put in above the basic raw equity shareholder. And there are no expensive sale lease-backs to clutter it up. It's pretty easy to understand, and let's just let time do its work. And we're prepared if the market turns back, but we just may well have just turned the corner here. Thank you very much.

And today's conference call has concluded.