Eneti Inc (NETI) 2015 Q3 法說會逐字稿

Hello and welcome to the Scorpio Bulkers Inc. third-quarter 2015 conference call. Today's call is being recorded. This presentation is available on the webcast. I would now like to turn the call over to Hugh Baker, Chief Financial Officer. Please go ahead.

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, President; and Cameron Mackey, our Chief Operating Officer.

The information discussed on this call is based on information as of today, November 2, 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's 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.

As well as this archive, we actually also have a small presentation. It is actually three slides, which is also included in the webcast. Now I would like to introduce Emanuele Lauro.

Thank you, Hugh, and thanks, everybody for joining us today. The format of the call today is going to be the following. We're going to have no introductory comments, but go straight into a few slides presentation as Hugh as mentioned, which he was going to take care of, and then we're going to go to questions where the management team is happy to answer any of your questions.

So Hugh, back to you, please.

Thank you, Emanuele. For those of you don't have the presentation, don't worry, I'm going to be very brief and just go over the highlights. Our financial results for the quarter showed that we made an adjusted loss per share of $0.05 for the third quarter of this year.

In terms of fleet development, we have more than doubled our fleet size during the quarter, taking delivery of two Capesize vessels, three Kamsarmax vessels, and seven Ultramax vessels, and as I'm going to go into more detail just below, we've also very much changed certain of our financing arrangements and I can give you an update on that.

In terms of the financing, the key development is that we have received financing for -- from two of the companies' lenders for three previously underfinanced Ultramax vessels.

In addition, the Company has accepted a proposal of financing for the fourth remaining underfinanced vessel, and we're expecting credit approval for that vessel within the month of November. So we're very pleased that we financed three of the four vessels, and that leaves us with 59 out of the 60 vessels in our fleet have now been financed.

All the loans, including these three new loans, are -- include the standardized Scorpio terms and conditions, and we've managed to keep the pricing of the new loans within our standard range of around LIBOR plus 3%.

In addition to that, we received approval from the Chinese state insurance company, Sinosure, of an insurance policy that has been outstanding, which now allows us to draw down on our $76.5 million facility which finances three Capesize vessels.

The other main development in the quarter is that we received a covenant waiver from all of our lenders for our interest coverage covenant, and that gives us freedom from our interest coverage for the entirety of 2015 and 2016 and gives us a period of enhanced flexibility beyond that to the end of 2017. Again, we thank our lenders very much for that support.

I can say that as of today's date, no covenants are in breach, and we're not expecting any financial covenants to be breached any time in the near future. So we have a degree of flexibility going forward into the future.

In respect of the summary of earnings in the voyages and earnings to date in the fourth quarter, we have actually provided some guidance, which is in the final page of our presentation, and I can say that so far, we've fixed 55% of the days in the third quarter for our Kamsarmax vessels at around $7900 a day. We've also fixed 56% of our Ultramax vessels at around the same rate of $7900 per day, and we fixed 81% of our Capesize days for the fourth quarter at $11,900 a day. And again --

Hugh, allow me to interject here. It's Emanuele. I would like to say that from a commercial standpoint, we most certainly focused on execution from the inception of this Company and certainly as the fleet delivers.

Scale at the group level has allowed us to leverage on not only cargo accesses but, of course, the support of brokers. We are not new to the dry cargo market, despite not having been most active on the freight front in the past decade. Our port infrastructure investments, our dry cargo logistics investments in places like India, Africa, or Southeast Asia in the past 10 years have allowed us actually to maintain a proper presence in the commercial dry cargo commodities world. And we didn't stop there, but this coupled with hiring a good team of professional freight traders, all with different backgrounds, either former traders or operators or brokers, has allowed us to produce results in line with most or the most established companies in the industry.

From a SALT perspective, it's nice to see that other third-party shipowners think the same since four different shipowners who joined the Scorpio calendar max pool in the last four months, contributing their own tonnage to it. And this is not only adding to the scale of the fleet, but also clearly demonstrates that other shipowners think that those pools are the best way to operate their dry cargo fleet.

So we continue to focus on execution. We continue as we get delivery of our fleet in the Eastern Hemisphere to unravel our plans to focus on employment and make sure that we get the best out of this challenging market.

With this, I finished. I don't know if, Hugh, you have something to add or if we want to go to questions.

Emanuele, I think I have nothing to add. We can go to questions.

(Operator Instructions) Jon Chappell, Evercore ISI.

Just a couple quick questions; two on financing, Toulon fleet. First, on the financing, you guys did a great job laying out with facilities are remaining, what you've drawn down already of the two, including last week. Just curious, though, as hose you stress test the model, what's the risk of any of the available credit coming in significantly lower than what you've listed here as the new builds actually deliver and are potentially mark to market?

Jon, that's a great question. There is always a risk in some of the facilities coming lower than you anticipate because obviously most of the facilities are based on a market value at delivery basis. We've done our stress testing internally on much lower values than current market values, and as a result of that, we don't think that the amounts that we can draw down from these loans is actually going to be lower than what we're using in our models, and certainly we are using some pretty low values in our own projections for that purpose.

So the answer to you is yes, it can come lower. In some cases, it will come lower than the committed loan amounts, and we've certainly taken that into account in our projections.

At the moment, we have stress tested our loans for minimum value clause breaches, and we're not coming up with any breaches. And the reason for that is that we are actually borrowing lower amounts at initial drawdown, which means that we again don't get into a situation where we breach the covenants later on.

Okay. Understood.

I hope that answers the question.

Yes, it does, and it's a good segue to the other question, which is a bit simpler. Just the covenant waivers getting almost 24 months of runway there, is there any cost associated with obtaining those waivers?

Yes, there was around $150,000 in fees paid to the banks for those waivers across all the -- in total across all the facilities.

Okay. That was worth it. Two things on the ships. It seems like some of the new building delivery periods have been pushed back a little bit. Is that something you have been asked for and, therefore, need to pay for, or is it just the shipyards can't keep up with their schedules?

Jon, it's Cam. It's neither. It's something that we get into discussions with the art about. Obviously at this point in time, it suits us to push deliveries back when and where we can.

However, the -- it's worth mentioning the flipside of ordering ships at the most reputable and qualified shipyards is that on their own, they don't tend to suffer delays or other production issues.

Okay. So just normal course of business and don't read into it anything else. And then finally, and I know that this may be a bit controversial, but I just wanted to ask about it anyway. It seems like after values where people thought maybe bottomed, starting to step down a little bit again, it seems like you have the liquidity runway now well into 2017, but are future asset sales completely off the table right now as asset prices continue to fall, or is that something that is still being considered?

I think you will consider the market each step. We have quite a long runway here. I think you are correct that asset prices have been weakening. In general, if we just have a little discussion on asset prices, the market is stressed at the moment. It is stressed because of the cash flows on the spot markets. It's stressed because you've had a number of non-US public companies already start to feel the pressure in terms of their balance sheets. And lenders -- I think that you should see SALT as quite an exception here because SALT has a new fleet. It's very familiar with its lenders. It has -- it had raised equity. And we've started the process of what we've been doing on the financing a time ago, but the general environment is that I think there are still companies that require -- acquire financing amendments, etc. etc., maybe impending breaches of covenants or already breached covenants, and that itself, combined with the weakness in the equities and the cash flow, is putting pressure on secondhand values. There's nothing you can say about that.

But as Hugh as pointed out, we are running our model in that weakened landscape. You cannot go on forever. Yes, we have a long runway, but you cannot go on forever. So the Company will continue to do whatever is required along this process to get to the end of the tunnel.

Okay. Got it. Thanks, Robert. Thanks, Cam. Thanks, Hugh.

Amit Mehrotra, Deutsche Bank.

Just had a follow-up on the perspective debt draw downs. Hugh, just wondering if you could be a little bit more specific on how much of the $590 million committed -- the Company expected to draw down? And I ask that just because if I look at the payments and drawdowns, the debt drawdowns over the last three months, it implies that most, if not all, but for sure most of that $590 million will be available to you. I just want to confirm that. And then also is there anything else out there in terms of debt financing that's not reflected in that $590 million number above and beyond that one additional vessel left to get commitment for?

Hi, Amit. We have three vessels that we are currently -- that we paid for. We've paid cash for that are currently undrawn, and they fit into three categories actually. One is -- one of the vessels has been unfinanced, and we've obviously got finance in place for that vessel. But we haven't closed it, but again, it's improved.

We have one of our Capesizes we paid cash for, which again is a vessel that was financed under the $76.5 million facility that we are probably drawing down. We're expecting to draw down on that in about 10 days time. And one is a -- again, a Japanese-built Ultramax vessel where we've paid cash and we pre-positioned the funds at the yard. So you see the cash outflow, but you don't see the debt drawdown. So that in total is around $52.6 million of debt that we're going to draw down on their existing delivered vessels.

In addition to that, obviously we have -- if you look at some of the debt numbers, they are slightly reduced. We've taken positions where we think we will not be able to draw on debt. We have reduced the amount somewhat to reduce our -- the commitment fees liable.

But notwithstanding that, we fully expect to take up the vast majority, and I mean very much of the vast majority of the available debt and be able to do so. Again, we've always assumed that we wouldn't be able to draw on the full amount of -- the full market values that were originally committed for, and we've been quietly reducing the size of that debt load as a result of that.

And in addition to that, we've been very successful in essentially drawing down the debt at very good valuations. So the valuations we've been receiving for our debt drawdowns have been very comfortable and certainly above our own projections.

So the -- just so I'm clear, the $52.6 million that you referenced, is that in the amount available balance of $589.8 million?

Yes, it is.

Okay. Okay. All right.

Sorry, I apologize. Yes, $40 million of that is in that balance. $13.5 million is not because it reflects one of the vessels that we just got approval for.

Okay. So the perspective debt balance for the Company could increase by that full amount, if not even more, after assuming the $13.5 million of additional does not reflect in that number, correct?

Correct.

Okay. Good. Thank you. Let me just ask a more operating related question, maybe for Cam or Robert. If you could just sort of update us on operating costs. I mean you now have a good number of ships, and I'm assuming you can provide some hard numbers around what the OpEx is looking like, and hopefully it's a little bit below the original expectations given the quality of the fleet. If you could just update us on that, that would be great.

Well, I think that the vessels -- you can see in the position, the vessel -- there's a big change. So I think that a, let's say more accurate number is going to come in at the end of this quarter. We've just got a tremendous change in -- as you quite rightly pointed out, the number of vessels coming in. So your -- any benefits to that are really going to be more shown from the next month or two.

Okay. Yes. That's fair. Alright, guys. That's all I had. Thank you so much. Appreciate it.

Omar Nokta, Clarksons Platou Securities.

More just a general question discussion. Last earnings call you were fairly close to when you had just issued the equity and you had sold most of the 20 vessels. You had said you were looking to take maybe a step back and just allow the cash to come in and see how the market goes. As things have developed here, obviously you've gotten this new waiver that definitely provides some flexibility. As you think about going into 2016, where are you on the idea of having a fleet of 60 ships? Are you still taking a step back, or would you look to be a seller again?

Well, at the moment, nothing -- if we look at the model and from the offering, I think -- in the offering, we're using market figures around $6000, $7000, and $9000 a day. We clearly were of the view that one should not -- one could hope for a winter improvement, but one shouldn't rely on it. We did have a little bit of a step-up in the market sort of a month or so ago, but the market has come down. So the market itself is, as you can see in our earnings, is slightly above what we were using in the modeling at the time.

And as Hugh as pointed out, we didn't model for a price increase. We modeled for the values to stay down and maybe decline further. So in this sense, however brutal a planet is, it's -- what is happening has been planned for, and that's the Company's view.

Now going forward, we -- luxury is perhaps a word you don't use in a market like this, but you'll understand the meaning of it, that we have done the hard work on the financing. We have done from both the debt and the equity side, and now really whatever you need to do, you can do it in measured steps. And you watch the market as we said to the earlier caller.

You can't indefinitely. If you were to run this through into 2019 and 2020, you can't indefinitely run on a market that's this bad. So it's still pretty uncertain as to when the market will recover. We've got great runway, and as we said before, you will do what you have to do as a management to ensure as best as you can that zero is taken off the table and ensure that as best as you can you can fulfill your commitments and ensure the best as you can that you are going to get the Company through the end of the tunnel, however long that tunnel is.

Yes, thanks, Robert. Well said.

So short answer is you are not going to take any of your weapons over time to defend yourself off the table. But at this point, you don't have to do anything. You have that [luxury of inverted commerce] to manage it properly without panic, to be proactive still rather than reactive.

Understood. And just sort of was going to -- was just thinking of further covenant waivers and ones that you would seek. Is there anything on the table you are looking to evaluate now? And also just wondering is there potential for being able to amend the minimum cash requirement, which is somewhere around, I believe, $50 million? Is that something that in discussions with banks that you could or they would be open to amending for it to be a little lower?

We're not planning on approaching our banks to amend any covenants. We don't feel we need to at the moment. As I mentioned earlier, we have a sufficient runway to sit and evaluate things. And certainly we've done some pretty tough stress testing of our own position, and we feel comfortable that we don't need to be asking for anything because we're not -- don't see ourselves breaching anything during the period of that runway. So it's not on the table for us.

In terms of minimum cash covenants, they are not something the banks actually get very flexible about at all. You can get a lot of flexibility from financial institutions on a lot of covenants, but I think you'll find that they generally are very inflexible about minimum cash covenants because they don't want that minimum cash used to support other financial institutions.

So generally speaking, the answer is it's not an area that people are generally successful getting relief from from the banks.

I think it's very much that the banks have really done a fantastic support to the Company, and they have worked really very hard across a number of banks coming up and supporting the Company and the shareholders here. And I think that we should have a bit of -- again, it's all about situational awareness. We have a market that is not producing cash flow. We have a -- asset values that are weak. We have a sharpened market that is weak. We have a paper market that is weak. We have players that are, as I said, non-public companies who are filing, etc. etc. And there are a lot of our competition who had hoped or relied on the fact that the market would continue to strengthen and continue to strengthen in asset terms and values right now, and the banks at the moment are having to look and look at these other areas of the dry cargo market.

So I think as Hugh says, we should be thankful for what we've received from the lenders across their support and be aware that if you are trying -- it's taken us three months to get to this point. After doing an equity raise with all the support that the group -- the broader group of Scorpio, plus the newness of the fleet, and there are people who are to starting now to face their issues. So we have to very much deal with what we have and be thankful for what we have from the lenders right now.

Yes. Thanks, Robert. Thanks, Hugh. You guys have definitely been fairly quick and early. Appreciate the answers. That's it for me. Thank you.

Gregory Lewis, Credit Suisse.

Just following up on Omar's question, is that a -- the minimum cash, that's per vessel correct? Or is there --

Yes, that's correct.

And it's roughly $1 million per vessel?

It's $850,000 a vessel.

Okay. Perfect. And then just Robert or Cam or whoever wants to take this, clearly the outlook for the dry book market is challenging. Since there's expectations that this could be a prolonged down cycle, clearly from your -- the moves that Scorpio's making, you are at least preparing for that. Are we seeing any response at -- on the supply side, i.e. at shipyards where we are starting to see the order book shrink? Are we seeing problems with deliveries? Are we seeing conversions out? Are we seeing any sign -- are we seeing any response on the supply side, or is it -- as we look at the order book over the next 12 to 24 months, unfortunately that's what we're going to be looking at in terms of supply growth?

Greg, it's Cam. I will answer your questions in two parts. One is absolutely we see a bunch of signs on a supply correction from the, say, entry side, i.e. from the point of view of shipyards. A lot of the conversions have already run their course. But what we are seeing now is second and third tier shipyards starting to consolidate or close, which, of course, is a very welcome sign. So your overall capacity available for dry bulk is rapidly declining.

Now the other area where we see a supply response is, of course -- and you know this as well as we -- is on increased scrapping, scrapping of vessels as young as 15 years of age. And I wouldn't underestimate the pace of this scrapping to continue in light of new regulatory requirements coming around such as ballast water treatment investment that will be required on these older ships and the balance sheets behind them that can afford or not further investments in these vessels.

So so far as you know the scrapping, particularly on the large vessels has been very -- accelerating rapidly the longer the market stays weak and the flatter the forward curve becomes.

Okay. And then just, Cam, real quick, when we think about the potential issue of the ballast water treatment, if we were to bring a 15-year-old vessel into the yard, roughly what would be the expense to bring that up to the new standard?

It depends a lot on the size of the vessel and the type of technology involved. But you're looking at, for Cape, somewhere between $1 million and $2.5 million. And then you are also -- bear in mind by about the third special survey or the 15 years, you are also starting to look at enhanced steel replacement on the vessel. So it becomes -- in a waiting game, when your curve flattens out as it has done and your balance sheets become strained as they have done, those owners just do not have the desire or the wherewithal (inaudible) to play that option on an older vessel.

Okay. Perfect. Thank you for the time, gentlemen.

Spiro Dounis, UBS.

Hi, this is (inaudible) calling in for Spiro. Just one quick question for me. I noticed that management has increased ownership significantly over the last quarter. Can you give any color on whether the rate of that buying will continue, especially if the share price continues to move sideways?

No. I think that -- we give you color on the buying if we don't have mark to marks in Scorpios ship holdings. You are buying enough for trading. By definition, you can't trade. It's not short term. It's a -- I guess it could be viewed as a statement of confidence that's the longer-term value of what we see in the Company. And we are, by definition, we have to give fairly regular updates on stock purchases. We have to obey the windows in order to do that, but the one privilege we have is we don't have to announce to everybody, oh, we are about to buy a whole bunch of stock.

Fair enough. Thanks for the color, guys.

Magnus Fyhr, GMP Securities.

Just one question left to follow up on prior questions regarding the financing on the upcoming new builds. So looking at some of the Capes you have delivering over the next couple of months, what kind of funding can you get for them? Just trying to figure out the leverage you are going to put on these.

Magnus, that's a good question. I think that we been putting leverage of 60% on our Capes. Generally speaking those Capes have -- we've been getting valuations of around $45 million, $46 million. The actual market valuations that we are receiving at the moment are probably a little bit lower than that, so I would probably, for your numbers and estimates, probably use valuations of $43 million, $44 million. And again, if they were, as we said, product sales candidates in the market now, it may be coming out less than that. But again for valuations received, we tend to get slightly higher numbers than last time, so I would use some mid-to low [$40 millions] for a Cape.

Okay. So when you stress -- under your stress test scenario, the -- roughly $600 million that you have available, that includes about a $27 million, $28 million for a Cape?

I can't really comment too much on that, but I would say --

I will comment that you would stress test lower. You are going to stress test lower than the actual present market. You are still in that environment where your percentages between literally any given month because on the one side, as Cameron is saying, you are putting in the steps for a long-term market recovery, but at the same time, you've got short-term weakness. On any given month, you've got to wait. The chance is 33% prices go down, 33% they go up, 33% they stay the same. So our stress testing is below our internal stress testing which we do not guide to, but we obviously show lenders and have had to show lenders in this last two, three months for them to get comfortable related to amendments are stressed at below the -- the low prices that are in 95% of any of analysts in the present NAVs, the low prices that are 5% to 10% below those numbers.

And Magnus, just add to that, we have a couple of Capes which we finance on the basis of contract price rather than market value, and we expect to deliver those with perhaps deliver debt of around $33 million a ship on those vessels. So it's a mixture, but as Robert says, our internal stress testing is much lower than where they are -- where values are now.

Okay. Great. Thanks for clarifying.

Amit Mehrotra, Deutsche Bank.

Just to follow up, Hugh, the $645 million of remaining newbuilding payments, almost half of that is in the first quarter of next year, $293 million, can you just give us any color both in terms of how that is spread over the quarter, whether it's all basically at the end or spread out more evenly and then what the breakdown is for the equity and debt component of the financing for that? Thanks.

Amit, there's a few vessels bunched up in the first weeks of January simply because they've been pushed over from last year from this year. But otherwise they are spread equally over the quarter. In terms of what we expect to draw down on those vessels again, we do expect to draw down our debt as discussed in our earnings release, and I don't think we have any specific comments that we can make on the amount of cash that will be used versus debt apart from the fact that all our debt is available to be drawn. So we're looking forward to -- most of it will be drawn debt and not cash.

Okay. Got it. Thank you.

Charles Rupinski, Seaport Global.

I just had a really quick question on chartering strategy, and if there are any scenarios that you would envision over the next, say, 18 months where you would consider putting something on longer, if there was some kind of anomaly in terms of the one year charter market or anything like that, are you going to basically plan on sticking to the spot strategy? Thank you.

I think we always evaluate opportunities, and we're not adverse to fixing in for longer-term charters. The problem is that with this market, as Robert was saying, the forward curve, the paper is weak, the physical market is weak, and we just feel that at this point, it is not the time to go on and fix it. As you seen some months ago -- probably actually a year ago when we took delivery of our first Cape, we had no problems in fixing around a one-year time charter. We thought that was the best solution for it.

So no, we're not adverse to period business. Yes, we do not think that this is the time to be fixing for long-term business.

Great. Well, thank you very much.

There is value, but there is no value today in our view --

Yes, sure.

For long-term business.

Okay. Thank you.

And with no further questions in the queue, I would like to turn the conference back over to Mr. Hugh Baker for any additional or closing remarks.

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

Again, that does conclude today's presentation. We thank you for your participation.