Eneti Inc (NETI) 2017 Q2 法說會逐字稿

Hello, and welcome to the Scorpio Bulkers Inc. Second Quarter 2017 Conference Call.

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, our 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 24, 2017, and may contain forward-looking statements that may 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.

Thanks, Hugh, and good morning, everybody. Thanks for joining us today.

Back in April, on the previous earnings call, we've been talking about the fact that we have managed to normalize our balance sheet. This normalization has continued, and we were able to take an important step in the right direction.

Just last week, we have reached agreement in principle with our lenders, whereby principal repayment on our debt that were previously deferred would be reinstated to their original form. Under this agreement in principle, we will be required to make principal payment of approximately $7.3 million in the third quarter of this year and a quarterly repayment ranging between $1 million and $4.5 million per quarter from this quarter throughout the fourth quarter of 2020. This step is significant and allows the company to really have all option at hand, including but not limited to the restoration of the ability to pay dividends.

What I just mentioned was achievable thanks to a number of factors, of which some stability in the rate environment is the most significant one. As outlined on Page 4 of the slides, which we've uploaded, we have just made -- well, you can see that the rate environment has stabilized since the beginning of this year. Whilst it is still not satisfactory levels and whilst we expect the rate environment to improve further in the future quarters, this stability has actually allowed management to take positive structural measures to improve the status of our company.

Our markets continue to improve on a fundamental basis. Asset values have now stopped rising after a rapid increase which we experienced in the first 4, 5 months of the year. And being opportunistic, we were able to sell 2 of our Kamsarmaxes back in April, as we discussed already.

Our newbuilding program is now fully delivered, and this allows management to focus on operating our fleet, which, being amongst the most modern in the industry, has minimal CapEx requirements going forward. We believe that the company steps are providing financial flexibility as well as greater potential for shareholder returns and value creation going forward.

In general, we are optimistic for the dry cargo market recovery and look forward to further strengthening our position in the market in what is an improving rate environment.

With this, I'd like to turn the call to Hugh Baker.

Thank you, Emanuele. I would like to refer all of you to our supplementary information presentation that we have uploaded to our website, and that provides some supplementary information to this earnings press release.

We made a net loss of $13.4 million in the quarter, which is $0.19 per share. However, I can report that we made positive cash flow from operations. Our cash position as of July 21 was $148.3 million. During the second quarter of 2017, just as mentioned by Emanuele, we completed the sale of 2 Kamsarmax vessels for $45 million, where $20.1 million of debt was repaid and net cash proceeds of $24.2 million was received. We also agreed to time charter-in one Ultramax vessel for 2 years, which has a further 1-year option at the company's option.

During the second quarter of 2017, our OpEx was reduced to $4,858 per day, cash G&A was $929 per day, and cash and interest -- I'm sorry, cash interest amounted to $1,797 per day. In total, OpEx interest and G&A amounted to $7,584 per day. During the second half of the year, we expect to manage these costs downwards further -- or further downwards.

In addition, during the quarter, we reinstated $45.4 million of principal repayments that were previously deferred. These -- this $45.4 million will be payable over the next 2 years and will be made from the third quarter of 2017 to the fourth quarter of 2020.

In addition, the restriction on the payment of dividends and share buybacks has been removed from all credit facilities. We are very pleased that we've been able to normalize our existing bank relationships and reinstate the loans to their original form. I'd also like to mention that, in addition to the fact that there are no restrictions on dividends or share buybacks, we have no other restrictions in place either. We don't have any cash sweeps; any big interest; any requirement to hold restricted cash as a result of debt service, liquidity or ballast water treatment system reserve accounts; and most importantly, we don't have any major debt maturities due to the past deferment of principal. As a result, we feel we have considerable flexibility and optionality for the future.

Now I'd like to open the call up for questions.

(Operator Instructions) Our first question comes from Gregory Lewis with Crédit Suisse.

Hugh, I guess my first question would be regarding the ability for you to work with your lenders to get them to -- your reinstating the debt prior to the relief of amortization gives you the ability to pay the dividends. How should we be thinking about the dividends? Clearly, you have a lot of cash on the balance sheet that you could fund some type of dividend, but should we be thinking about the dividend as more of a cash flow from operations type number?

I think -- Hugh, I'll take that. I think you said, [be thinking], Greg, that the company has been focused in the last months, maybe a year, on, first of all, surviving a very, very bad market and then righting the ship. And now what we've been doing is normalizing the position. I think that that's where the focus of the company has been. The company itself has, as Emanuele said, only just done this in the last week or so. So we're now -- only now, for the first time, got all our options in place, et cetera. And we haven't sat down either properly as a management neither -- nor with our board to determine which of these options we are going to use going forward. And that will be determined over the next weeks or months.

Okay, great. And then just on Slide 4, you kind of talked about the projections that you've booked already in Q3. Just as we look at the market over the last couple weeks, it looks like it's improved a little bit. Do you have any sense for what type of rates those vessels are fixing today and maybe how we can think about the remaining, I don't know what, 45% to 50% of the days if we were to just roll through what we're seeing -- what you guys are seeing in the market today?

I can answer the first part of that question, and maybe Emanuele was -- can add to it. Greg, what we've been seeing is that in the -- we obviously make projections as a group going forward. And what I -- what we can see is the projection, the rates that we are booking for August are a little bit higher than the rates that are indicated there simply because of the -- those rates are averages for the period that we have forward bookings for. So I would probably -- I'll pass this to Emanuele, but I'd say the curve is upward slightly.

Yes, I agree, Greg. I don't have much to add to what Hugh has said in the sense that you've seen the stability in the rate environment that has been there since the first quarter, really. If you look at Q1, Q2 and Q3, the rates are very, very similar to what has been booked in Q3 so far. So whilst we would like to see the rate environment improve more significantly, it's tough to tell you what you should budget for the remainder of the quarter. What we do instead is, in order to be transparent, we take, for our internal projections, third-party indications of where the market is and use those so that the board gets comfortable that management doesn't just make up a number depending on mood. But I would say that the -- rolling those numbers for the remainder of the quarter is probably safe enough.

Our next question comes from Jon Chappell with Evercore.

Obviously, on the financial side, you've given a little bit of taste that you're in a strong position but also that you're a little bit more optimistic on the market and therefore are willing to kind of, as you said, normalize the capital structure. From an operating standpoint, you've chartered in one ship now after rolling off a pretty heavy chartered-in fleet. How do you kind of foresee both the charter-in fleet going forward as you think the market continues to come off the bottom, but also your willingness then to add own tonnage?

I think that...

(inaudible) Sorry, Robert, if you want to go, it's fine.

I was just going to say that generally, Jon, that that's in -- we think there's great value in the charter we've just done now. And I think that the company is being focused again to the same answer to the dividends, that we've really been really focused on getting the operating efficiencies that have been coming down. I mean, it's just fantastic that we can sit here as we go into the summer period with all these alternatives, that yes, it's legitimate that very shortly, the company could pay a dividend if they wanted to. But yes, we could buy assets if we found that, that was the right [route of] the curve. And it's the same as the dividends. That type of question, we will start to answer ourselves over the next weeks and months in terms of overall strategy.

Let me ask a follow-up on that same topic. If you look at the order book in the segments that you've chosen, obviously, that's down to levels that you haven't seen in major asset classes in probably more than 20 years. It seems like some newbuilding momentum has started to pick up in one of the segments where you have a large focus, the Kamsarmaxes. Can you just talk about what you see going on there? Is that just yards kind of getting desperate and putting out prices that are too good for others to pass up? Is that more of a secular change? How do you kind of perceive that order book and what that means to your fleet going forward?

I'll take this. Emanuele here. It's weird, right? As soon as there is a little bit of positiveness in the market, you see reported that newbuilding orders have been placed. I think if you want to look at it from a positive perspective, you have to think about the fact that the shipbuilding capacity has shrunk significantly. You see that now only a much smaller number of yards are building vessels. And these vessels are -- or these orders are placed by generally quality owners, the few owners that have access to capital and have access to debt or don't need the debt even in this market. And sort of you are not so concerned because these ships are going to end up in relatively strong hands as opposed to before where you could not really control where the orders were placed, you didn't know whether it was -- how opportunistic the order was at all really. So it is a fact more than 60% of the shipbuilding capacity has disappeared in the last 7, 8, 7 years. However, of course, are we clear with the fact that orders are -- continue to be placed? Definitely not. We have the most modern fleet out there, and we certainly don't wish for it to increase. Price-wise, to address the latter part of your questions, I think that price-wise, we're still seeing relatively attractive pricing out of China. And instead, in Japan, the prices are -- for the asset class you were referring to, the Kamsarmaxes, are definitely on the high 20s, and they don't seem to be moving from there. And this is why this has created some sort of resistance because with the rates that there are today and that we're experiencing today, we're still not out of the woods if you're paying in the high 20s for the assets. So it's just a wait-and-see. Hopefully, it will be strong hands and good shipyards only in the next wake of newbuildings, and hopefully, it will not happen in any significant way for another year or so.

Our next question comes from Amit Mehrotra with Deutsche Bank.

So the first one is on the partial reinstatement of the amortization payments. It's obviously not a significant amount of incremental dollars, but I mean, frankly, it's still a little bit of a head-scratcher in my view. I mean, the company was still very cash flow negative in the first half if you adjust for the asset sales. The third quarter looks to be weaker than the second quarter based on the disclosures. So just against that backdrop, can you just kind of explain the thinking behind accelerating debt repayments? And what are the other reasons aside from maybe the removal of any dividend or restricted payment covenants that you mentioned?

Amit, well, I'd say -- Hugh, pardon me. I think that we would -- what we would see in the third quarter, Amit, that yes, the Kamsarmaxes might be behind, but the Ultramaxes are ahead, and we have more Ultramaxes than we have Kamsarmaxes. So there's every reason, with Emanuele's commentary, that he -- that in Hugh's commentary related to the spot rates earlier that your cash flows in 3Q are going to be better than 4Q. Obviously, we feel that the market is going to continue to improve. And whether it improves $1,000, $2,000, $3,000, $4,000 during this period, we nevertheless feel it's going to improve. We don't have very much cash-out with the new fleet. And then it's just really important in your makeup to normalize when you can afford it and you think you can afford it to normalize that balance sheet as quickly as possible. We don't think it's the right thing to go out and buy assets or charter in ships or pay dividends or buy back stock or all the things that you can do or even stand still if you can afford it on the back of your lenders giving you moratoriums. You just should get back into your -- into a normal amortization and a normal relationship with your lenders as soon as possible.

Okay, okay. So this move is really more of a normalizing of relationships with the banks as opposed to inducing your ability to pay equity holders in this current market. Is that how we should interpret it?

No, it's both. It's, first of all, you're normalizing your position with your banks, which then enables you to both legally and structurally and correctly, so we could still buy assets up to yesterday, that wouldn't have mattered. So it allows you all of your options going forward. And it is also a sign that management believes that we're through the worst of the dry cargo market.

Right. Okay, that's helpful. Just one other question on the dividend, if I could, on possible dividend. Shipping companies over the last past cycle have really gotten into a lot of trouble by dipping into the equity of the company, whether it's the cash flow on the balance sheet or raising outside equity to fund dividend payments that they really can't afford. You guys own a very large percentage of the company, which is -- seemingly aligns you well with shareholders. And this kind of goes back to Greg's question, the first question, really about what the source of any prospective dividend payments are going to be because as you see them today, the company does not have enough cash flow to fund dividend -- the debt repayments, frankly, from an operating cash flow basis. So is there any -- can you provide any assurance to the other equity holders of the company that future dividend payments are going to be paid for by generated free cash flow as opposed to existing share...

Well, I think, at the moment, I think the assurance that you would give anybody is what we've said before, that we haven't even discussed doing the dividend -- doing a dividend within management, not alone going to the board, that it -- this is a movement that allows you the optionality, and then you're going to sit down and work out what it's doing. But I would agree, in general principle, it's not a good thing to voluntarily go and start to pay a meaningful dividend if you are running cash flow negative. We don't know where we're going to be in 1 quarter or 6 months or -- this market is moving very fast. Remember, it was only a few months ago that all of these companies were still running negative operating cash flow numbers.

Right. One last question...

Okay, where we are now, it doesn't take the company very much to go from actually positive earnings here. And certainly, positive [rolling] cash flow didn't take that much of a rate increase.

Yes. I guess vice versa, too, as we give you a push forward (inaudible) sort of this operating...

Sure, which is -- but that's why you're in a great position. You can afford either -- you can truly afford either position.

The next question comes from Ben Nolan with Stifel.

So I had just 2 quick ones. First, Hugh, you mentioned that you have this 70 -- almost $7,600 a day of cash expenses, and the G&A expenses have been coming down quite a lot. Is that where you would see a little bit more room to cut? Or how should we think about when you said that you'd expect your cash costs to come down?

I think we see room for slow but steady reductions in OpEx and G&A. I don't want -- I want to manage expectations on that. I don't think that you're going to see very large falls, but I think we're obviously working very hard to rein in all of the cost items in the company. And we're comfortable that the cash G&A and the cash OpEx are probably -- are going in the right direction. I think that's as far as I'd like to go. But again, I think we would like, quarter-on-quarter, to show you good news there, but I don't want to go any further than that.

Okay. No, that's helpful. And then sort of associated with that perhaps, but when talking about sort of the normalizing of your loan facilities, are there any movements in your interest margins as well as a function of sort of getting back to amortization and so forth?

No, there aren't. We -- all of our debt is priced to between LIBOR plus 2.925% and 3%. So there's a sort of 8 basis point spread between all of our secured debt. And we don't see that reducing mainly because we don't actually see ourselves refinancing it in the near future. I think if we were to acquire new assets or to refinance, I think we would be looking at margins that would be either at similar levels or slightly below. And then we feel that we have, I mean, terrific flexibility in our financings because we don't have any of the sort of what I'd call the legacy problems that I think that a lot of dry bulk companies incur, including [sub pick] interest and cash flow use. So when we -- our financing is essentially very plain vanilla, and what you see is what you get.

Our next question comes from Magnus Fyhr with Seaport Global.

Just -- most of my questions have been answered, but just on the fleet -- I mean, with the restrictions removed now, do you feel like you have the right fleet composition? I mean, you sold out of the Capesizes and now mainly focus on Kams and Ultramaxes. Maybe you can elaborate a little bit on why you think you're well positioned there with those 2 asset classes or if there's options to go into other asset classes.

Well, I'll take it then, Emanuele here, (inaudible) and then my colleagues can chip in. But first of all, I don't think that we've exited the Capesize market because of disbelief in the market, but it was just a necessity. And as we discussed in the past, I think buyers -- at the time what the company needed to sell were only on the Capesize segment or were only interested in the Capesize segment. So we were basically divesting there through lack of other alternatives. We have sold what we could back in the day to keep the company alive. Having said that, yes, the focus now is on Kamsarmaxes and Ultramaxes. We are comfortable in the 2 segments in which we operate. Ironically, actually, our team was least experienced in the Capes, and now of course, we don't have that problem anymore. We are looking at the advantages that these segments can provide, like on the Ultramaxes, the variety of customers, the variety of products that you ship, et cetera. But we don't dislike, for instance, the smaller segments, like the Handys or the bigger segments like the Capes. So it was not a strategic measure back in the day. As we made public, we were divesting through necessity, not through a strategic move. So that's where we are.

All right. And just -- you've been operating the fleet now for over a year, and I mean, you have a very modern Eco fleet. Can you tell us a little bit about the cost savings that you've achieved on fuel savings? Do you have a little bit more evidence?

They are a blend. I don't know if Cameron wants to elaborate further, but they are difficult to [allocate, the 2 things]. First of all, we've made public that yes, the more modern fleet are better in consumption. How do we quantify that or translate that into dollars? Especially on dry cargo, unlike tankers, it's a little bit more difficult because in dry cargo, a lot of the voyages are time-chartered voyages, and you basically pass on the cost of the bunkers or the saving of the bunkers to the end user, to the charterer. Now in this rate environment, which still is suboptimal and it has been very, very severe, the owners negotiating a position as being weak to -- quite weak as opposed to the charterer's one, right? It definitely was a charterer's market. So being able to pick and choose and do movement on a voyage basis rather than a time-chartered basis has not been the easiest. We've been focusing really on making sure that we were getting the best cargo for the shipping position. As you remember, we've actually fixed quite a lot of vessels for periods ranging between 4 to 6 months or 5 to 7 months. So we elected or decided to give away any potential upside there by way of securing what we thought was the best employment for the fleet at the time. So I don't know if that answers the question, but it's difficult for me to give you a dollar number. Whilst it is very easy to say that in -- on average, between Ultramaxes and Kamsarmaxes, you can see that 4 to 6 tonnes a day on a normal cruising speed for a full speeding day are saved between an Eco and a non-Eco vessel. Now with the cost of bunkers being where it has been lately with the barrel, which has floated with $40 a barrel for a while, with -- savings are not exciting if you translate them in dollar terms.

Our next question comes from Noah Parquette with JPMorgan.

I just wanted to get your guys' thoughts on the delay of the [house water] regulations to 2019. Is that something you guys -- there's a lot there was a probability of happening. And given your young fleet, are the [changers] thinking on strategy at all?

Perhaps I can take that, Emanuele.

Go ahead.

I think those among us who are a bit cynical probably saw this or the possibility of the delay coming and are not surprised. I don't think, on the other hand, that we ever argued that there would be some dramatic step function in the composition of the fleets or the makeup of the ownership of the fleets. When these regulations became effective, it was always in our mind that this was going to be a gradual phase of implementation, coinciding, by the way, with -- as Emanuele mentioned earlier, restrictions on capital to traditional shipowners. So let's put it this way: there's a glass half-empty and glass half-full elements of this, which is, yes, some scrapping on the margin, and some financial stress on the margin has been postponed for those operating older ships or weaker balance sheets. That's absolutely true. On the other hand, there were other means. And the delay of a couple years, we don't think is going to have a dramatic influence either way on the shape of the market and supply-demand fundamentals. So we'll take it as it comes. Now that being said, further delays we find very implausible at this point. We really are at the end. And so we are looking at, like I said, some owners that, even with a year or 2 in hand, will have a lot of difficulty in meeting use as standards just on the basis of the cost and time and availability of capital that it will require.

Our next question comes from Amit Mehrotra with Deutsche Bank.

I just had one quick one on the overall market. Iron ore -- and maybe this question is for Cameron or Robert. But iron ore into China, obviously, it's just a big part of the trade, and people are getting a little bit more nervous maybe about the inventory level of the Chinese ports. But then just in terms of where you guys play in the Ultra and Kamsarmax segments, could you just talk to us a little bit about where you're seeing growth right now for your vessel classes? And then also, like, minor bulking ports in China are up quite significantly year-to-date, which is maybe encouraging. If you could just maybe elaborate on that just so we get a sense of why you guys are maybe optimistic for at least the market that you are traversing.

Yes, I can take that. So look, I think we all acknowledge there's no getting away from either China as a global consumer or from iron ore as the dominating cargo in the dry bulk market, period. What I would say again is a flip side to some nervousness about inventory levels is you have record-high steel demand, plus steel production [part] being in China last time I checked. And where we get tremendous benefit out of this is triangulation of backhaul opportunities for our vessels. So we import into China, and then steel product is coming back out. So we see a lot of demand for steel cargoes coming out of China. Similarly, we've had very positive grain harvest, South America and North America creating a lot of the network benefits of these smaller ships that we just don't have on the larger ones that are basically A to B traders. So a lot of agricultural commodities, fertilizers. Again, steel products, something that we're focused on because of the premium that they usually pay. And the qualification of the necessary specification of many ships that could carry these heavy -- very, very heavy cargoes is something that we're benefiting from. Every time someone asks -- parenthetically, every time someone [doubts] China's ability to manage extraordinary situations, I think they seem to manage that okay. We don't have blind faith in China, but as we said, the level of control that, that government has on that economy seems to continue to amaze us. So we're -- I'd say we're cautiously optimistic here.

Ladies and gentlemen, this does conclude today's Q&A portion. I'm going to now turn the call back over to our host.

Thank you very much for listening to the call. I think the company has nothing further to add. So we'd like to thank you all, and we look forward to speaking to you all soon. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.