Oct 29, 2014
Executives
Hugh Baker – CFO Emanuele Lauro – Chairman and CEO Robert Bugbee – President
Analysts
Jonathan Chappell – Evercore Partners Ben Nolan – Stifel Amit Malhotra – Deutsche Bank Herman Hildan – RS Platou Markets
Operator
Hello and welcome to the Scorpio Bulkers Incorporated Third 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.
Hugh Baker
Thank you, operator. Thank you 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 date October 29, 2014 and may contain forward-looking statements that involve risks and uncertainties.
Actual results may differ materially from those set forth in such statements. For discussion of these risks and uncertainties, you should review the forward-looking statements discussed 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 webcast live on the web is also being recorded for playback purposes. An archive of the webcast we will make available in the Investor Relations page of our website for approximately 14 days.
Now, I’d like to introduce Emanuele Lauro.
Emanuele Lauro
Thank you Hugh and thanks everybody for joining us today. We have experienced a tough rate environment in 3Q and as a matter of fact since the beginning of the year the market has been rather disappointing and definitely performing below our expectations as well as the expectations of many other market participants.
In the past 18 months, at Scorpio Bulkers we have managed to build a company like no other in cargo space. 100% of our vessels are belonging to latest generation of assets and we are uniquely positioned to take advantage of market recovery.
At the same time, we are uniquely positioned to be able to wait for this recovery to materialize as expected. We have worked honestly to put together the best possible fleet.
We have been to the highest possible specifications at the best shipyards on the secured debt function of our fleet in a short time. We still are continuing to show our support by having presented us proposal from loan facilities to cover the remaining un-financed portion of our fleet which is 14 vessels out of total of 80.
Earlier in the year, we’ve decided to take Time Charter exposure. This was done in order to provide our company with operating leverage, which would have captive for the waiting time to our new billing deliveries in 2015 and 2016.
In other sites, we were wrong, locking with the exposure we took will not affect the Company’s future position. Contracts are coming to an end quickly and the exposure is increasing every day.
Around 50% of our PC fleet can be delivered to its owners in the next four months. We have decided to order vessels, which would have delivered in 2015 and 2016 avoiding paying premium for 2014 deliveries.
In other site, we were right. We are looking forward to receiving our new billings as we approach 2015 or more than 40 vessels would be delivered to us and what we believe will be a healthy rate environment.
For the short-term, we have seen and are continuing to see mid-sized fleets from west arising and having reach Time Charter equivalent in excess of $40,000 a day. The Pacific rims rose to the low to mid-20,000.
This positive rate hike which has affected both basins East and West, has made a difficult for Charters to apply pressure to the smaller sizes such as Panamas. China is supporting the smaller sizes like the Supramax in the Pacific with fresh steel cargos.
Coal shipments into India continue to serve supporting the mid-sized vessels such as the Panamax. We are seeing renewed interest to the period business from end users and major operators towards the Kate market with rest of period business would have quarterly in the low 20s.
In general terms, we believe that the commodity prices corrections that we’ve experienced in the past months would stimulate demand side. We have experienced the slowdown in new building orders.
We think that this would be beneficial to our market going forward and some of the second [PAIs] have been forced to raise the white flake and will not be able to deliver on that order book. With this, Robert over to you.
Robert Bugbee
Hi. Good morning everybody.
I quickly if we come back to little bit and get a little bit of perspectives on the physical market and what’s going on out there. As manual says, it is nicely high than this point last year.
Structurally things are certainly looking in flavor on the front meant rose the commodity prices before and the result of most surprisingly stimulating demand. And we are seeing that happen in other markets in crude products.
Experience yacht really in trouble there are since the delay ships that are being canceled ship may or even delivered properly. I think this is important to look at Salt still has best fleet asset.
It is the fleet that everybody wants. I think that it changing.
If we compare that market to the year ago, I think what you going to see is a continued theme of consolidation. We are seeing various moves to consolidate company so far this year.
I think that move is going to continue and be particularly driven by company which PE target for shareholders. And with that I think we’ll now open straight up to questions.
Operator
Thank you. (Operator Instructions).
And we’ll take our first question from John Chappell with Evercore.
Jonathan Chappell – Evercore Partners
Thank you and good morning guys. Emanuele, I wanted to ask you about the Time Charter strategy.
You mentioned to invest 50% in the fleet can be redelivered to the owners shortly, but it also looks like there is a couple recent Charter updated in the press release. Have you started to take delivery of the majority of the fleet next year?
Do you envision as the Time Charter fleet going down significantly?
Emanuele Lauro
Well, I think the strategy on the Time Charter side was to deliberation of leverage and to the adoption of it into the book. This was the reason why we started entering into the strategy at all.
As we are going to take delivery of our vessel for sure, there is a lesser requirement for operational leverage, which will be intrinsically provided by our own assets. So of course, we think that, the Time Charter book will lead increasing as we have received as we take delivery of our fleets.
Jonathan Chappell – Evercore Partners
Okay. As far as these five updates that we just view those as stock market was bottoming, maybe saw some signs of an uptake and we’re able to pulling some tonnage at historically low levels.
Emanuele Lauro
That is correct. You’ve seen some of the starting points on the fleets and as you have seen on the release where as low as $5,000 a day for a period of time even if it’s quite short period of time.
So, those were opportunity which we thought they were still valuable to the company. So, we’ve entered into those.
Jonathan Chappell – Evercore Partners
Great. Robert, you mentioned that you have the fleet that everybody wants.
Obviously, the stock is trading at a pretty significant discount to any regional matter. How you do that calculation?
Have you seen offers for vessels? Have you thought about selling vessels and easing our funds and buyback program someone that only have in your thoughts?
Robert Bugbee
Well, I think that first thing has to do to get that best side fully financed so that’s we’re doing. I think in order to do that, when you going through credit committees and things you really don’t want to put in a buyback even though can believe a right at the tremendous arbitrage between NAV and stock price.
So again, I know that the Street moves very fast in terms of the pricing and so you now a little bit in shocking in general spaces at the moment. But from a corporate position, you got to focus on finishing debt position before you start do anything like that.
Now, you’re right I mean it all be at that’s going to be a big and that’s going to be a big especially on the case with this market and you can do charters and you got a when you got a great fleet for this modern and the case markets fundamentally held strong. As the management in this situation you are always going to be receptive to hearing people’s offer.
But, I think it would be generally unproductive to obtain best pricing or opportunities to discuss this further on the entire vessel.
Jonathan Chappell – Evercore Partners
Okay. Just one last kind a medium-term strategic thought.
As the ships deliver the operating cash flow hopefully ramps assuming that rates can hold or improve from current levels. How do you think about following a similar strategy to staying and what I mean between that is ramping a dividend and or share buyback program as appose to you already have a fleet now that’s 80 vessels.
Do you envision any growth beyond that or is it more of a returning cash to shareholders?
Robert Bugbee
Yes. I think that you’re bringing both through.
I think you got that flexibility and if we go back to your first question. I mean as a company, it’s really massive at the end of the day whether it’s 73 or 80.
But all of this becomes a capital allocation question in a sense, you clearly want to get to that point where you can pay a dividend as quick as you clearly want to get that point and have flexibility. The arbitrage whereby the stock is trading above NAV is one thing and other is ability to take opportunity to take by shift to the all the people having prices.
So, nothing really is going to change. I mean if you look to company notwithstanding where it’s going on the broad equity market, they’re pretty well the same.
It just that, that itself is a little matured. It should set the company back if you start to do anything like that.
Now you’re right I mean it all be at that’s going to be big if, that’s going to be a big if, especially in the case with the people in the market and you can do charters and you got a when you got a great visibility to this modern. And the case markets fundamentally tell things strong.
As the management in this way strain you ways clients to able to set this to hearing people’s offer. But I think it would be generally unproductive to obtain best pricing or opportunity to discuss this further on the entire vessel positions that you bring yourself with them.
Jonathan Chappell – Evercore Partners
Great. That makes sense.
Thanks Robert.
Robert Bugbee
Thank you.
Operator
And we’ll take our next question from Ben Nolan with Stifel.
Ben Nolan – Stifel
Thanks. Yeah, I guess my question relates to the financing you guys obviously just last week I guess announced, the two incremental bank loans to fund the new buildings.
And so, a few more vessels that need to get financing. I assume that those are some of the more further day to deliveries.
Is that something that, that we should be expecting to happen soon or is it something that has a little bit more lean time given presumably later deliveries?
Emanuele Lauro
No, Ben. I mean, I think we’ve indicated in previous calls that we expect to finalize the debt financing for the entire fleet by the end of this year and that is still is very much the case and we are still on schedule to do that.
We have three credit facilities that we’ve sheet for and the banks are essentially credit for and if we expect to execute the commitments within this year. So, we’re all scheduled for that and we expect to be fully financed by the end of this year.
Ben Nolan – Stifel
Okay. That is very helpful.
And is market similar to what you’d announced on the other wins where you can get 60% financing for the cost that is available and should we expect similar terms on those term financings?
Hugh Baker
You should expect some of the terms on such financing. As a basic point, the market is probably got better in the last six months, the market is again is bifurcating between companies that have access to capital like Scorpio Bulkers and companies that don’t and we are very fortunate to have tremendous amount of support.
I think we currently have 19 financial institutions that are lending to us with three more to come and 50% of our debt of our debt is gone be held with external credit agencies. And so, we have this tremendous support within the marketplace for financing for Scorpio Bulkers.
So, I don’t want to project any announcements but the terms and conditions are actually getting slightly better.
Ben Nolan – Stifel
Okay. That’s helpful.
And then my last one and I know Robert how much you love this, but you guys are now take a delivery to call it core and core Eco. Can you maybe talk to what your consumption generally is on those as appose to some of the other vessels that you have chartered in, I mean, is it performs on those vessel are materially superior to the consumption you’re seeing on your fleet?
Robert Bugbee
That I can’t. As expected and materially better than those shifts that we’re chartering in, it’s depending obviously changes with the vessel class and size but it’s as expected.
Ben Nolan – Stifel
Okay, all right. That’s it from me.
I appreciate it guys.
Operator
And we’ll take our next question from Amit Malhotra with Deutsche Bank.
Amit Malhotra – Deutsche Bank
Great. Thanks.
You talked about having the debt financing in place before maybe doing something proactive or aggressive in terms of capturing the dislocation between the value of the stock and the value of the asset. I think you just said the debt financing should be in place by the end of the year.
So, just assuming if the market value of the company stays roughly where it is today at that time, would you then be more willing to engage and something like small asset sell and using proceeds for a buyback or is the plan really just to see what the spot rates go next year and hope that the potential recovery would close that gap?
Robert Bugbee
I think we just focused on what we need to focus onto right now and that could even come earlier, right. I mean if someone walked down in favorable from consisted into tough take and that 2 weeks both phased out and day or something where you’re going to valuate at that particular point.
I think the point here as a company has a terrific active base that they’re clearly have dislocation between the asset value and opportunity related to stock price. So the company has a priority right now on a debt funding that is a priority to the management to the company.
That’s what we have to do deal at this point and whether or not you get significant offer that you would take it as it comes, but you’re not going to anticipate I mean the opportunity goes, right. We intend to do et cetera.
We you just end up closing that arbitrage soon.
Amit Malhotra – Deutsche Bank
That’s fair. I mean just based on your comments back in April, I thought where the stock is relative to where it was there?
Robert Bugbee
Absolutely and that’s the main, but we could not change equity market. Market is a putting a far higher value on transparency, debt funding and the strategy.
Now if you existing if you have had this position right now in the physical markets, we’re pretty firm. I’m now ensure that you would be going forward the financing you would have done what you need to do rather than press to get financing towards the backend of 2015, 2016.
Amit Malhotra – Deutsche Bank
Okay. Maybe I can just switch to the underlying fundamentals of the business.
I mean there has been plenty of focus on sort of the supply side and the rest on the supply side. But just curious to see how you see the risks evolving on the demand side.
I mean, China has clearly slowing does that cause you at all to sort of reassess your demand assumptions or do you think those are completely intact?
Robert Bugbee
Well, it’s the basis for the Time Charter.
Amit Malhotra – Deutsche Bank
Well, I mean just the annualized GDP run rate is down for two consecutive quarters. The property market is slowing average sale prices are going down, I mean those are just be the first of many?
Robert Bugbee
So, where would you come out on consensus for Chinese GDP.
Amit Malhotra – Deutsche Bank
Yeah. I don’t want to do that but our Deutsche Bank forecast calls for an annualized GDP numbers 6.5% in the second quarter of next year that sort of the official target.
Robert Bugbee
I’d say that’s an extraordinarily healthy growth rate, but it is more unlikely if we look at countries like India and China, going to be stimulated further by broad cheaper commodity prices. I mean, there not just where royal is today because Indian GDP by 4% this point going forward.
And reality is that the China despite this despite not be annual prices were higher, Chinese iron ore imports were record levels for September. So, we fit in the world, we are seeing a broad commodity demand growth whether this is vessel oil, crude products, oil, coal, iron ore I mean you only the carry out the say the entire power and we’re seeing it across many, many ships and many markets.
I mean I literally cannot meant this when you had soft demand growth in search and rate growth in October in the crude oil market side market and the product market ever. So the Asia or in China is going into recession mode right now.
Amit Malhotra – Deutsche Bank
Great, great. Okay that’s fair.
Thanks very much for the clarification.
Operator
And we’ll take our next question from Herman Hildan with RS Platou Markets.
Herman Hildan – RS Platou Markets
Good afternoon guys. Hi.
I guess this just a question for Hugh with the more to mix step up on the bank financings on the fleets.
Hugh Baker
We give everyone prove as to how we will calculate these numbers. The first thing is thank you to bringing up our breakeven because they are very low and the reason they’re so low is mainly because we’ve orders ships at favorable prices and secondly we have low advanced rate on our debt.
Now if you combine a low leverage of say 57.5% or 60% based on low contract prices you put in a repayment profile of around 15 years and when you put in a loan margin of LIBOR plus 275 and then you put in whatever say three years LIBOR spot rate which is not very much ago we are looking at all in financing cost that well below 5% and indeed you’re looking at companies that is making breakeven rates which are extraordinarily low. You want to trailing SG&A on top of that, you can do that but either way you’re coming up some pretty low numbers and that makes us very optimistic about the future concerning just want to be able to get to these financings so easily as because this is not a tough proposition for a financing institution.
The breakeven as you know really massive and let’s look at where this was ago, we have 42 ships delivering 2015 and that can offer a lot of cash and that cash is coming well above our breakeven, and so we have this rule of money that’s going coming in 2015 which is hopefully going be able to yield a good return for our shareholders.
Herman Hildan – RS Platou Markets
And so kind of just rough numbers that you should be gears on small and that indicates and sale this all on the Supramax.
Hugh Baker
If you say sir.
Herman Hildan – RS Platou Markets
Yeah. Okay, that’s very helpful.
And when you look at your organization early kind a fully build up takes for delivery 8 to 6 month approximately.
Hugh Baker
I’ll probably pass this on for Robert, but yes we are.
Robert Bugbee
We’re getting pretty experienced. We’ve been taking we’re coming to the dark tail nicely.
The finishing of the product tankers is coming at the point of trailing down product tankers is coming whether going and ramping up. Drydock is generally easier we’ve been gently building up chartering things and operation thing consistent with when we’ll be ready.
Hugh Baker
We have more under water as we speak on the commercial side so the addition comes as Robert said at the start, as good a timing as it could be really.
Herman Hildan – RS Platou Markets
Yeah. The question is more on the commercial side on the chartering team and probably G&A that you will out with the vessels.
Okay. That’s it from me.
Robert Bugbee
All right. Thank you very much everybody for your time.
Now we see there are no further questions. So, thank you.
Operator
Ladies and gentlemen, this does conclude today’s conference. We thank you for your participation.