Mar 4, 2015
Executives
Hugh Baker - CFO Emanuele Lauro - CEO Robert Bugbee - President Cameron Mackey - COO
Analysts
John Chappell - Evercore ISI Gregory Lewis - Credit Suisse Ben Nolan - Stifel Nicholas Amit Malhotra - Deutsche Bank Herman Hildan - RS Platou Markets Sal Vitale - Sterne Agee
Operator
Hello and welcome to the Scorpio Bulkers Incorporated Fourth Quarter 2014 Conference Call. Today’s conference is being recorded.
I would now like to turn the call over to Hugh Baker, Chief Financial Officer. Please go ahead, sir.
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 today March 04, 2015 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 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 we will be made available on the Investor Relations page of our Web site for approximately 14 days.
Now, I’d like to introduce Emanuele Lauro.
Emanuele Lauro
Thank you, Hugh. Good morning to all and thanks for joining us today.
As most of you are aware, we like to dedicate most of the time spent of these calls to Q&A and today would be no exception. Myself and Robert will make a few opening remarks and then we will open the floor for questions.
We are not proud to be reporting disappointing results in what has been a very challenging quarter. As I have outlined in our last earnings call three months ago, we have made mistakes in the way we have positioned ourselves last year.
We have realized, we had taken some wrong decisions and since we have taken prompt corrective actions and we continue to do so. Management has taken significant steps to improve our balance sheet position but the work is not over.
The market we’re facing has been the most challenging drybulk market for the past 30 years. Whilst we did not expect this, we are working hard to turn it around.
Management is not working under the assumption that the market will significantly improve in the near future. We are not adopting a hope strategy.
To the contrary, we continue to do things in order to improve our balance sheet and we believe we will be successful doing so. I wish at this stage we could be more specific and detailed on what exactly we are doing, and we look forward to continue to communicate with you on our Company positive developments.
With that Robert, I would like to turn it on to you.
Robert Bugbee
Good morning everybody. So I think what I’d like to highlight and stress what Emanuele was saying is that the assumption we are working on is to continue to strengthen the balance sheet in every way that we can, the liquidity of the company and also to minimize the cash losses as a result of weak spot market.
We’re 100% committed to this. We’re as a management insiders we have a very significant investment in the Company and we’re aligned with [indiscernible] to do this.
Some of the stuff we've been doing is reducing the Time Charter in-book. For example from December the 14th we had -- of September we had a exposure of 24 Time Chartered-in vessels at a notional value of 264,000 a day and this is has been reduced to 241 with 20 ships in the Time Charter at the end of December, the quarter that you are seeing now.
And right now that has been reduced to 14 vessels with a $168,000 of notional value or notional commitment and that we will continue to take that down. At the same time as you have seen with the first Capesize vessel that we had delivered that we're -- we have chartered that vessel out, we would expect to see more charter out of vessels as these not only create a more predictable cash flow stream but also the rates are above the present spot market from a cash flow basis they work very well for working capital.
We have initiated various delays of or change to the yard payments and delay in the delivery schedule. It is helping the liquidity of the company tremendously and you have got a new updated CapEx table on that.
We have converted and we have sold vessels. We don't -- as we have stated before we don't think there are really anymore conversion opportunities but we will continue to sell vessels.
The fundamental asset that this company has is the best fleet that's out there -- it's a great spec fleet, it's a modern fleet and combined with the fact that we have pretty well -- 95% fully financed on the debt side we have very strong sort of asset coverage over liabilities, we have a net asset value that’s above the present stock price. So the best thing that we can do is use everything we can to secure not only that net asset value position but also strengthen liquidity and selling vessels is an extremely effective way of doing that.
We will leave no stone unturned in the financing either. We're presently exploring some sale lease back alternatives that are actually fairly competitive as we have left this after when we've raised equity and sold vessels so that the balance sheet is reasonably visible those people entering into that.
As Emanuele said we have had great support from the lenders. And this is what we will continue to do, some of this works in all of this at any given point is in progress, some of it will be finished sooner than later.
We are at this point negotiating with third-parties for the sale of the Capes that were transferred into LR1. We're doing that in a patient constructive way.
If there was no urgency it would have been nice to had that done by this conference call but as some of you may be aware the product market itself is strengthening it's a strong market so there is no -- the best thing to do to create value for [bulk] is to let that take it's natural course. And with that we would like to throw it over to questions, please.
Operator
Thank you. [Operator Instructions] Our first question comes from John Chappell with Evercore ISI.
John Chappell
Robert you are pretty clear on the steps you are taking but I just want to get a little bit more clarity on the financing side. It seems from the press release that there are 5 ships that don't have commitments in place today.
Number one is that the right interpretation of it and then number two how soon do you think you will lock that up? and then as a second part to that question I assume that as in most cases the terms for financing are certain percentage of the purchase price or market value as market values seem to be coming down across every age class, are there financing shortfalls potentially as they kind of mark those to current market values as opposed to purchase price?
Robert Bugbee
So with the first question -- so what was the first question on that one?
John Chappell
It was just am I reading it right there are only 5 more that require --?
Robert Bugbee
Okay. So we have obtained term sheets and sustained offer on those particular vessels but as you can observe the balance sheet is moving around a little bit, in, when we're selling vessels we're taking them out of existing credit facilities which can allow space in those credit facilities.
So the first of those vessels got some delivery till the end of this year and then the balance in '16 and the best thing to do right now is to leave that slightly open until we decide whether to take the offers that we have got on the table for those or to drop them into or whether it's financially better for us to drop them into other credit lines that could open up through sale of assets. A lot of our -- our loans are pretty mixed between draw down of contract value, some have market value but we tested it and then actual loan to value clauses in this can be around 140% so the way we’ve tested this is on pretty low prices, worst case positions, even lower than they are today.
And we are happy in the ratios that we don’t have to plug that really into 2015, we’ve done some discussions in other loans where we have shifted the market test away from 2015 on delivery to just being the actual value the ship on delivery and then a 140% to value after that. So if you imagine, if you took a Capesize that was bought at 55-56, you’re getting 55% - 60% of that on delivery and then the market test comes at a 140% over that position, so comfortable is probably not the right word but you’re really okay.
We’ve tested this internally down to around $40 million, $41 million for new Capesize as this year, that’s not to say we think we’ll get there, but that’s the actual that Emanuele was stressing that the Company is taking. It’s taking no hope, it’s just working through and grinding this position and securitizing the position we have.
John Chappell
That makes sense, and just wanted to talk about two other kind of areas in quiver, first on the asset sale, it seems like the bottom probably has not been reached yet on asset values and you’re not going to do any more conversions where the market maybe a little bit more optimistic on the tanker side. So what’s you kind of pain threshold as far as taking losses on asset sales or do you feel that maybe at this point those have to be put on hold until the market kind of stabilizes?
Robert Bugbee
No, I think that you’re in the position now where a lot of the hard work is being done with the equity raise, the initial sales, the restructuring here. So you don’t have to sort to panic in a situation, but I think this is the fact that even if you take prices down pretty hard from where they’re today, you still would be on an equivalent sale base trading significantly above your stock price in terms of net asset value.
So when you have such a huge gap like that in turn that that you’re doing -- you don’t really think of it as the pain threshold because you’re just securitizing what you have at a higher level. So you are very open to doing those sales because they immediately create value and this is a company with a lot of operating leverage and a lot of ships.
So selling a few more ships does not really impact the upside leverage to a recovery, but when you have -- we don’t give details on asset value, but when you have a very large gap between NAV and stock price on a fantastic fleet that is got its bank finance impact and that has great asset coverage, it is a very sensible thing to do and at this stage it’s not really taking pain it’s just securitizing value and maintaining the optionality of the Company. I mean this, what is SALT is, it’s a terrific option through the recovery of the dry cargo markets.
So what we have to do is make sure we keep that option intact as an option, create some time on that option and not deteriorate the upside of that option too much.
John Chappell
Yes and that’s a great Segway in my last question, you’ve motioned the new charter you put on -- new charter out and had to look for some more of those going forward, how much charter coverage do you want? Is this going to be kind of like a frontend loaded early delivery of ’15 just by some time through ’15 or would you to look to do significant time charter recovery other than potentially takeaway some of that optionality in it?
Robert Bugbee
I think, you’re going to look at up to one year, 13 months, 14 months type charters and as you get deeper into this; six month out then you might show some others to 7, 8, 9. But the reason those things area attractive is you saw the charter of our Cape, our Cape was chartered out at 13,800 a day which is significantly which is significantly above the price and spot market, one and two, when you charter a vessel out, it’s the customer that pays for the fuel, so it’s very good on your liquidity and you are getting the cash up front and in a situation where you are dealing with a weak market you are creating some visibility on it.
So in a sense that we would see this as a sort of like a six month to 13-14 months sort of bond portfolio the right thing to do is where possible is just to keep these charter ticking along especially when the charter market is so high for one year compared to the stock market. But we are not planning as we’ve said presently for recovery but we do believe that with the dynamics that are in place with almost historical record scrapping going on a starvation of capital from the dry cargo market and very few new buildings, plus conversions, plus delays in delivery, plus a world that is being stimulated by low commodity prices, low interest rate, fundamental commodities like iron ore and oil that are down and countries like India that are growing crazy at some point and the harder it is at the moment probably the quicker it comes the dry bulk market will recovery so we do not want to give away the recovery of the market by going out further than we think is necessary.
Operator
Our next question comes from Gregory Lewis with Credit Suisse.
Gregory Lewis
Thank you and good morning. Robert you touched on or Emanuele might have been you touched on the ability to potentially do sale and leaseback transactions and I guess if you could provide a little bit more color around that in terms of the appetite or the potential lesser that would be interested in doing that because I mean that kind of dovetails with extending the optionality for when the cycle eventually does turn.
It’s definitely been used in other industries it’s obviously using shipping. If you can just provide any sort of color and maybe timing around what we potentially could see around the ability for you guys to potentially do some sale and leasebacks?
Robert Bugbee
We’ll give what we can the potential -- generally always the potential at a price for a company to do a sale leaseback but is rather like a bond. I mean it’s not just the idea of doing a sale leaseback you have to do it at terms and effective borrowing cost that make some form of sense so is it no point in doing double digit sale leasebacks in the same way as is not much point in doing double digit bonds because they just chock your ability and you just die a death of the thousand cuts.
But we are -- it is something is in progress which I am reluctant to give too many details around, but in progress means that we are further along than just indications, further along than just passing pieces of paper across and you are coming down to actual details and you are somewhere between a commitment and closing. And we would -- our time table is to be able to show different way -- our time table show the greatest visibility we can to the market on next on our first quarter earnings call which will be somewhere around April 27, 28, and by that time we would expect to have the lion -- really the big lion share of what we’ve been doing accomplished.
Whether it’s further delays, whether it’s sale leaseback, whether it’s sales and has the full financing in place.
Gregory Lewis
Okay, great. And it sounds like you kind of answered my next question which was as we think -- I mean probably there is not much -- we’re in March already, there is probably not much you can do to the 2015 delivery schedule.
But as we look at sort of the middle second half of ’16, is that where you think potentially we could see an update on either in Q1 or the Q2 earnings call?
Robert Bugbee
We’ve done a reasonable amount of shifting, Gregory once you guys have a little time I know that today was really crowded and unfortunately through some mechanics we released sort of very late this morning. But if you see the actual CapEx for the ward payment schedules in half time you can already see that there has been reasonable shift in some of the ’15 deliveries as well.
And in ’15 a three month shift is a pretty significant and meaningful period on vessels when the spot market is so weak, so it's a mixture. But you are correct we will provide really a lot of details over this next two month period.
Operator
We will go next to Ben Nolan with Stifel Nicholas.
Ben Nolan
Just I guess continuing to drill down on a few of those things. Robert you said that when looking at the possibility of selling assets, at least it sounded like the way you guys are thinking about sort of on a smaller or maybe even a one-off basis just kind of as needed without really making monumental changes to your own order book.
I mean is that how we should be thinking about it 2, 3, 4 vessels or are you?
Robert Bugbee
I think that's how you should be thinking about it.
Ben Nolan
Okay.
Robert Bugbee
There is no one thing that we're doing at the moment is a silver bullet but if you add up all the things that we're doing at the moment, combine them with what we have done you create a pretty solid position.
Ben Nolan
And the one thing that just to clear it. The one thing that I didn't hear mentions anywhere is the possibility of further equity issuance.
Is it fair to assume that given where you believe your NAV to be that's not an option that's on the table for you guys?
Robert Bugbee
Well you are never ever going to get or shouldn't ever get an executive to discuss that. But we've been very consistent saying that we are following what we call the self-help methods and all of the methods that we laid out earlier in the conference call are self-help methods, plus the combination that we are determined to let's say take the easy route which is to try and securitize your gap between NAV and stock price at the moment.
So that would infer that at this point we are much more willing to sell assets than we are to raise equity.
Ben Nolan
Yes and that was my thinking and I appreciate you not being able or willing to kind of quantify but it doesn't seem like it's the most expedient solution.
Robert Bugbee
It's not -- it's not -- you are never going to get us to do anything. I mean to live within a world and what we're saying is that over the next two months we are doing a tremendous amount of things and hope to do a lot of things.
But who knows what we could wake up to in the world tomorrow if you have like a September the 11th event for example.
Ben Nolan
Right, absolutely and then the last question that I had is and I think you’d know the answer to this but obviously you are allowing your Time Charter-ins to roll off, but is there any point at any level where you would consider maybe adding to that position or is that just no longer part of the strategy?
Robert Bugbee
At this point there is -- any point is a big, big price, but this point is clearly not the strategy to do. Because if you have a stock that's substantially trading below NAV and has negative cash flow you’re in a market that's has charter rates higher than spot rates, it's the exact opposite of what you want to do.
The last thing you want to do is to take in vessels that are above the market -- you want to preserve cash, preserve capital as much as you can.
Ben Nolan
Sure. Yes absolutely.
And I guess the thinking on that was and talking to a number of ship owners there is some thinking that perhaps the longer-term Time Charter rates might actually come to parity with the spot market at levels sub $10,000 a day, substantially sub $10,000 a day and I don't know if there would be any appetite at all for that sort of thing if they were to materialize.
Robert Bugbee
I think that as we've explained on the call we're really not spending much time in the market curve -- we're spending all of our time trying to securitize the value of the company and increase and extend the optionality that this fleet has in the market. And all I would say at the moment is that there is not a sign that the Time Charter market is coming into -- the long Time Charter market is coming in parity to present spot rates, it is above that.
Operator
We will go next to Amit Malhotra from Deutsche Bank.
Amit Malhotra
Just wanted to follow-up on your last comment with respect to proactive things you can do to extend the liquidity runway as the move like you said are sort largely incremental as opposed to transformational. How is the business plan does not rely or how is it that you guys are not relying on sort of a significant improvement in spot rates and maybe you could just elaborate on what rate assumptions you’re using or thinking of and basing you restructuring sort of actions on?
Robert Bugbee
We’re using pretty low assumptions lower than one year charter rates. We’re using -- obviously they’re far more in line with spot on our Time Charter fleet or vessels that are Time Charters and we’re using asset values that are below where the curve at this particular point.
And I think that the question is -- it’s not as if the Company -- when these things are -- there are a lot of incremental things that all add up here and it’s not as if the Company has not done nothing, I mean we’ve raised $150 million of equity. We’ve sold -- we created another $100 plus million in sale of the converted LR2.
We’ve already said that we’re negotiating for the sale of the LR1 which is another $60 plus million. We have shifted the yard deliveries forward which obviously improve your present cash flow.
We’ve adjusted the charter book and we’re still doing further enhancements related to what we discussed earlier on the call including sales plus we have been working and had great support from our lenders whereby you’re less likely to trip any covenants clauses, et cetera. So I know that you have this view that we have too little to do that’s too late, but the reality is as we’ve done so much so early, so ahead of most of the market here.
I mean we really bit that bullet and as Emanuele said this [may occur] way back in November and we’ve have been working really hard since and we’re alluding that on this call you should absolutely rely that the present disclosures on what we’re doing or what we’re doing are not correct that we’re actually further ahead and even what we’re implying on the conference call. And you’re just adding things up.
Amit Malhotra
I just want maybe one additional question with respect to sort of the liquidity runway, I mean I would assume that the operating outflow will increase significantly in the first quarter obviously you just given where the spot rates are in the delivery of additional ships, so could you just give us --?
Robert Bugbee
Why do you make that assumption? You’ve said increasingly dramatically I’ve already explained that you’ve dropped your Charter Book down by $100,000 a day from December 31st to today.
You have -- actually your first quarter liquidity isn’t looking too bad when you have that in combination with the use of proceeds from sales.
Amit Malhotra
Great and I am just looking the operating cash flow which is at --.
Robert Bugbee
I understand that you can’t just look at something. You have to look at the combined position and you have to look at the total and you have to look at the actual work that’s been done that every month, every two to three weeks you get to expect somewhat.
You get the banks closing on the debt side and you get the movement to the positive in the total part of the cash on the balance sheet.
Amit Malhotra
Okay got it, just one last question.
Robert Bugbee
And you think so far pretty behind on that curve, which I understand.
Amit Malhotra
Okay let me ask you one last question with respect the 10 vessels you have under contract to be sold, pro forma for the sales, if I heard your comments before is a 160 million of net proceeds, I understand the capital --.
Robert Bugbee
No, no, that’s not correct what I said, what I said was the vessels that we had sold the actual conversion from Capes into LR2 and then the LR1 in addition to that we’ve sold an Ultramax and we’ve sold Kamsarmax.
Operator
We’ll go next to Herman Hildan with RS Platou Markets.
Herman Hildan
Robert, just a follow-up, did I understand you correctly on covenant side that the convents will not be tested until the vessels are delivered and that’s when you kind of drove down the vessels and ask them to do a convents test?
Emanuele Lauro
Herman I think I mean covenant testing is done after each quarter. We are not using our projections and basis our own information in terms of the initiatives we’re taking and the self-help that we’re doing, we are not anticipating any breaches in covenants this year.
Herman Hildan
Yes, okay.
Emanuele Lauro
Nothing is declared, this year or next.
Herman Hildan
Yes, so I mean just going to summarize what Robert just said with stock to this year, how self-help not to do with the average rates and so at what stage we believe it best for us we should [indiscernible] some delays for and postpone deliveries from the yard, but so far lending’s other than we call it not lending for the [indiscernible], how will you contribute with anything and that’s obviously kind of the big delta here on the final solution?
Robert Bugbee
No I think that the lenders have contributed, they’ve put up commitments, they’ve closed on loans and there has been some adjustment in the positions to the positive to the company. But the great this is that the Company isn’t needing lenders to do anything and the most important thing is that the lenders too like to see Companies do proactive positions.
So I think that it’s a very positive sign for the company that is doing all this in an environment where it hasn’t had to ask a lender to change a covenant or make a waiver, et cetera. You should -- company much start by helping itself before it goes to other to help them.
Emanuele Lauro
We have 23 lenders currently lending to the company which is a pretty large amount and that all of them are very closely informed as to the company’s projections, the company’s liquidity position and the various self-help initiatives. And they have all been very supportive.
It’s very clear things are nervous about the dry bulk market, but we spent a lot of time last year and lot of energy developing our bank financing and I think that that has paid off because we do have a very supportive bank group who are very confident about the future of the company and very supportive.
Herman Hildan
And then just another comment on will the leverage in terms of kind of having the final solution in place, did [indiscernible] correctly that by the Q1 you expect to come up and give us full detailed -- call it albeit actually taking then and looking at that which would be a much more complex.
Robert Bugbee
What we said is that you would expect by the Q1 conference call which is April 27, 28 to have had the vast majority the lion share of these initiatives put in place and us able to be very transparent about that. Right now obviously we can’t be totally transparent as we’ve been like to that’s simply because you are in negotiations, you are in discussions and it’s commercially you have to be a little bit protective at this stage.
Herman Hildan
Fully understand and I appreciate that.
Robert Bugbee
As you’ve seen to the time table which is why we say you shouldn’t rely on whatever you think is where we are at the moment.
Herman Hildan
I mean just some want to get some what a ship owner seems to obviously like your fleet and then not so much of your balance sheet, in terms of M&A obviously that’s an [insulator] sell this. Could you give some kind of comment on how you view the potential from May is this on an approaches to the company, et cetera?
Robert Bugbee
I can certainly tell you that there has been quite a few people who kind of smiled that this all winked at us across the bar, we’ve had a couple of drunkards who come along thinking that they could get away with a really cheap deal. But that’s -- we’re happily carrying on getting on with our life and obviously we have a fiduciary duty to our shareholders but nobody has come with a sober, sensible offer to make us sit down at the table with them.
There has been lots of talk, but you are correct in identifying there are lot of people who would like this fleet first.
Operator
Our next question comes from Sal Vitale with Sterne Agee.
Sal Vitale
Just really a clarification on the five vessels for which you do not have bank financing secured what is your expectation as to when you actually finalize that?
Robert Bugbee
What I explained was that we are happy with the idea of finally financing them, that we had some offers on those vessels but we -- are as explained we have a moving balance sheet that involve sales, involves sale leasebacks and things, involve taking some ships that would be sold out of existing credit line. So we will spend the next few weeks to determine what we should would do, whether we take separate new commitments or whether or not we include them in other things or even whether or not one of these ships, maybe the ones that are sold.
So it's not the question of not being able to get the finance, it is having the finance options but deciding which is the correct option to choose.
Emanuele Lauro
And Sal, just to add to that we have under certain of our credit facilities, we have to provided substitution, which means that we can obviously substitute the un-financed vessels into these facilities and so that, that gives us additional flexibility to take a more relaxed position.
Operator
It appears there are no further questions at this time Mr. Baker I would like to turn the conference back to you for any additional or closing remarks.
Hugh Baker
We have no further closing remarks and thank you for joining us today and we look forward to speaking to you soon.
Operator
This concludes today’s conference. Thank you for your participation.