Apr 28, 2015
Executives
Hugh Baker - CFO Emanuele Lauro - Chairman & CEO Robert Bugbee - President Cameron Mackey - COO
Analysts
John Chappell - Evercore Spiro Dounis - UBS Securities Andrew Casella - Imperial Capital Amit Malhotra - Deutsche Bank Charles Rupinkski - Global Hunter Sal Vitale - Sterne Agee
Operator
Welcome to today's Scorpio Bulkers, Inc. First Quarter 2015 Conference.
[Operator Instructions]. At this time I would like to turn the call over to your host for today Mr.
Hugh Baker, Chief Financial Officer. Please go ahead, Mr.
Baker.
Hugh Baker
Thank you, Operator. Thank you for joining us today.
On the call with me are Emanuele Lauro, 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 April 28, 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 will be made available on the Investor Relations page of our website for approximately 14 days.
Now, I’d like to introduce our Chairman and CEO, Emanuele Lauro.
Emanuele Lauro
Thank you, Hugh. Good morning to everybody and thank you for being on the call with us today.
At the beginning of March during our fourth quarter earnings call I said that we were not proud to be reporting disappointing results. In what has been a challenging quarter and actually year.
Unfortunately that feeling has not changed much, as the first quarter of 2015 has been still a challenging one. As you’ve realized we’re not hiding behind the fact that we’re experiencing the worst dry cargo over the past 30 years, nor we’re adopting a hope strategy waiting for the market to get better and take us out of trouble.
As I said before management is not working under the assumption that the market will significantly improve in the near future. We actually continue to take all the necessary measures to improve our balance sheet.
We’re basing our strategy on recognition then when a market unexpected heats a third year low it is best to prepare early for a prolonged U shaped recovery rather than hold for a B shaped one. Management and the Board of Directors are both determined to continuing strengthening the balance sheet through actions that I believe Robert has defined as self-help in our previous calls.
Our operating base case is that the dry cargo market will not make a sustained recovery until the second half of 2016. We told you early in March that by this time we would have been able to provide you with more clarity on the actions taken to improve our balance sheet and we believe that the last weeks announcement are doing so.
We’re of course happy to answer any questions shortly but before that what I would like to do is thank all our capital providers both lenders and shareholders for their continued support in what is an extraordinary time. We will be pass on to Robert Bugbee.
Thank you.
Robert Bugbee
Good morning everybody. So what we have done out there since our last discussion we have clearly sold some assets, we have delayed some of the deliveries and we had some assets converted and sold.
We did not think that there will be any more conversions, we will go with the book of dry cargo carriers as they are. Secondly, we do not think that there will be any meaningfully more postponements in delivery, we have done a bulk of that.
What we’re committed to do is to continue to sell assets and we’re presently negotiating for the sale of further assets and the extent to those will be revealed over the coming days. So far we are going forward our view is that what we have?
We have the best fleet out there. I want to make sure that we take this balance sheet and secure this balance sheet by the easiest way possible which is deleveraging and raising liquidity through sale as opposed to example of entering into super high sale lease finances, as some of our competitors have done and/or indeed you know just doing dilutive equity transaction.
With that I think we would just like to open it up to questions.
Operator
[Operator Instructions]. We will go to first John Chappell of Evercore.
John Chappell
Robert, you said a fair amount on just a few cents, is there just -- wanting to get your views on one question that I get frequently, is there a right sized fleet that you’re looking at post this exercise? I think there is probably a right size or capital structure but when you think about the amount of vessels still potentially on a sales block, what could you be looking for going forward?
Robert Bugbee
I think we have to recognize what we have and in Emanuele's opening statement is that if we look at the dry cargo, the sector how we got here. There wasn’t a single operator [indiscernible] certainly, customers, anybody really any industry who foresaw the market that we have right now and on that simple basis we think it's reasonable to expect that probably there is no real valued opinion of what the market could be going forward for the next year or so.
So the best way to deal with this is statistically that probably we got 33% of the market staying the same, 33% of it getting worse and 33% can get better. It becomes random.
What we have at the moment is the market that is generating significant cash losses on any vessel size at any financing structure. In other words if you’ve have any debt pool on any vessel the spot market is creating a negative position.
So it is quite difficult to precisely give you that answer, because it's simply means that any company that has debt theoretically to the extent that this continues is unfunded that’s quite definition and the theory. But what we can do is we can model out and literally say, okay let's see this market sustained as Emanuele says through to end of June 2016, what does the company need to do fulfill it's obligations and keeping that rolling forward let's say nine months basis.
You never want to get within six months of that clock and nine months is a good position. So if for example we were to I don’t want to negotiate the position in public but I think it's fair to say that a recent article in trade winds was pretty well-correct that having announced three shifts you were likely to see a number close to 10 over the coming days.
Now when we get to that point on a very conservative basis it becomes very clear that the company can withstand a very bad, bad situation through till December, 2015 and probably even through to the first quarter of 2016. It then has a six months at least a six months run-way in which to it can absorb the situation and besides whether or not the prudent thing is to sell more assets in a controlled position and many people talked about step, but the most important thing is that each step from now on you actually have to take is a smaller step to right size any position.
So I would say you’re going to see somewhere plus minus one around the number of 6 or 7 over the next coming days. And I also think that in this environment -- look it's not just that the easiest way to create liquidity by selling an asset you take down leverage increase of liquidity and equity, you also have a situation where the stock is trading below the intrinsical net asset value of those implied of those sales therefore it is the right thing to do in terms of your shareholders in an uncertain market to first securitize the intrinsic or net asset value of the company.
Indeed there is a strong argument that if this is sustained you should go further anyway, you should go beyond the position and then you get into a situation where you may have excess liquidity and then that opens up some flexibility.
John Chappell
And before all these asset sales I think the big focus on your unfunded capital commitments, it seems like a lot of addressing and you’ve been saying to release if you read the release that there is four still kind of negotiating but do you feel like you need to move forward on financing those four immediately or as you continue to sell assets will more capacity come up on some of your existing facilities as we saw I think it was your announcement last week.
Hugh Baker
John, you’ve actually characterized that quite well. We’ve been waiting to finance those four [indiscernible] vessels because obviously with the -- as we say the rapid place of asset sales we definitely think that there will be some space developing in our existing facilities for such situation.
One of our biggest credit facilities has a substitution capability and obviously under certain circumstances that can be utilized. As a general point our banks are very happy with the developments in the company.
They appreciate the steps the company is taking to strengthen it's balance sheet and we’re relatively comfortable and I'm cautious about using those words but I will use the word comfortable. In that we think we can we’re very comfortable we can get financing for these remaining foreign [ph] finance vessels.
They are Japanese built ultramax's which is vessels the banks appreciate. We’re not particularly aggressive in terms of our expectations in respect of the advance rates and the banks are very supportive of us at the moment.
So we’re comfortable and relaxed but to answer the question yes we’re moving ahead with financial levels.
Emanuele Lauro
I would just add to that if we look it from the lenders position, the lenders get you advice your lenders literally a weekly sometimes bi-weekly basis and in certainly long we don’t necessarily to identify it. The vessels that are committed on that one that are going in the coming days could take along that committed down to a very insignificant level where those lenders themselves are so happy, want to be part of the total group's lending and you know they just may say fine we will just take those remaining vessels.
So we’re correcting and characterizing it as comfortable
John Chappell
One last quick one, you put a new bill that you ticked related to your time charter, given your view on kind of second half '16 and preliminary the one relating to those. Do you’ve any more thoughts about facing ships on contracts, do you feel the contract values have now become so low that you would rather just keep the optionality to the upside?
Robert Bugbee
I think as we alluded and Emanuele alluded to begin with, we literally are not taking hope into consideration. It is simply taking a face opposite taste that is a [indiscernible] in terms of rate structures themselves which are pretty terrible and working your position.
Now that means that you are not sitting there saying, oh my god we better not fix the ship out 7 or 8 or 9 months because we think there could be a big winter rally etcetera. You’re trading it on the position so I think you will almost certainly see in the takes [ph] for example where there is clearly a significantly threat from the spot rate to the TC rate whether it's 6 months, 7 months, 8 months that we would do something.
How short or long I don’t yet know. In the ultramax there is -- Kamsarmax I mean you can see from our bullets, chartering especially -- the chartering guys are actually doing pretty good and that’s a more difficult one because our actual spot earnings are so close to the charter rate anyway, it is the performance of the past.
Operator
Up next from UBS Securities, we will go to Spiro Dounis.
Spiro Dounis
Just wanted to touch on sale lease backs I you could, I know they were mentioned on the last call and it's not like maybe they are in advance stages, just wondering if they still remain an option or you opt to outright sales is the best -- that’s when you move the share price close to NAV and that values the balance sheet?
Robert Bugbee
I think the sale lease backs is a little bit of like going to your credit card or can be like going to your credit card to fund your own personal expenses is that very self-gratifying in the time until the bills come in later. So if you simply on the mathematics the cleanest way to do it is through sales.
That’s the cleanest way of strengthening a balance sheet is through sale, especially as it preserves your key cash breakeven levels which are pretty low primarily as a result of the modern design of the vessels and the quality of the vessels. However there is potential situations where we could create some form of happy marriage where if you could do a sale leaseback on some portion of your vessels that was significantly below double digits in effective borrowing cost and I don’t think we would be averse to doing that but I think that to do a sale leaseback double digit costs would be the equivalent of doing a very high yield bond and ultimately you actually choke the company by doing this.
And the irony is of course as you continue to strengthen the balance sheet your ability to do a sale lease back at a reasonable cost gets better because your balance sheet itself gets better.
Spiro Dounis
Got it. Okay, so maybe that could be one of those steps that you said that when you take down the road that’s smaller?
Robert Bugbee
Yes that’s a step that would come, that’s kind of after what we’re doing our step.
Spiro Dounis
You also mentioned on the last call that some opportunistic buyers were winking at you from across the bar, just wondering if you can comment on whether that level and type of interest is receded following all the progress you’ve made?
Robert Bugbee
Well a lot of them now who are winking across the bar because they sort of had a couple of drinks probably sort of had a lot of drinks by now perhaps and falling off the bar and around the floor and the great irony is that SALT itself -- we have been in trouble as Emanuele says, we’re not proud of it but we follow through this we’re pretty close actually to being not right now but we’re pretty close to being the most transparent balance sheet, the best fleet and the strongest balance sheet out of the bigger peer groups. And that’s not to say that we would try to acquire them then.
Operator
Next from [indiscernible].
Unidentified Analyst
I just had a couple of more financial related questions, just first really simply wanted to get a sense on the CapEx schedule for the second quarter, it doesn’t seem that clear in the release what was paid from the beginning of the month through last week. It doesn’t look like it's that much but just wanted to see if what the exact number was?
Robert Bugbee
There was between April 1st and April 24th, there was $6.9 million of capital expenditure of which 5.5 of that was related to [Technical Difficulty] sale. We only had to make two payments.
Unidentified Analyst
And also wanted to ask about the sales which have been impressive in number for the past few days, how were these being done, are these innovated or are you continuing to make the payments yourself and then getting paid on deliveries once that sale is affected?
Cameron Mackey
To the extent that we can negotiate with the yard and so far that’s have always been the case. The contract is renovated [ph] so the obligation to company at least from the point of closing of sale.
And closing is not -- delivery of the -- the closing is now and the company steps out--
Unidentified Analyst
And that’s great, and that’s basically across all the sales?
Cameron Mackey
Yes.
Unidentified Analyst
And then just finally wanted to ask about the Capesize acquisition, it's seeing you drew down 26 million which there is a bit lower than we were thinking, could you have drawn down more or what do you think behind the 26 million versus something in the low 30s that we were thinking?
Robert Bugbee
That at the time that was a 50% advance rate deal, it's the thinking was that the this loan is actually a bridge loan and it's a bridge loan to the closing of a much larger facility guaranteed, insured by -- signed and assured attorney of State Insurance Company and we’re actually waiting on Ministry of Finance approval, for that it's approved signed and assured and believe Bank, ABN AMRO [indiscernible] but we’re waiting on the Ministry of Finance approval. So as a result of the ship was actually delivered before the Chinese government's approval is granted we put together the small loan and drew it down at 26 million.
But I wouldn’t read anything into that.
Operator
[Operator Instructions]. Moving on to Andrew Casella of Imperial Capital.
Andrew Casella
Just one follow-up on the cape's -- sorry the draw down on the $26 million facility. So you said that it was a 50% advance rate so I'm kind of penciling out that you’ve got a $52 million evaluation which is roughly 10% above kind of what a resale cape is going for per Clarkson's at 40 million.
How are you kind of seeing the banks react to lower asset valuation? Are you at delivery are you seeing them come above we’re referencing as far as broker quotes or any color on that would be helpful?
Cameron Mackey
Generally speaking they are coming slightly above broker quotes simply because often valuations are slightly backward looking. But the valuations generally can catch up pretty quickly.
So most of the banks for instance are looking at sort of capesize values in the mid-40s now.
Robert Bugbee
I think I want to be very clear on this. I mean that -- your value part of the plan not just the cash flow rate and your base operating base, we’re also expecting that many, many banks valuations for the first quarter in many of the other fleets were given a pass because the market felt down so fast there was a great wide bid offer and it was like, okay, we see it now a real value as we get more deeper into the second quarter and lenders realized that there wasn’t a bounce in the market to the second quarter and that actually values have deteriorated.
I think you’re likely to see across the dry cargo space lenders start to be a little tougher, generally, on calling the loan to value clauses.
Andrew Casella
Got it. So when we think about, I know in the past you’ve said some of your loan facilities are based on contract pricing and most are based on market price.
So we should think about it on say a quarter lag, to what's been reported by the brokers as far as what we should think about as far as what the loan availability will be at delivery.
Cameron Mackey
Andrew, I think what you should probably do is assume that the loans are drawn at very close within 5% of prevailing market values. That will be the safe thing to do.
And certainly in our projections we, that’s what we do.
Operator
Up next we will hear from Amit Malhotra of Deutsche Bank.
Amit Malhotra
Hugh, just wanted to just get a little bit of more clarity on the path to full funding, based on the disclosures and sort of the actions it seems like the company has like 1.3 billion - 2 billion of payments left and there is just under 1.1 billion of available undrawn debt to pay for this. So sort of subtracting one from the other you get to 250 million of payments against the cash balance of 133 million of which it's pretty covered in 50 million.
So I'm guessing the view is just an entire gap will be sort of funded entirely with one additional debt financing to some of the excess cash balance sheet in three return of cash for the held for sale fleet. Is that a fair assessment of sort of how you’re going to plug that hole?
Hugh Baker
We don’t need a 360 million equity offering nor do we send the new memo out in both Norwegian and German translation.
Amit Malhotra
I think the math improvement coincides with the disclosure improvement, can I just ask one more question follow-up on the return on equity payments that’s on the held for sale fleet. Can you just give us some color on sort of the amount and timing of the cash that you expect to be returned the company, one still held for sale fleet -- because -- I mean that’s a pretty substantial amount of money, they have already put in there so I'm wondering if that could significantly boast the cash balance once you’re actually clos on the sale.
Cameron Mackey
Yes they can and certainly most of -- all of our current vessels are actually being sold by Innovation [ph],and once those innovation agreements get signed you know we get the cash transferred [Technical Difficulty] to us. So we should see it impacting relatively quickly on our balance sheet and certainly by the time we release our next results you will see the proceeds from those sales actually [Technical Difficulty].
Amit Malhotra
The amount paid to-date is in 310 million, it's not going to be all of that I would assume but if you can guide to that?
Cameron Mackey
I think in the next earnings call.
Robert Bugbee
I would say Amit, in all fairness as we said earlier we do intend to announce further committed sales over the next phase and yes that will add further to the transparency.
Amit Malhotra
Okay, just one last question if I may more higher level. I totally understand Robert that the company as you put it sort of extend optionality mode and that makes complete sense -- you’re now but just from a planning perspective given sort of grown view of a prolonged U shaped recovery how does the company have sort of what the right capital structure is for the business?
Robert Bugbee
I think we will be very careful is the company is making no view on what it thinks the market will do, zero view. It is operating under the base assumption that there will be no recovery until at least second half of '16.
Those are two different things.
Amit Malhotra
Okay and you think the pro forma sort of capital structure is appropriate for sort of that type of time frame and recovery?
Robert Bugbee
Right now obviously I don’t because we continue to sell assets.
Operator
From Global Hunter, we will hear from Charles Rupinkski.
Charles Rupinkski
Most of my questions have been answered, just a quick one on modeling sort of as your new builds get delivered I think it is for you Baker, what if any working capital requirements are there say for the first month, in terms of bunkers or repositioning or anything like that?
Hugh Baker
Charles generally speaking we’re putting in, we’re assuming $0.5 million to $2 million [ph] in initial working capital in form of bunkers.
Charles Rupinkski
Okay, sorry 500 to 750?
Hugh Baker
In terms of the takes, it tends to come out less than that obviously if it's placed on time charter.
Charles Rupinkski
And speaking just on the time charter versus spot, this is a final question for the management as a whole. You know with the Capesize chartering arrangement is there any view that this might be something that you would want to build on or participate in some kind of arrangements as chartering?
Emanuele Lauro
We’re going to keep all options open but we’re not going to participate in a loose commercial arrangement as it's been described so far.
Operator
And our final question today comes from Sal Vitale of Sterne Agee.
Sal Vitale
First question, Hugh if you could help me with this. So you ended the quarter with $776 million vessels under construction, what is that today?
I'm calculating just based on the 1.96 billion minus 1.32 billion remaining, and paid about 640 million. Is my thinking about that right?
Hugh Baker
Yes you’re, we have made again we have made 6.9 million payments in the last four weeks. So I think obviously add that to that number.
Sal Vitale
Okay and then Robert just a quick question for you, if I look at the Clarkson's rates for the Capesize, for the first quarter, average is about $4500 so if I look at your Capesize, the TCE rate you realized on the Capesize that’s about 12,700 so that’s a pretty hefty premium there. Why is the premium there more significant than for say the Kamsarmax and the Ultramax.
How do I think about the?
Robert Bugbee
You think about that the cape is chartered out, it's on time charter and there is a very significant specification enhancement in the market, the cape was able to capture that spread and the forward curve is in Contango on the cape market.
Operator
And it appears there are no further questions at this time, I would like to turn the conference back over to the presenters for any additional or closing remarks.
Hugh Baker
We have no closing remarks. Thank you everyone for joining us today and we look forward to speaking with you soon.
Operator
Thank you. And again that does conclude today's conference and we thank you all for joining us.