Jul 28, 2015
Executives
Hugh Baker – Chief Financial Officer Emanuele Lauro – Chairman and Chief Executive Officer Robert Bugbee – President
Analysts
Jonathan Chappell – Evercore ISI Gregory Lewis – Credit Suisse Amit Malhotra – Deutsche Bank Omar Nokta – Clarksons Platou Securities Ben Nolan – Stifel
Operator
Hello and welcome to the Scorpio Bulkers Incorporated Conference Call. This call 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 all 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 the information as of today July 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 Emanuele Lauro.
Emanuele Lauro
Thank you, Hugh. Thanks everybody for taking the time to be with us today.
We appreciate it. I’d like to start today from where we left it in mid-June during our offerings.
So we’ve issued 153 million shares in the middle of June, we felt that it was the right thing to do, the right move in order to ensure visibility for the company going forward. We feel we have placed our sales in position for a long-term recovery.
Usually markets that break the peers low, it takes time to recover and in the first half of this year, we have experienced breaking the first year loss. It is more likely that we will experience bombs along the roads rather than a straight line recovery.
This is at least that we expect. During our offering, the rates projected by the company in the marketing material and of course in the financial projections we’re quite conservative at $6,000 a day for Ultramax, $7,000 for Kamsar and $9,250 for Capes.
This projections were until the straight projections where until the end of 2016. And only a realistic improvement is projected in 2017.
We feel that conservative but this is what we felt comfortable projecting at the time. The eco premium which we apply to this rates, on average across the three classes of vessel is $1,000 a day, which again may be seen as a little bit conservative.
But that’s what we have in our projections. Since the offering the market has improved quite substantially.
It’s difficult to say whether this improvement is the beginning of a sustained recovery or just a spike. As I said – a few seconds ago, management intention has been to really position the company for a long-term recovery.
We would welcome – a prompt recovery of course. But we have planned for a long-term one.
Otherwise we kept executing on the sales which were agreed pre-offering and we can look at the strong fleet of 60 units at the end of our new building program. With this I know Robert is – jumping toward and then we can go straight to questions.
Robert Bugbee
I don’t think I really have – I think corrected to that other than yet Emanuele correct at present we’re experiencing quite a strong improvement in rates. In addition to that an improvement in values and in some categories that Capesize, in the Kamsarmaxes that value improvement has been quite substantial.
I think that probably coming about to – major industry players on the private side seeing through and seeing through what they except to be a recovery that that shipping markets do that, that’s what we selling tankers and products and they have to get ahead of that curve, combined with a very important thing that has happened is that present rates are now above OpEx and interest. So companies like ourselves no longer bleeding everyday from the NAV.
And the other thing is that in other areas that the shipping industry crude and products those markets – is a very strong and private owners you have mixed fleets – crude oil tankers that are making tremendous positive cash flow. So have felt more confident to step in front of the dry cargo in absolute buying whole strategy.
But I think just with that we’ll turn it over to questions.
Operator
[Operator Instructions] And we’ll first go to Jon Chappell with Evercore ISI.
Jonathan Chappell
Good morning or good afternoon guys. The first thing I want to address was – the post offering kind of liquidity situation I think that far more important than earnings are even really asset values right now.
If I just read the press release correctly Hugh or Robert, certainly about $185 – I’m sorry, $855 million of remaining credit facilities pledged for all but the four ships that haven’t been financed yet. If I read that correctly, does that assume based of contract values where we may have misinterpreted things in the past.
And if so can you give us sense and I have my own estimates, but could you give us sense for what that number might be if we were to use actual market values as the ship brokers are presenting them today.
Hugh Baker
Thank you, John. That’s a very good question.
I think it’s very important to make clear that the $854 million of committed finance as of July 27 is just that, it is committed finance, but it is not a necessarily the amount will be drawing down on delivery of the ships. We all have to understand that the majority of our loan contracts are based on a market value at delivery mechanism whereby we’re borrowing a percentage of the market value at delivery.
Therefore the actual amount that we can borrow upon delivery of the remaining ships is could be much lower than that $854 million number. Now internally maybe one way to look at that is to look at some basic math, if we have a Capesize vessel that is ordered for $55 million and we finance that at 60% then we’re going to borrow at $33 million.
If that vessel was actually worth $45 million, then we’re going to be borrowing $27 million. Now we’ve obviously done the sensitivity analysis ourselves.
We are very comfortable that the amount of leverage that we can – commitments that we can get out of these facilities is going to be sufficient depending on where you put, you place values, you are going to come up with different numbers, but essentially basis the sensitivity we’re using, we’re going to get slightly less than $800 million. And you can do your own versions of that math, and you will probably come up with similar numbers.
I mean generally speaking we’re fully aware of the values of ships right now. I’d also like to point out that the, the valuations have drawdown are based on appraisals from brokers and they tend to be lagging indicator.
So we tend to be getting slightly higher valuations from brokers than the actual perhaps that’s the actual market value of the assets. A good example of that is the – the recent SBI Montesino, which is financed under our $240.264 million credit facility mentioned on Page 3 of our release.
Again we borrowed just over $27 million against that ship, basis evaluation of 46 in the quarter as of two weeks ago. Now that obviously is not, you’ve seen in recent Capesize sales perhaps coming in at less than that.
So we are very comfortable with the amount of money that we can borrow under facilities but it’s not going to be $854, and you can certainly do the analysis number and willing top line sales and if you do that analysis with you. So we certainly expect more or less.
The other things I would like to say is that.
Robert Bugbee
One, just one thing on that clarification, this is – the weaker prices that Hugh referring to the deal that we’re done, sort of weeks ago at the bottom, we ourselves sold Capes at $43 million and that’s what we are modeling for, that was the purpose of the rise the models there were based of no improvement neither in right as Emanuele said or in values from that 42, 43. Right now, the Capes are mostly you know modern resell Capes with the recent sales and deals that are being negotiated at the moment it would be valued around 46, 47.
It just very simply, that we in our models are not relaying on that, we are comfortable that the market could go back to, where it went, where it was at the bottom in two months and we would still have run rate through 2016 into 2017.
Jonathan Chappell
And can I ask about the – you had mentioned in the press release there is four ships that’s still have not yet financing yet include some Japanese built ships, so good quality. It seems like you’ve been talking of those for a little while, as the conversations with the banks changed all for better for worse in the last three months maybe post the equity rates and post kind of this will upturn in asset values, is that Rob has been talking about and when we start to see some clarity around that financing?
Emanuele Lauro
Jon, we expect to close the financing on our four vessels, before our next conference call. And the answer to your question is very clear yes, we’ve seen a huge turnaround from the banks and that’s very much related to the actions the company has taken in achieving liquidity I mean the company as we know we’ve reduced our forward commitments by $673 million, we’ve raised net proceeds of $197 million from the sale of the 20 vessels and that in combination with the equity rates has made our banks extremely supportive of the company.
We have offers in place and I’m sorry. I have to correct that proposals in place from four of our lenders.
The proposals amount to approximately $50 million which is approximately a 50% advance rates against current market values for these Japanese built assets. And we’re very confident that we can execute these facilities in due course over the quarter.
I would like to say that the bank market generally is financing both ships is pretty terrible. I don’t think it is possible to get financing for both ships really under any circumstances and indeed we’ve been talking about this ships for over a year and it tells you something that with the company you know we have very strong bank relationships and we’ve been finding it very difficult to do something.
We find it pretty easy to finance 76 new buildings and the remaining four are being very difficult to indeed. So I think that the overall market for finance is very difficult but there is nothing like raising equity and being very proactive about dealing with the issues to get support from the banks.
Emanuele Lauro
I think in general look at and Hugh is quite right, it’s a general principle you know that the banks are feeling the pressure, you can imagine the dry cargo space, when it relates to SALT. The banks are very confident and there to strongly support the company and we will see that in as Hugh said in various things going forward that hopefully we will have templated installing by the time of the third quarter release and may be even before.
And the banks are looking at this very simply that we have a new fleet that the modeling of the company to the banks can withstand pretty tough asset test related to the next 18 months of based up this low tough models. And also they are really confident in the actual government’s aspect of the company in fact that, this company took appropriate measures when safe to the potential of potential solvency issues and they were strongly encouraged by not only in terms of number of the top 12 shareholders but the actually majority of the percentage of shareholders in actual number of shares on all time long in support this transaction.
Robert Bugbee
Jon, just add to that we have over dozen lenders and there is an element of them awarding us for our behavior by providing this finance I mean they have been very supportive to the company and other terms and condition to the finance are relatively favorable and the advance rates little high, but everything else is very favorable. So we are now in a position where the company – expects to have financing on all 60 of these vessels.
Every single facility is essentially plain vanilla standard debt finance. There is no leasing, there is no balance sheet obligations.
We’ve been very fortunate that we’ve been able to get secured bank finance for all of our ships and all of that financing is priced at you know LIBOR plus 3% or less. And we’ve managed to hold line on terms and conditions in pricing.
And our banks have been very supportive on that. So we feel that our capital structure is well…
Emanuele Lauro
And I say that’s – very, very important point. The way you have now in fact we have that sort of buying new fleet we’ve still been how to extend some of the deliveries.
You have very – you have a very clear kind of balance sheeted amount. There is no lease thing, there is nothing.
So you will literally have an option to the recovery of the dry cargo market. That retains – strength in the option even at very low numbers.
Even a step back in the recovery of that dry cargo market. And that should – that is confident thing to all of the capital providers of the company.
Jonathan Chappell
If I can just ask one more and it’s more strategic and really needs all of this. So two months ago – not even there is concerns about solvency you took the necessary management is painful it was now if I look at these numbers and you know try and do market value analysis on the remaining debt, actual cash balance, look at remaining CapEx looks like there is offering in excess of $200 million even before you get the financing for those other ships.
Where clearly a place we’re pleading cash on a daily basis anymore so just over the next six months or five months as we go into year-end. How do you think about may be – the cash profit that you’ve generated right now.
Are you still in defense mode and we’re just going to hold on make sure that this is in a seasonal blip and there is some – sustainable recovery. Do you start to look to offense a little bit, how do you just think about the buffer as we go to the next five to six months?
Robert Bugbee
Well I think that – what we what the company investing at the moment is just to watch and execute on primarily what you were saying closing down this bank position, taking the benefit of other thing that the banks may be it help in the liquidity – so focused on that definitely at this point, that yes, its pretty you know its an interesting thing that the market really is showing some time to recovery here. And you don’t get this and you have this continued big spread which will probably then widen between NAV and the stock price.
And you then go into theoretical surplus liquidity well. You’ve got to do something about that as a management.
And but at this particular point, the focus is going to be executing and crossing the eyes and I mean dropping the eyes and crossing the pieces on the actual finance. And I think as Emanuele as pointed out is not yet clear, that whether this is just a seasonal blip.
There are still a some headwinds related to demand even though the dynamics set with ships being delayed scrapping low interest rates around the world, low commodity prices for an eventual stimulation of demand. But right now, you wait and you watch and that is probably a conversation there is more appropriate in let’s say the next earnings call.
Right now, it’s about making sure we close and get the benefits of the goodwill that we have from the lenders to improve our liquidity further.
Jonathan Chappell
All right, good. Thank you, Robert.
Thanks, Hugh.
Operator
And next we will next move onto Gregory Lewis with Credit Suisse.
Gregory Lewis
Yes, thank you and good morning. You touched on something and I’m just unlike a little bit more color on that.
So we’ve taken delivery of some vessels. So now we have couple handfuls of vessels on the water.
A lot of companies that are sometimes facing solvency liquidity however you want to frame it. Have actually use that the sale and leaseback market.
And to hold on to that upside and it doesn’t sound like that’s something that you guys are at all interested in. You can just elaborate maybe why that wouldn’t be a pass that you could go down to on some of your vessels, as it looks like it would free up a fair amount of cash.
Robert Bugbee
Okay. Couple of things.
Firstly, we believe we don’t need to do that at the moment. We have adequate cash.
We have adequate liquidity. And as we’ve indicated that there maybe ways to even improve that further of the financing side.
Secondly, sale and leasebacks are pretty expensive trades to do. I mean no dominees on the other side of that trade and in real cost terms they are going to come in double-digit values.
Secondly, they – it is a sale of that asset, that’s what it is. And the – you based the actual sale to start with on market values.
So it doesn’t necessarily free up that much cash when you take into account the much higher steeper interest rates penalty the increase of your overall break-even points to a market. And the third thing is it makes the balance sheet more complicated.
You have – it’s not as clean as a straight sale and it’s not as beneficial as commercial loans to your break-even. So sale and leaseback traditionally are being used in shipping when really you’ve got no other choice.
Its one step away from doing some massive exorbitant high yield, super high yield bonds.
Gregory Lewis
Okay, okay. So thanks for that Robert.
And then just one other question, I mean I realize your – you are not in the market in terms of looking that at adding tonnage right now, but how is – what's the debt in the sale and purchase market right now for dry bulk as we try to find the bottom. Are we at a point now where we’re not really seen potential sellers in this market, which maybe…
Robert Bugbee
At this moment, as Emanuele alluded you’ve got cash upgrades in values. And as the reason actually that much outlet buy in terms of resell, and it’s also expressed in the time chart on market itself.
There is not that much ability for people to let’s say please take for example one option, one option, one year. So the both the time chart to market and there is some pin market are showing a fairly high degree of resilience.
And as…
Gregory Lewis
Okay, perfect. It looks like maybe we’ve gotten through the worst of the dry bulk market here.
Okay, guys. Hey, catch up with you tomorrow, have a great day.
Robert Bugbee
Thanks.
Hugh Baker
Thanks.
Operator
And moving on we’ll go to Amit Malhotra with Deutsche Bank.
Amit Malhotra
Yes, thanks a lot. First question is for Hugh.
That $197 million of cash proceeds from the 20 sold or held for sale assets. I think you mentioned that but I just want to confirm that that is a net number and we don’t have to subtract anything from that.
Is that right?
Hugh Baker
Well. Let me talk you through that number Amit.
On Page 2 of our report, we talk about $197 million in aggregate cash proceeds and a $673 million reduction in future CapEx. That number refers to the all 20 of the vessels that we have sold.
Now 16 of this 20 have actually been sold in fully sold and suppose we’ve actually received the proceeds and that the sale is its – they are essentially completely of our books. The remaining four vessels three of them we expect to close in August 1, we expect to close our next delivery in September.
Just to make you understand that number, the – you can actually go back to the Page 8, where you got the assets held for sale of $74 million on the balance sheet. We’ve also had related partly payment which is a deposit from Scorpio Tankers, which of $31.2 million and again those forms have largely been received and we’ve also got if you look at the, the proceeds from asset sales in 91 again, that’s in the cash flow.
Now, we obviously sold seven vessels in July. And that we’ve received the proceeds from those.
So the way that $97 million number looks that essentially covers 16 out of the 20 vessels, the four remaining vessels I can advice you have limited cash proceeds. So we’re looking at cash proceeds for the remaining four vessels of under $5 million.
And so that 100 that the majority – vast majority indeed over $190 million of that $197 million is actually being received and is included in our current cash position.
Amit Malhotra
So that 448 includes, $192 million of that $197 million.
Hugh Baker
Approximately, yes.
Amit Malhotra
Okay. That’s helpful.
Thanks, Hugh. And then one other housekeeping items is the older period and share count.
Hugh Baker
That is on – that is listed on Page 8 and it’s a three, but I’m also looking at the number here. Its 335 million, 310, 465 shares outstanding.
Amit Malhotra
Okay, thanks. And then one bigger picture question for Robert if I may, I mean the current rate environment, if its maintained, the company I think could be reporting the first ever sort of positive EBITDA in the third quarter which should obviously be nice.
Just like to get some color from you Robert on if you are seeing anything from the trading – the physical trading perspective there either maybe encourages you, and makes you little bit more skeptical of the mini rally that we’re seeing quarter today.
Hugh Baker
Bob?
Robert Bugbee
Obviously, as we’re going to repeat that this company is planning for the work. But if you were to let’s say put a more constructive position on that you would see a number of things that are encouraging is that the – in some of the fact is actually the right today higher than where they were at this point last year, but that first thing is pretty encouraging.
The second thing is that time chart to market itself is hardening up the traders are in there looking to get tonnage is not just the owners that sort of tightened up there. The outside of the trade it’s also that the customers too.
The other aspect is clearly the first step of this you know we’ve had this stronger market for few weeks now and the first step would have been to absorbed all that idle tonnage. That was sitting around really almost in semi layer and particularly in the Cape market.
So that’s an encouraging sign that this – that the actual demand in there has managed to absorb, not just the tonnage that was in that market at that time, but then some of the surplus market is to semi lay up and it is continuing. Those are very favorable signs.
The second thing that is very encouraging in the asset side is that by and large they are really quality buyers they have being stepping in. This is real deep pocketed private money with a lot of experience in that dry cargo side.
And they are not going to get shaking out of their trades and that fairly there are vessels that previously would have had been lucky to get one of two people inspecting and now having 10, 12, 13 inspecting. So that doesn’t mean the rates cargo back down what that means there is most likely to be still maintained a bit under the asset even if rates with a two, four little bit.
Those are really encouraging path to that.
Amit Malhotra
And does the current inflection change it all your view in terms of how you want to balance the chart on strategy of the business.
Robert Bugbee
No. I think thatwe’ve got to as I said earlier with Jon, this is – we’ve seen what we’re doing where we’ve been willing to take less than one year duration charters that are fundamentally positive or we interest in operating at the – you need way for let’s stabilize this I mean – has started tremendous upside – is discounted – most trading is discount to NAV and everything so.
Let’s do the simple, stupid things for a few months and using the fact that our interest cost low with no leases or funky start in there. Get to that positive view because you’re talking about as quick as possible.
Amit Malhotra
Got it. Okay, thanks very much.
Good luck, guys. Thank you.
Operator
And next we’ll move on to Omar Nokta with ClarksonsPlatou Securities.
Omar Nokta
Thank you. Very helpful calls as expected.
Just wanted to touch on little bit of the earlier question. Kind of where we are – with Scorpio and its life cycle.
You – Robert and Emanuele you guys have been pretty vocal, at least as of the last earnings call about being sellers in the market. And just not for worsening amount.
But do you view has start today as not a seller. Has that kind of idea have been put on pause like you’re saying you’re evaluating how the markets…
Emanuele Lauro
I think that idea you know previously we were seller to obtain liquidity, much needed liquidity. That is now being achieved.
And as we alluded to earlier, right now it’s about closing down those financing positions and watching you may become a seller not because you don’t think the markets going out. But just simply because you maintain a huge spread, negative spread from share price to NAV.
But you’ll constructive being the market, insiders would not have got into this deal and that way that they bid, if we didn’t feel in the long-term, you could get a multiple return on the actual investment in the first place. And as we’ve seen, this new generation have seen is that – things turn fast in – that you got a massive upside operating leverage still on the company with a downside that’s protecting on.
And it is a very big, financially operated leverage play to the upside in the dry cargo market. If you start getting 10% increases in asset value and you move the company from a – cash negative into cash positive and then you move into underlying profitability.
And you should be one of those first movers to do that because you got a new fleet and because you got a low interest burden. This company can in a very quick time, like you to seen on the tankers side, except in this particular company would be like on steroid this same thing can be three or four were doing a couple of year time.
Omar Nokta
Indeed. Yes, thank you.
That’s very helpful. Also just wanted to – go over just the numbers again with few, I did have – just a question on the four remaining vessels so as I understand that the first 16 those have essentially closed or innovated and then the final four you expecting to close on the three Capes in August.
Once that’s closed that’s also going to be essentially innovated as well with the final Kamsarmax in September being the only one that you’re on the hook for making payments until it delivers. Is that correct?
Hugh Baker
Yes, I mean I think that there is one more payments on the Capes, before closing but that will sort of come out in the wash. So yes that the three Capes in August have innovated the September, this early September delivery Kamsarmax is being sold by MOA and we obviously making payments until then.
The next payment on that ship is actually delivery anyway.
Omar Nokta
Got it, okay. And then just one final, just quick modeling questions – you put the table in the release showing all the remaining CapEx.
Just wanted to, just get the exact number if you can share, what the installments that were made between July 1, and the July 27?
Hugh Baker
I told you that – $74 million.
Omar Nokta
Thank you, very much
Hugh Baker
Sorry, I apologize, I apologize $76 million
Omar Nokta
Got it, all right. Thank you
Operator
And we’ll move on to Ben Nolan with Stifel
Ben Nolan
Yes, thanks.
Hugh Baker
Ben just apologize. Seems it will be the last question to you.
Thank you.
Ben Nolan
Just made it in, good.
Hugh Baker
No, you save the back at the last.
Robert Bugbee
You always do that one.
Ben Nolan
All right. I have a few, hopefully that works.
But…
Robert Bugbee
Maybe just have a cluster of one on one to go through.
Ben Nolan
You mentioned that, you have or see some proceeds from the sale, of the vessels in July, sort of a long, the line of – Omar’s question. How much you pay, how much have you received in July what is that number?
Robert Bugbee
I like to step back and just say that we have received as – going back to our earlier answer. We’ve received over a $190 million of the net proceeds that we are anticipating for the sale of all of assets.
Ben Nolan
Okay, and if so then I just back out…
Robert Bugbee
You just back out because we got the other number during the – in the balance sheet.
Hugh Baker
Is that it Ben? Hello?
Operator
His line disconnected.
Hugh Baker
Okay. Let’s concludes that, okay.
So I think thank – we got to thank you very much. I really appreciate that and looking summary the way that we view that as you’ve got a very strong option on the recovery long day adoption for recovery in the dry cargo market.
That anything recovery is going to flow immediately through to the benefit of the company either in asset prices due to leverage to that and the NAVs or straight through into EBITDA or an ultimately earnings. Because we’ve managed through this process to retain very low breakeven points through about to the clean balance sheet and the transparency that balance sheet.
As a fact that predominantly Bob keep it on in commercial loans, there is no converts and yes, there is no security that is being put in above the basic rule equity shareholder. And there are no expensive sale leasebacks to clustered up its pretty easy to understand and let just – let time do its work and we’re prepared if the market turns back, but we just may well have just time the corner here.
Thank you very much.
Operator
And today’s conference call has concluded.