Nov 2, 2015
Executives
Hugh Baker - Chief Financial Officer Emanuele Lauro - Chairman and Chief Executive Officer Robert Bugbee - President Cameron Mackey - Chief Operating Officer
Analysts
Jonathan Chappell - Evercore ISI Amit Malhotra - Deutsche Bank Omar Nokta - Clarksons Platou Securities Gregory Lewis - Credit Suisse Magnus Fyhr - GMP Securities Charles Rupinski - Seaport Global Securities
Operator
Hello and welcome to the Scorpio Bulkers Inc., Third Quarter 2015 Conference Call. Today’s call is being recorded.
This presentation is available on the webcast. I would now like to turn the call over to Hugh Baker, Chief Financial Officer.
Please go ahead.
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, President; and Cameron Mackey, our Chief Operating Officer. The information discussed on this call is based on information as of today November 2, 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.
As well as this archive we actually also have a small presentation, it’s actually three slides, which is also included in the webcast. Now, I would like to introduce Emanuele Lauro.
Emanuele Lauro
Thank you, Hugh and thanks everybody for joining us today. The format of the call today is going to be the following.
We’re going to have no introductory comments, but go straight into a few slides presentation as Hugh has mentioned, which he will going to take care off. And then we’re going to go to questions where the management team is happy to answer any of your questions.
So, Hugh back to you please.
Hugh Baker
Thank you, Emanuele. For those of you who don't have the presentation don't worry I am going to be very brief and just go over the highlights.
Our financial results for the quarter showed that we made an adjusted loss per share of $0.05 for the third quarter of this year. In terms of fleet development we have more than doubled our fleet size during the quarter taking delivery of two Capesize vessels, three Kamsarmax vessels and seven Ultramax vessels.
And as I am going to go into more detail just below we’ve also very much changed certain of our financing arrangements and I can give you an update on that. In terms of the financing the key development is that we have received financing from two of the company’s lenders for three previously unfinanced Ultramax vessels.
In addition, the company has accepted a proposal of financing for the fourth remaining unfinanced vessel and we are expecting credit approval for that vessel within the month of November. So we are very pleased that we’ve financed three of the four vessels and that leaves us with 59 out of the 60 vessels in our fleet have now be financed.
All the loans including these three new loans include the standardized Scorpio terms and conditions and we managed to keep the pricing of the new loans within our standard range of around LIBOR plus 3%. In efficient to that we’ve received approval from the Chinese State Insurance company Cynosure of an insurance policy that have been being outstanding, which now allows us to drawdown on our $76.5 million facility which finances three Capesize vessels.
The other main development in the quarter is that we received a covenant wave up from all of our lenders for our interest coverage covenants and that gives us freedom from our insurance coverage for the entirety of 2015 and 2016 and gives us a period of enhanced flexibility beyond that to the end of 2017. Again we thank our lenders very much for that that support.
I can say that as of today's date no covenants are in breach and we’re not expecting any financial covenants to be breached in anytime in the near future. So we have a degree of flexibility going forward into the future.
In respect of the summary of earnings in the voyages and earnings to date in the fourth quarter we’ve actually provided some guidance, which is in the final page of our presentation. And I can say that so far we’ve fixed 55% of the days in the third quarter for our Kamsarmax vessels at around $7,900 a day, we’ve also fixed 56% of our Ultramax vessels at around the same rates of $7,900 per day and we fixed 81% of our Capesize days for the fourth quarter at $11,900 a day.
And again…
Emanuele Lauro
Hugh, allow me to interject here. It’s Emanuele.
I’d like to say that from a commercial standpoint, we most certainly focused on execution from the inception of this company and certainly as the fleet delivers. Scale at the group level has allowed us to leverage on not only cargo accesses, but of course the support of brokers.
We are not new to the dry cargo market despite not having been most active on the freight front in the past decade. Our port infrastructure investments, our dry cargo logistics investments in places like India, Africa or Southeast Asia in the past 10 years have allowed us actually to maintain a proper presence in the commercial dry cargo commodities world.
And we didn’t stop there, but these coupled with hiring a good team of professional freight traders all with different backgrounds either from a traders, or operators, or brokers has allowed us to produce results in line with most or the most established companies in the industry. From a self perspective it's nice to see that other third party ship owners think the same, since four different ship owners have joined this Scorpio Kamsarmax pool in the last four months contributing their own tonnage to weight.
And this is not only adding to the scale of the fleet, but also clearly demonstrates that other ship owners think that those pools are the best way to operate their dry cargo fleet. So we continue to focus on execution, we continue as we get delivery of our fleet in the Eastern Hemisphere to unravel our plans to focus on employment and make sure that we get the best out of these challenging market.
With this I finished, I don’t know if Hugh you have something to add or if we want to go to questions.
Hugh Baker
Emanuele, I think I have nothing to add. We can go to questions.
Operator
Thank you. [Operator Instructions] And we’ll go first to Jon Chappell with Evercore ISI.
Jonathan Chappell
Good morning or good afternoon guys. Just a couple quick questions; two on financing, Toulon fleet.
First, on the financing, you guys did a great job laying out with facilities are remaining, what you've drawn down already of the two, including last week. Just curious, though, as hose you stress test the model, what's the risk of any of the available credit coming in significantly lower than what you've listed here as the new builds actually deliver and are potentially mark to market?
Hugh Baker
Jon, that’s a great question. There's always a risk in some of the facilities coming lot lower than you anticipate because obviously most of the facilities are based on a market value at delivery basis.
We’ve done our stress testing internally on much lower values than current market values and as a result of that, we don't think that the amounts that we can drawdown from these loans is actually going to be lower than what we are using in our models and certainly we’re using some pretty low values in our unprojections for that purpose. So the answer to you is yes, it can come lower, in some cases it will come lower than the committed loan amounts and we’ve certainly taken that into account in our projections.
At the moment, we’ve stress tested our loans for minimum value pools breaches and we’re not coming up with any breaches. And the reason for that is that we are actually borrowing lower amounts at initial drawdown which means that we again don’t get into a situation where we breached the covenants later on…
Jonathan Chappell
Okay, understood.
Hugh Baker
I hope that answers the question.
Jonathan Chappell
Yes, it does, and it's a good segue to the other question, which is a bit simpler. Just the covenant waivers getting almost 24 months of runway there, is there any cost associated with obtaining those waivers?
Hugh Baker
Yes, there was around a $150,000 in fees paid to the banks for those waivers in total across all the facilities.
Jonathan Chappell
Okay. That was worth it.
Two things on the ships. It seems like some of the newbuilding delivery periods have been pushed back a little bit.
Is that something you have been asked for and, therefore, need to pay for, or is it just the shipyards can't keep up with their schedules?
Cameron Mackey
Jon its Cam. It’s neither, it something that we get into discussions with you, but obviously at this point in time it suits us to push deliveries back when were we can.
Jonathan Chappell
Right.
Cameron Mackey
However, it’s worth mentioning the flipside of ordering ships at the most reputable and qualified shipyards that on their own they don’t tend to suffer delays or other production issues.
Jonathan Chappell
Okay. So just normal course of business and don't read into it anything else.
And then finally, and I know that this may be a bit controversial, but I just wanted to ask about it anyway. It seems like after values where people thought maybe bottomed, starting to step down a little bit again, it seems like you have the liquidity runway now well into 2017, but are future asset sales completely off the table right now as asset prices continue to fall, or is that something that is still being considered?
Robert Bugbee
I think you’ll consider the market each step I mean we’ve quite a long runway here. I think you yield correct that asset prices have been weakening, in general if we just have a little discussion on asset prices the market is stressed among the stress because of the cash flows on the spot markets, it’s stressed because you had a number of non sort of the U.S.
public companies already start to feel the pressure in terms of that balance sheets. And lenders I mean I think that you should see SALT is quite an exception, because SALT now has a new fleet, it’s very familiar with its lenders, it raised equity and we started the process of what we’ve been doing on the financing a long time ago, but the general environment is that I think there are still companies that acquire financing amendments et cetera, et cetera you know might be in pending breaches of covenants or already breach covenants.
And that itself combined with the weakness in the equities and the cash flow is putting pressure on second hand values, is that nothing you can say about that. As Hugh pointed pit we're running our models in that weaken landscape.
You cannot go on forever, yes we have a long runway, but you cannot go on for ever so the company will continue to do whatever it is required along this process to get to the end of the tunnel.
Jonathan Chappell
Okay, got it. Thanks Robert, thanks Cam, thanks Hugh.
Operator
And we’ll go next to Amit Malhotra with Deutsche Bank.
Amit Malhotra
Yes, thanks good morning, afternoon everybody. Just had a follow-up on the perspective debt drawdowns.
Hugh, just wondering if you could be a little bit more specific on how much of the $590 million committed – the company expected to drawdown and I ask that just because if I look at the payments and drawdowns, the debt drawdowns over the last three months, it implies that most, if not all, but for sure most of that $590 million will be available to you. I just want to confirm that.
And then also is there anything else out there in terms of debt financing that's not reflected in that $590 million number above and beyond that one additional vessel left to get commitment for?
Hugh Baker
Yes, hi Amit. We have three vessels that were currently – that we paid for, we paid cash for that the currently undrawn and they fit into three categories actually one is one of the vessels is being unfinanced and we’ve obviously got finance in place for that vessel but we haven't closed it, but again it’s approved.
We have one of our Capesizes we paid cash for, which again is a vessel that was financed under the $76.5 million dollars facility that we’re probably drawing down, we are expecting to drawdown on that in about 10 days time. And one is again a Japanese built Ultramax vessel where we paid cash and we preposition the funds of the yard.
So you see the issue the cash outflow but you don't see the debt drawdown. So that that in total is around $52.6 million of debt that we are going to drawdown on that sort of existing delivered vessels.
In addition to that obviously the - we have if you look at some of the debt numbers that are slightly reduced we've taken positions where we think we will not be able to drawdown debt we’ve reduced the amount somewhat to reduce our the commitment fees liable. And but notwithstanding that we fully expect to take up the vast majority and I mean the very much the vast majority of the available debt and be able to do so.
Again, we’ve always assumed that we wouldn’t be draw on the full amount of - the full market values of the originally committed for and we've been quietly reducing the size of that debt load as a result of that. In addition to that we have been very successful in essentially drawing down the debt at a very good valuation.
So the valuations we've been receiving from our debt drawdowns have been very comfortable and certainly above our own projections.
Amit Malhotra
So just so I'm clear, the $52.6 million that you referenced, is that in the amount available balance of $589.8 million?
Hugh Baker
Yes it is.
Amit Malhotra
Okay. Okay.
Hugh Baker
I am sorry I apologize $40 million of that is in that balance, $13.5 million is not reflects one of the vessels that we just got approval for.
Amit Malhotra
Okay. So the perspective debt balance for the Company could increase by that full amount, if not even more, after assuming the $13.5 million of additional does not reflect in that number, correct?
Hugh Baker
Correct.
Amit Malhotra
Okay. Good.
Thank you. Let me just ask a more operating related question, maybe for Cam or Robert.
If you could just sort of update us on operating costs. I mean you now have a good number of ships, and I'm assuming you can provide some hard numbers around what the OpEx is looking like, and hopefully it's a little bit below the original expectations given the quality of the fleet.
If you could just update us on that, that would be great.
Cameron Mackey
Well, I think the vessels you can see in the position, the vessels that the big change. So I think a – let’s say more accurate number is going to come in the end of this quarter, you’ve just got a tremendous change as you quite rightly pointed out the number of vessels coming in.
So you will any benefit to that are really going to be more shown from the next month or two.
Amit Malhotra
Okay. Yes.
That's fair. Alright, guys.
That's all I had. Thank you so much.
Appreciate it.
Operator
We’ll go next Omar Nokta with Clarksons Platou Securities.
Omar Nokta
Hi, thank you. Yes, just – More just a general question discussion.
Last earnings call you were fairly close to when you had just issued the equity and you had sold most of the 20 vessels. You had said you were looking to take maybe a step back and just allow the cash to come in and see how the market goes.
As things have developed here, obviously you've gotten this new waiver that definitely provides some flexibility. As you think about going into 2016, where are you on the idea of having a fleet of 60 ships?
Are you still taking a step back, or would you look to be a seller again?
Robert Bugbee
Well at the moment nothing, if you look at the model and from the offering I think – on the offering we were using sort of market figures around $6,000, $7,000, $9,000 a day. We clearly were of the view that one should not – one could hope for a winter improvement, but one should rely on it.
We did have a little bit of step up in the market sort of a month or so ago but the market has come down. So the market itself as you can see in our earnings is slightly above what we were using in the modeling at the time.
And as Hugh as pointed out, we didn't modeled for a price increase; we modeled for the values to stay down and maybe declined further. So in this sense, however a brutal a plan it is, what is happening has been planned for and that’s the company’s view.
Now going forward luxury is perhaps a word you don’t use in a market like this, but you’ll understand the meaning of it that we have done the hard work on the financing. We’ve done from both the debt and the equity side and now really whatever you need to do you can do it in measured steps and you’ll watch the market as we said to the earlier caller.
You can’t indefinitely if you to run this through into 2019 and 2020, you can’t indefinitely run on a market this bad. So it’s still pretty uncertain as to when the market will recover, we’ve got great runway.
And as we’ve said before you will do what you have to do as a management to ensure as best as you can, the zero is taken off the table and ensure that the best as you can, you can fulfill your commitments and ensure as best as you can that you are going to get the company through the end of the tunnel, however, along that tunnel is.
Omar Nokta
Yes. Thanks Robert, and well said.
Robert Bugbee
The short answer is you are not going to take any of your weapons over time to defend yourself off-the-table. But at this point you don’t have to do anything, you have that “luck” to manage it properly without panic to be proactive still rather than reactive.
Omar Nokta
Yes, understood. And just sort of was going to – was just thinking of further covenant waivers and ones that you would seek.
Is there anything on the table you are looking to evaluate now? And also just wondering is there potential for being able to amend the minimum cash requirement, which is somewhere around, I believe, $50 million?
Is that something that in discussions with banks that you could or they would be open to amending for it to be a little lower?
Hugh Baker
Omar, we are not planning on approaching our banks to amend any covenants, we don't feel we need to at the moment. As I mentioned earlier, we have a sufficient runway to sit and evaluate things and certainly we've done some pretty tough stress testing of our own position and we feel comfortable that we don't need to be asking for anything, because we are not – don’t see ourselves breaching anything during the period of that runway.
So it's not on the table for us. In terms of minimum cash covenants, they are not something that banks actually get very flexible about the tool, you can get a lot of flexibility from financial institutions on a lot of covenants, but I think you'll find that they generally are very inflexible about minimum cash covenants, because they don't want that minimum cash used to support other financial institutions.
So generally speaking the answer is it's not an area that people are generally successful getting relief from the banks.
Robert Bugbee
I think it's very much that the banks have really done a fantastic support to the company and they’ve worked really very hard across the number of banks and coming up and supporting the company and the shareholders here. And I think that we should have a bit of – again it’s all about situational win and so we have a market that is not producing cash flow, we have a asset values that are weak, we have charter market that is weak, we have a paper market that is weak, we have players that as I said non-public companies who are filing et cetera, et cetera.
And there are – a lot of our competition who had hoped or relied on the fact that the market would continue to strengthen and continue to strengthen asset times and value right now. And the banks at the moment having to look and look at these other areas of the dry cargo market.
So I think as Hugh said we should be thankful for what we’ve received from the lenders across their support and be aware that if you are trying, it taken us three months to get to this point after doing an equity rates with all the support as a group, the broader group of Scorpio plus the newness of the fleet. And there are people who are just starting now to face the risk.
So we have to very much deal with what we have and be thankful for what we have from the lenders right now.
Omar Nokta
Thanks Robert, thanks Hugh, you guys have definitely been fairly quick and early. I appreciate the answers.
That’s it from me. Thank you.
Operator
And we’ll go next to Gregory Lewis with Credit Suisse.
Gregory Lewis
Thank you. Hugh, just following up on the Omar question, is that the minimum cash that’s per vessel, correct?
Hugh Baker
Yes, that’s correct.
Gregory Lewis
And just – it’s roughly $1 million per vessel?
Hugh Baker
It’s $850,000 per vessel.
Gregory Lewis
Okay. Perfect and then just Robert or Cam or whoever wants to take this, clearly the outlook for the dry book market is challenging.
Since there's expectations that this could be a prolonged down cycle, clearly from your – the moves that Scorpio's making, you are at least preparing for that. Are we seeing any response at – on the supply side, i.e.
at shipyards where we are starting to see the order book shrink? Are we seeing problems with deliveries?
Are we seeing conversions out? Are we seeing any sign – are we seeing any response on the supply side, or is it – as we look at the order book over the next 12 months to 24 months, unfortunately that's what we're going to be looking at in terms of supply growth?
Cameron Mackey
Greg, it’s Cam. I’ll answer your question in two parts.
One is absolutely we see a bunch of signs on a supply correction from the say entry side i.e. from the point of view of shipyards.
A lot of the conversions have already run their course, but what we are seeing now is second and third tier shipyards starting to consolidate or close which of course is a very welcome sign. So your overall capacity available for dry bulk is rapidly declining.
Now the other area where is see is supply responses of course and you know this is what we is on increase scrapping, scrapping of vessels is young as 15 years of age. And I wouldn’t underestimate the pace of the scrapping to continue in light of new regulatory requirements coming around such as the balance water treatment investment that will be required on these older ships and the balance sheet is behind them they can afford or not further investments in these vessels.
So far as you know the scrapping particularly on the large vessels have been very accelerating rapidly the longer the market stays weak and the flatter the full curve becomes.
Gregory Lewis
Okay. And then just, Cam, real quick, when we think about the potential issue of the ballast water treatment, if we were to bring a 15-year-old vessel into the yard, roughly what would be the expense to bring that up to the new standard?
Cameron Mackey
It depends a lot on the size of the vessel and the type of technology involved, but you are looking at for a Cape somewhere between $1 million and $2.5 million and then you are also very mind by about the third special survey or 15 years you are also starting to look at enhanced deal replacement on the vessel. So it becomes a waiting game when your curve flattens out as it has done and your balance sheets become strained as they have done those owners just do not have the desire or the aware with all to play that option on an older vessel.
Gregory Lewis
Okay, perfect. Thank you for the time gentlemen.
Operator
We’ll go next to Spiro Dounis with UBS.
Unidentified Analyst
Hi, this is [indiscernible] calling in for Spiro. Just one quick question from me.
I noticed that management has increased ownership significantly over the last quarter. Can you give any color on whether you believe the ray of that volume will continue especially if the share price continues to move that way?
Cameron Mackey
No, I think we’ll give you color on the buying is we are not – we don’t have mark-to-markets in Scorpio ship holding, you are buying enough or trading by definition you can’t trade, it’s not short-term I guess it could we viewed as a statement of confidence that the longer term value of what we see in the company. And we are by definition we have to give fairly regular updates on stock purchases, we have to obey the windows in order to do that.
But the one privilege we have is we don’t have to announce to everybody – oh, we are about to buy a whole bunch of stock.
Unidentified Analyst
Fair enough. Thanks for the color guys.
Operator
We’ll go next to Magnus Fyhr with GMP Securities.
Magnus Fyhr
Yes. Good morning, guys.
Just one question left to follow-up on prior questions regarding the financing on the upcoming new builds so looking at some of the Cape’s you have delivering over the next couple of months what kind of funding can you get for them just trying to figure out the leverage you are going to put on these?
Hugh Baker
Magnus, that’s a good question. I think that we've been putting leverage of 60% on our Cape’s, generally speaking those Cape’s we’ve been getting valuations where around $45 million, $46 million.
The actual market valuations that we’re receiving at the moment probably a little bit lower than that, so I would probably for your numbers an estimates probably use valuations of $43 million, $44 million and again if they were as we said prompt sale candidates in the market now it maybe coming out less than that, but again for valuations received we tend to be get slightly high numbers than last done so I would use sort of mid-to-low 40s for Cape.
Magnus Fyhr
Okay, so when you stress – and do your stress test scenario roughly $600 million that’s you have available that includes about a $27 million, $28 million for Cape?
Hugh Baker
I can't really comment too much on that, but I would say that…
Robert Bugbee
I’ll comment that you would stress test lower, you are going to stress test lower than the actual present market. You are still in that environment where your percentages between literally any given months, because on the one side as Cameron is saying you are putting in the stress for a long-term market recovery, but at the same time you’ve got short weakness.
On any given month you’ve got to wait the chance 33% prices go down, 33% that go up, 33% they stay the same, so stress testing is below internal stress testing which we do not guide to, but we obviously show lenders and we had to show lenders in this last two, three months from them to get comfortable related to amendments. Our stress test below the low prices that are in 95% of any of the analyst and present NAVs the low prices that 10% below those numbers.
Cameron Mackey
And Magnus just add to that we have a couple of Cape’s which we financed on the basis of contract price rather than market value and we expect to deliver those with that’s deliver debt of around $33 million to ship on those vessels. So it's a mixture, but as Robert says our internal stress testing is much lower than where they are and where values are now.
Magnus Fyhr
Okay, great. Thanks for clarifying.
Operator
We’ll go next to Amit Malhotra with Deutsche Bank.
Amit Malhotra
Thanks just a follow-up. Hugh, the $645 million of remaining newbuilding payments, almost half of that is in the first quarter of next year $293 million.
Can you just give us any color both in terms of how that spread over the quarter whether it's all basically at the end or spread more evenly and then what the breakdown is for the equity and debt component of the financing for that? Thanks?
Hugh Baker
Amit, there is a few vessels bunched up in the first weeks of January, so I believe because they’ve been pushed over from last year, from this year but otherwise the spread equally over the quarter. In terms of what we expect to drawdown on those vessels again we do expect to drawdown debt as discussed in our earnings release and I don't think we have any specific comments that we can make on sort of the amount of cash that will be used versus debt from the fact that all our debt is available to be drawn.
So we are looking forward to most of it will be drawn debt and not cash.
Amit Malhotra
Okay got it. Thank you.
Operator
And we’ll go next to Charles Rupinski with Seaport Global.
Charles Rupinski
Good morning, thank you for taking my question. I just had a real quick question on chartering strategy and if there are any scenarios that you would envision over the next say 18 months where you would consider putting something on longer if there were some kind of anomaly in terms of the one-year charter market or anything like that or are you going to basically plan of sticking to the spot strategy?
Thank you.
Hugh Baker
I think you know we always evaluate opportunities and we are not adverse to fixing in for longer-term charters the problem is that with these markets as Robert was saying the forward curve the paper is weak, the physical market is weak and we just feel that at this point is not the time to go on and fix. As you have seen some months ago and probably actually a year ago when we took delivery of our first Cape, we had no problems in fixing it on a one-year time charter, we thought that was the best solution for it.
So no we are not adverse to period business. Yes we do not think that this is the time to be fixing for long-term business.
Charles Rupinski
Great. Thank you very much.
Hugh Baker
There is value, that there is no value to date in our view.
Charles Rupinski
Oh, yes. Sure.
Hugh Baker
For long-term business.
Charles Rupinski
Okay thank you.
Hugh Baker
Thank you. End of Q&A
Operator
And with no further questions in the queue, I would like to turn the conference back over to Mr. Hugh Baker for any additional or closing remarks.
Hugh Baker
Thank you, operator, we’ve no closing remarks. Thank you all for joining us today.
And we look forward to speaking with you all soon.
Operator
Again that does conclude today’s presentation. We thank you for your participation.