Safe Bulkers Inc (SB) 2014 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Safe Bulkers conference call to discuss second-quarter 2014 financial results. Today, we have with us from Safe Bulkers Chairman and Chief Executive Officer, Polys Hajioannou; President, Dr. Loukas Barmparis; Chief Financial Officer, Konstantinos Adamopoulos; and Chief Operating Officer, Ioannis Foteinos. (Operator Instructions).

Following this conference call, if you need further information on the conference call or on the presentation, please contact Capital Link at 212-661-7566. I must advise you that this conference is being recorded today, Wednesday, July 30, 2014.

Before we begin, please note that this presentation contains forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Concerning future events, the Company's growth strategy and measures to implement such strategies included expected vessel acquisitions and entering into further time charters. Words such as expects, intends, plans, believes, anticipates, hopes, estimates and variations of such words and similar expressions are intended to identify forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct.

These statements involve known and unknown risks and are based upon a number of assumptions and estimates, which are inherently subject to significant uncertainties and contingencies, many of which are beyond the control of the Company. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, changes in the demand for drybulk vessels, competitive factors in the market in which the Company operates, risks associated with operations outside the United States and other factors listed from time to time in the Company's filings with the Securities and Exchange Commission. The Company expressly disclaims any obligations or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with respect thereto or any change in events, conditions or circumstances on which any statement is based. And we now pass the floor to Dr. Barmparis. Please go ahead, sir.

Good morning. I am Loukas Barmparis, President of Safe Bulkers. Welcome to our conference call and webcast. Let's move on to discuss the financial results for the second quarter of 2014, which were announced yesterday after the close of the market in New York. We are on slide 3 where we present the census of main events on the shipping industry.

Supply of vessels is still one of the major forces affecting the shipping market outlook. However, the rate of fleet growth and the current order book are decreasing. Double-digit net fleet increase in 2012 was followed by a 5.5% increase in 2013. For the first six months of 2014, the fleet has increased by about 3%, same as the respective period in 2013. The outstanding order book for 2014 is 7.4 million for Panamax and 12 million for Capes. As presented in the graph at the bottom right, the order book for the upcoming year is declining. Furthermore, the present (inaudible) market deters investors in the shipping industry, which we consider as quite important for the healthy future recovery.

The expected deliveries for Panamaxes represents about 7% of the total fleet for 2015 and 5% for 2016. (technical difficulty) same for Capes, the order book represents about 8% of the existing fleet for 2015 and 8% for 2016. (inaudible) has slowed down and the growth rate of the order book is expected to shrink further due to the scrapping. We expect gradually to see scrapping of older vessels mainly due to our economical operation and technological advances.

During 2013, (inaudible) reached 1.7 million deadweight tonnes scrapped and during the first half of 2014, about 7.4 million tonnes were scrapped, which equals about 27% of the newbuild vessels entered in the market this year. Furthermore, the order book is expected to shrink further as certain purchase options, which are inflating the order book, will not be (inaudible) or delays and cancellations may occur.

On slide 4, we present a brief outlook of the recent capital market. As presented in the top left graph, Capes charter rates have outperformed previous years' average earnings for the seven month period ago 2014. Year-to-date average sub $14,000 versus $6800 for the same period in 2013. Currently, seasonal slowdown affects Capes, but market and rates are just below $10,000. Dropping iron ore prices presently at about $95 per tonne have set Chinese domestic iron ore production to be less cost-efficient. This (inaudible) to China resulting to a record year-on-year increase in imports starting at about 24% in the first half of this year.

Furthermore, stable growth in China ranging at 7.5% and governmental announcement for the multi-billion dollar stimulus for urbanization is likely to enhance further seaborne trade to China providing support to the market. Our three Capes are in long period time charters and strong rates, on average about $30,000 per day, but spot in Capes market will benefit our fleet as we drag rates upwards for post Panamax vessels.

On the Panamax side, the market is following a similar pattern with 2013. Average year-to-date charter stands at about $8,100 versus $7,500 for the same period in 2013. It is important to note here that due to our (inaudible) operations and low breakeven point, we are the first to make money compared to all our peers when the market recovers. Presently market rates have dipped below $5000. Second, disturbances in commodity trading have affected the Panamax market negatively. The heavy winter in the United States and the mild winter in Europe disturbed coal trading and (inaudible) Indonesian government in nonferrous metal exports such as nickel ore has caused a shortage of more than 100 million tonnes of commodity exported from Indonesia.

However, the market prospects appear to be more positive. The expectations for a record grain season ex-America reaching the record of 1 billion tonnes corn crop is expected to increase demand for sea trade. Further recent political developments in Indonesia will most likely result in our resuming exports of the nonferrous metals, which will restore trading activity in the Pacific. Promising trade developments and seasonal trade patterns create expectations for a stronger year towards the end, of course, which we are well-positioned as we maintain substantial exports from the spot market.

You have seen many times the slide 5, which shows the determination of the management to maintain the linked cost tax rate, the low operating expenses and the management fees and breakeven point. The interests of our management are fully aligned with the interests of our public shareholders, our CEO invests in shipping-only activities only through Safe Bulkers and currently controls together with his family about 57% of our common stock. We have no experience of the cyclicality of the (technical difficulty) market, which allows us to be well-positioned for recovery.

Moving to slide 6, we have contracted substantial expansion for the next years with (inaudible) eco-design newbuild drybulk vessels through 2017 with an average price of $31.1 million. We are a spot market player. Safe Bulkers has half of its anticipated ownership days open for the remainder of 2014. Opening (inaudible) substantial upside potential for revenue. We do not want to cripple our earning capability by contracting (inaudible) cancel for one to two years from now.

We have comfortable leverage. Our net debt per vessel averages at $8.1 million in the second quarter of 2014 in compliance with our loan covenants. The average age of our fleet is 5.5 years while currently the value of a five-year-old Panamax is about $24.5 million as per the bulk (inaudible) assessment index. We maintain lean operations with $5,691 per day per vessel for our OpEx and G&A expenses in total for the second quarter of 2014 compared to $5,648 for the respective period of 2015, amongst the lowest in the industry.

In G&A, we include public company expenses and management fee expenses. Due to these factors, due to such factors compared to our peers, we are able to make money in substantially low markets and moreover, from an early point during market recovery. We preserve our financial flexibility with low financing costs at an average interest rate of 1.69%, including the margin for all back (inaudible) and credit facilities during the first half of 2014. We seek to expand our business sensibly according to our risk assessment (inaudible) value and reward at the same time our shareholders as we have done again for this quarter with a declaration of a dividend of $0.06 per common share.

We completed the public offering of 2.3 million Series C and a public offering of 3.2 million of Series D cumulative redeemable perpetual preferred shares, each with an 8% dividend with $107.5 million of aggregate gross operating proceeds. This further strengthens our liquidity and allows us to have a fully financed expansion program.

Moving to slide 8, (inaudible) performance of our chartering policy against the spot market, which we outperform most of the time such as in the bottom graph. The open days for our fleet include a decrease in (inaudible) newbuilds, 49% of the (technical difficulty) for the remainder of 2014, 81% in 2015 and 90% in 2016 offering substantial upside potential for revenue. We currently seek to employ our vessels mainly in the spot market to have the flexibility that the spot market offers in loan charter period and the upside potential when the market improves.

On slide 9, on the graph, we present our fleet and order book. Currently, we own a fleet of 51 high-spec vessels and (inaudible) 13 new eco-design newbuild vessels from top quality shipyards (inaudible) with deliveries one in 2014, six in 2015, five in 2016 and one in 2017. As a result of investing during the lower part of the shipping cycle, we have had substantial (inaudible) annual growth rate since our IPO. We remain consistent to our asset management policy by investing mainly in newbuild (inaudible) vessels.

Going to slide 10, we present on the bottom graph our daily operating and (inaudible) expenses. Our daily operating expenses were $4,578 for the first half of 2014 and our daily general and administrative expenses were $1,178 consisting of $748 daily management fees and $430 daily public company expenses. In total, we paid daily $5,756 to run our vessels in our Company. This figure includes all costs except depreciation and financial costs. It is amongst the lowest in the industry and consistent with previous years and with our lean operations. On the top graph, we present the average interest rate of 1.692%, including the margin for all bank loan and credit facilities during the first half of 2014, maintaining low financing costs.

On slide 11, on the bottom graph, we present our net debt per vessel ratio, up $8.1 million in the second quarter of 2014, together with the fleet expansion. Our intention is to maintain comfortable leverage on a net debt per vessel basis and comply with our financial covenants. On the top graph, we present our liquidity and our ability to finance our capital expense requirements. As of June 30, 2014, our liquidity was $456.9 million while our capital expenditure requirements were $351.9 million. We have not included our contract revenue and additional borrowing capacity as of July 28, 2014, which was $112 million secured loans against six of our newbuild orders. We want to have the ability to raise additional indebtedness against one unencumbered contract newbuild vessel upon its delivery providing us with further financial flexibility.

Looking on slide 12, our Board has declared a dividend in the amount of $0.06 per common share payable on about August 29. Safe Bulkers has paid over $200 million in consecutive quarterly dividends since the Company's IPO in 2008. Now our Chief Financial Officer, Konstantinos Adamopoulos, will present in more detail our financial results.

Thank you, Loukas and good morning to all of you. On slide 14, we present selected financial highlights for the second quarter of 2014 compared to the same period of 2013. Net revenue decreased by 10% to $37.2 million from $41.4 million. Daily vessel running expenses remained stable to $4,455 compared to $4,414 for the same period in 2013. Interest expense decreased to $2.2 million, or 4% in the second quarter of 2014 from $2.3 million for the same period last year as a result of the decrease in the average outstanding amount of loans and credit facilities, the weighted average interest rate of such loans and held facilities.

Net income decreased by 91% to $2.1 million from $24.6 million during the same period last year. Adjusted net income decreased by 79% to $3.2 million from $15.1 million. EBITDA decreased by 58% to $15.1 million from $36.1 million. Adjusted EBITDA decreased by 29% to $16.3 million from $26.6 million during the same period in 2013. Earnings per share and adjusted earnings per share were $0.01 and $0.02 respectively compared to $0.32 and $0.19 in the second quarter of 2013 calculated on a weighted average number of shares of 83.4 million and 76.6 million respectively.

Moving on to slide 15, we present definitions and reconciliation of our financial fundamentals for the second quarter of 2014 compared to the same period of 2013.

In slide 16, we present selected operational highlights for the second quarter of 2014 compared to the same period of 2013. All the ships available and operating days increased by approximately 19%. We owned and operated an average of 31 vessels and a fleet utilization rate of 98.4% compared with an average of 26 vessels and the utilization rate of 99.1%. The average daily time charter equivalent per vessel was $11,642 compared to $17,116.

Moving to slide 17, we present definitions and reconciliation of our operational fundamentals for the second quarter and first half of 2014 compared to the same periods in 2013. The result of our financial performance is clearly demonstrated by the Company's consistent (inaudible) dividend policy maintaining a (inaudible) meaningful dividend throughout the last crisis contrary to the vast majority of industry peers.

As presented on slide 18, our Board of Directors declared for the second quarter of 2014 a cash dividend of $0.06 per common share payable on or about August 29 to shareholders of record at the close of trading on August 19, 2014. We have declared and paid dividends consecutively in all 25 quarters since our Company's IPO more than six years ago.

In the second quarter of 2014, we concluded two public offerings, one for 2.3 million 8% Series C cumulative redeemable perpetual preferred shares issued at a price of $25 per share and another for 3.2 million 8% Series D cumulative redeemable perpetual preferred shares issued also at a price of $25 per share. The aggregate gross offering proceeds before underwriting discounts and other offering expenses amounted to $137.5 million, further strengthening our balance sheet.

Earlier this month, our Board of Directors declared a cash dividend of $0.50 per share on our 8% Series B preferred shares and a cash dividend of $0.46667 per share on our 8% Series C preferred shares. Each dividend will be paid on July 30 to shareholders of record as of July 25 on the Series B and C preferred shares. This is the fifth consecutive cash dividend declared on the Company's Series B preferred shares and the first cash dividend declared on our Series C preferred shares since the respective commencement of trading on the NYSE.

Summing up our presentation on slide 19, as the market outlook is still challenging, we are prepared as a long-term-oriented company. We have been in shipping for more than 50 years. We know this industry and we believe in its fundamentals. We actively monitor our order book and fleets. As a result of our track record and reputation in the industry, we have developed strong long-term relationships with key (inaudible) charterers and banks in Japan, Europe and China. We have a history and a reputation of operating excellence as reflected in our excellent utilization rates and operating expenses. We maintain low financing costs as a result of our [loan] spread and our prudent leverage, always in compliance with our financial covenants.

We actively manage our young shallow [drafted] fleet of 31 drybulk vessels, all of which are (technical difficulty) 2003 onwards. Our substantial charter coverage with established performing customers supports our strong balance sheet and liquidity providing financial flexibility. We remain committed to a prudent dividend policy to reward shareholders through payment of dividends and the assured future expansion and deleveraging. You may find our contact details in slide 20. Thank you for listening and we are now ready to reply to your questions.

(Operator Instructions). Gregory Lewis, Credit Suisse.

Yes, thank you and good afternoon, gentlemen. As we look at the fleet, and you mentioned in the prepared remarks that you are becoming more of a spot operator, whether that is dictated by the market, I guess my first question is related to as I look at some of the vessels, whether they are Panamaxes or Kamsarmaxes or post Panamaxes, as I look at some of these vessels that are on spot contracts, I see a very wide range of pricing for some of these vessels. As an example, I look at some of the post-Panamaxes, which are larger vessels and they are being fixed at sub $7,000 a day where it looks like I see similar vessels being fixed around that same period of time in June, yet they are smaller vessels, yet they are earning a better rate. If you could just provide some insights or some color around what is driving that. Is it the location of the vessel when it is getting fixed or is it the cargo? Just some color around that would be helpful.

Yes, the market is very volatile and sometimes there is a spot of opportunities. Early in the second quarter, we fixed one Panamax, our older ship, by the way (inaudible) we fixed her up I think (inaudible) for one year. The current one-year rate is around $10,000 for Panamaxes. At that time, there was an opportunity to get this rate. The same happens in the spot market where there is a lot of volatility. Sometimes you can fix ships at $5,000, sometimes at $8,000, sometimes shortly to Far East at $13,000 or $14,000. Depends a lot on which week the ships open and where it is open and if there is a spot of opportunity in that location. So sometimes on ships, you expect to do less, you do more and sometimes on better ships that you expect to do better, they are not in a good position or there are many ships open at the same position, you have to fix at lower rates.

And overall, the market underperformed in the second quarter with average (inaudible) Panamax index overall $6,300. So it's rather difficult to make sense of what you fix and what you get on each occasion. But there are opportunities. Even in this market, you get the hotspots as we say.

I like hotspots. My other question is related to the preferreds. Clearly you had some success with those during the second quarter and I guess since those preferreds have been raised, we've actually seen a little bit of softness in asset pricing at least in secondhand vessels. Clearly, you guys prefer newbuilds over secondhand vessels. As we think about the preferred -- the money raised from the preferreds, are we seeing anything interesting from the shipyards that potentially could lead to additional newbuild vessels being placed or any sort of opportunistic acquisitions would be more on the secondhand vessels at this point?

(inaudible) the yards always take time until they are just prices downwards. So for that, we have to wait and they will wait to see how the market develops in the last quarter and then decide if they will lower price again. I don't expect the yards to lower prices any time soon. It is more a secondhand situation, but again it all depends on the freight market. If the freight market changes in September, October, then you will see also second-half prices firm up. They are directly related to what the freight market is doing. As you know, the Company has the liquidity and if there are opportunities, we will seriously consider these opportunities.

Okay, perfect. Hey, guys, thank you very much for the time.

Christian Wetherbee, Citi.

Good afternoon. This is Seth in for Chris. I just had a couple of market-based questions for you guys. As we've seen, rates did appear and I realize this is a seasonally slow period; however, I was wondering are you guys seeing any incremental idling of capacity or -- I know this is more difficult to measure as well, but do you think the current rate environment sort of induces any more incremental order book slippage going forward?

I think that the one good thing of this low freight market in the second quarter was up -- the newbuilding orders stopped as of April. I think everybody started reconsidering its approach. We have some contracts that were at letter of intent stage where they didn't materialize as full contracts. So from that point of view, I think the market cooled down and some of the orders were not finalized. And it's good because it gives some breathing space as the order book in the first quarter was really building up. So one thing, there is not a bad thing without a good thing behind it.

Sure, sure. I definitely recognize that. Then just a general question on rates. To follow up on the earlier set of questions, I think you mentioned maybe the September timeframe is the first opportunity where we could see a bit of a lift up in rates. I am just wondering what's the incremental demand or whatever you think you are going to see that can drive a rate increase.

Look, things have not changed negatively on the supply side. I mean the supply side is under control, like if there was a surprise on the demand side with the bauxite and the nickel ore cargoes into China, with the unwinding of shadow banking in China and many of the cargoes that we have in ports gave us collateral for loans by second-rated banks in China, the government stepped in and helped to break this shadow banking regime. And these cargoes became available to the importers and there was a very slow (inaudible) of new purchases of these cargoes since they were existing in the ports. They have to be consumed first.

This according to our (technical difficulty) affected on an annualized basis demand by around 130 million tonnes, which is equivalent to 3% drop in annualized demand, which was not calculated in anybody's calculations. This was a major factor in the second quarter. We believe as time passes this will sort out and when these cargoes get consumed, more cargoes will start being imported and things in September and onwards should start getting normalized because it is abnormal to have at this time of the year so low spot rate.

Great, that was interesting color. And that is all I had, so I will turn it over.

Does that answer your question, Mr. Wetherbee?

Yes, yes, thanks. That is all I had.

Noah Parquette, Canaccord.

Thank you. A lot of my questions have been answered, but I guess you have an interesting situation now where the physical spot market is pretty bad, but there is still a lot of hope that the market will pick up and we are in a cyclical upturn. Are you seeing anybody -- are you seeing any increase in scrapping because the market is so bad or are people still looking ahead a year expecting things to improve?

Yes, I think also the owners of all ships, they prefer to wait to see what happens in the second half of the year and especially in the last quarter before they decide to scrap the old ships. One good thing is that no ships over 20 years trade and maybe we see even ships 18, 19 years old, but they have to meet new regulations. The owners will be very hesitant to pay the extra million or two to upgrade those vessels. So at the moment, they are waiting. We don't see the scrapping yet, but I mean if the market is not improving substantially in the last quarter of the year, they will send even younger ships than 20 years old to the scrap yard.

Okay, thanks. That is all I have.

Fotis Giannakoulis, Morgan Stanley.

Yes, hi and good afternoon. From your presentation and from what Paul has mentioned earlier, it seems that you have an optimism that the market will turn around at the end of the year. Can you please elaborate a little bit on that and what -- is it going to be the nickel ore trade that is going to drive the market or the coal trade that is going to rebound? And also, about a few months ago, you were talking that potentially the rates for Panamaxes might even reach $20,000. Do you think that this expectation has been adjusted downwards given the weak market and what would be the rate that you think that the Panamaxes will be earning at the end of the year or early next year?

Yes, first of all, I believe that the nickel ore and the bauxite imports into China will normalize in the September onwards, in October, as the cargoes that were kept in the ports will be consumed and they will import more cargoes. Also, we believe the grain season in the US is a record grain crop there and September onwards will help a lot the market, the North Atlantic market, which was underperforming in the second quarter.

South America exports as well we know that is a fraction exported till now with problems in Argentina and the uncertainty the country has with a possible devaluation of their currency and all the grain exporters have been keeping cargoes back and they are waiting to see what happens with their currency before they sell the cargoes. So I think all these things could play very well for recovery in the end of the third quarter and into the fourth quarter.

Now predictions to make -- I mean when you see Q2 averaging $6,300, when the expectation was to average at least $12,000, you cannot really make predictions at this stage, but we definitely believe that, in the fourth quarter, (inaudible) onwards, we will see a reasonable market. Not (technical difficulty) not gentle market we had in the second quarter.

On the other hand, what I would like to add on what Polys said is that the market is what it is and really we will see in the (inaudible) of time, of course, it will reverse. But I mean for our Company, what we are focused is (inaudible) better through (inaudible) so we are focused on lean operations. You may see that we have the lowest (inaudible) operations, the lowest operating expenses (inaudible) G&A. So we can make money much earlier compared to any other Company probably out there. And in addition, we have -- let's say we have not locked all our fleet on (inaudible) time charters for one or two years, which would undermine the earning capability, the future earning capability in case of turn of the market. So I think that we are trying to do our part as much as we can with this hands-on approach, this direct management approach that we have followed all these past years consistently. And at a certain point of time, of course, the market will do whatever it has to do. Thank you.

Thank you, Loukas. One more question and a follow-up on Greg's earlier question about the preferred offerings that you did. If my calculations are correct, you should have more than $200 million of cash in your balance sheet and you mentioned earlier also that there is a possibility to see secondhand prices coming off after this bad quarter. Are there any thoughts of potentially utilizing this excess cash that you have for secondhand acquisitions? And in any case, more generally what was the purpose of this preferred given the fact that you have quite a large number of vessels without any debt?

Look, the Company doesn't want to overleverage and the debt we want to have a controlled debt around 50% level. We don't want to have much more than that. On the other hand, we didn't want to issue shares at this point of time and dilute shareholders. The preferred shares gave us a good opportunity to have excess liquidity in the Company without diluting shareholders. We believe that the Company will make on all its investments of newbuildings of $31 million is the average cost of our Japanese newbuildings. We prefer that we will make over time well over this 8% we are paying to the preferred shareholders and that was a decision that we took on the previous two offerings. And I think the Company is well-placed. When the markets start showing signs of recovery, I believe there will be a small time lag between pickup again of our secondhand prices. The Board will see the opportunities and decide at the time if we should make more investments. I think there is quite a good possibility to do so.

Thank you very much. That's all I had.

(Operator Instructions). As there are no further questions, I will now pass the floor back to Dr. Barmparis for closing remarks.

(technical difficulty) this discussion. I think our Company continues to do what we have said in the past. We are trying always to be focused on our lean operations and to be always a low-cost provider in which case we can make money earlier than the others and of course, the market right now is challenging and we don't know how long it will last. We expect that let's say in the next periods this will turn, but, at this stage, I would like to thank you and looking forward to see you again and discuss with you in our Q3 results. Thank you to all.

And with many thanks to all our speakers today, that does conclude the conference. Thank you for participating. You may now all disconnect. Thank you all very much, gentlemen.