Safe Bulkers Inc (SB) 2016 Q3 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers conference call to discuss the third-quarter 2016 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 any 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.

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 strategy, including 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 the 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 now I pass the floor to Dr. Barmparis. Please go ahead, sir.

Good morning. I'm Loukas Barmparis, President of Safe Bulkers. Welcome to our conference call and webcast to discuss the financial results for the third quarter of 2016.

Let's start our presentation with some developments in our industry. The tougher market has somewhat recovered since the beginning of the year and has results shown in slide 3: $7,200 per day for Panamax and $10,500 per day for Capes, while the year to date average is substantially lower: $4,700 for Panamax and $5,200 for Capes.

Asset values, as shown in slide 4, have also somewhat recovered. A five-year-old Cape costs now about $23 million compared to the low of $21 million earlier this year. And the five-year-old Panamax is now at about $14 million compared to $11.1 million low earlier this year. However, they remain close to the historical lows.

In slide 5, we see information about the net fleet change in Capes and Panamaxes. It seems that due to scrapping, a balance is gradually being achieved. The important point in slide 6 is that the excessive order book of the past year is substantially reduced after 2017. Some delays -- delayed deliveries from past order book will be delivered in 2018 and 2019, but there are no new orders.

As a result of -- one, scrapping effect of all the vessels whenever the market is very low; two, the additional effect of installation of ballast water treatment plant in all vessels after 2017 -- and please know that about 20% of the Panamax fleet is more than 15 years old and should install the ballast water treatment plant at least when they reach their fourth special survey within the next five years. And three, [it's in] our financing constraints for new orders. So we believe that the order book is not expected to grow. Achieving a stable fleet size -- the equation for a potential recovery is related directly to the global development, which dictates the demand for drybulk services.

In the next few slides, we show certain information in relation to demand. In slide 7, we see certain important information in relation to iron ore trade. China is doing better than expected earlier in the year. Iron ore substitution takes place, and iron ore imports increased by 7% in the nine months of 2016 versus 2015. Also imports from Brazil increased by 9% compared to 2% from Australia, which [improves] the ton-mile effect.

In slide 8, we see information in relation to grain demand. Grain supports historically the drybulk transportation demand and, with seasonality, boosts in certain periods (technical difficulty)

In slide 9, we see information on bulk coal trade. (technical difficulty) increased by 18% versus the same period in 2015 due to import substitution. India's development is related to coal and has supported the demand for coal transportation the last years.

There are also reports about emerging Asian nations that may also play a greater role in the coal market. We will spend some time to show in slide 10 some additional information about China, which has a very extensive (technical difficulty) development plan of several periods of R&D (technical difficulty)

Coal has been and is clearly the preferred energy fuel. 74% of electricity production is coal-derived. Electricity production, a good indicator for China's economy, is up by 8% the nine months of 2016 versus the same period of 2015.

In the middle figure, we see that the coal output in China was reduced by 12% as the operating days in mines were reduced from 330 to 276. It's clear that the Chinese coal was substituted by the coal imports. In the other figure we see (technical difficulty) large number of mines, and we need to know that China's imports account from only 5% of coal consumption.

In slide 11 we see growth forecast of the major bulk commodities. We summarize all this information in slide 12, noting that excessive past order book is exhausted by 2017. No additional drybulk orders take place.

Financial squeeze in shipowners and yachts, technological constraints in relation to ballast water treatment plant, stabilization or decrease of drybulk fleet, seaborne trade growth forecasts. China, a key player in drybulk transportation. Substitution of Chinese local production of iron ore and coal. Chinese infrastructure projects. India, emerging Asian nations may provide a growing market for coal imports. As a result, any spike in demand will boost charter market up to 2017.

Let's see now in slide 15 some information about our Company and its financial performance the last quarter. Our time charter equivalent rate was $7,637 for the third quarter of 2016 as compared to $8,843 for the same period last year.

Our operating expenses were $3,617 as compared to $4,550 last year. Our G&A expenses were stable as compared to last year.

We operated an average of 36.97 vessels for the third quarter of 2016 as compared to 35.98 vessels for the same period last year. As a result of weakened charter market experience, our net revenues declined the third quarter of 2016 to $27.1 million from our $33.5 million during the same period in 2015.

Our net loss for the third quarter of 2016 was $24.5 million as compared to $7.5 million during the same period in 2015. Of course, this includes nontax impairment loss for the two newbuilds (inaudible). Our adjusted net loss for the third quarter of 2016 was $9 million, up from $6.3 million during the same period in 2015.

Loss per share and adjusted loss per share for the third quarter of 2016 were $0.34 and $0.15, respectively, as compared to loss per share of $0.15 and adjusted loss per share of $0.12 during the same period in 2015. Adjusted loss per share remained stable compared to the previous quarters at $0.15, and matching (inaudible) compared to the worst Q1 quarter of $0.21.

Liquidity in a cyclical industry like ours is a key point, and we will show in the next slide what we have achieved. In slide 14 we focus on our expense, both OpEx and G&A, including everything -- drydocking and operational supplies. We managed to reduce the aggregate figure from $5,608 per day for the first nine months of 2015 to $4,865 for the first nine months of 2016. This represents $10 million annualized savings compared to our performance of the last year and about $22.8 million or $0.27 per share compared to the average expenses for both years.

In slide 15, we show that the effect we have achieved by our cost-cutting effort was sustainable during all three quarters of 2016. For us, it's important to be able to demonstrate that we have positive operational cash flow.

In slide 16, we have shown again the profile of loan repayment, as is scheduled earlier this year before Hanjin bankruptcy, when additional difficulties will be imposed by the banks and by ECB controls. This quarter, we wanted to (inaudible) the capital expenditure requirements. We did one resale and one novation of past more expensive contracts in order to preserve liquidity. This was not done in the open market where prices are subdued, but it was based on highest valuations received by the special committee of our Board of Directors, supported by an independent counsel. Two valuations were received from two independent brokers, and the highest was selected. The end result was that we managed to avoid $48.6 million of CapEx, about half, and avoid additional indebtedness.

Of course, our CEO has waived management fees for these transactions. The liquidity we preserve can be used more wisely at the beginning of the next shipping cycle. We are now left with only two newbuilds in our order book. The first, which is (technical difficulty) so as shown in slide 17, $24.8 million sale and leaseback financing. In 2017, we need to (technical difficulty) CapEx from our liquidity.

In 2018, we have the second newbuild delivery. We have already agreed the issuance of $16.9 million, a (technical difficulty) dividend, preferred equity financing. So we need to spend from our liquidity only $5.5 million. In total for both years, we have a $50.5 million CapEx, and we need to spend only $8.8 million from our liquidity.

As of October 2016 -- October 26, our (technical difficulty) liquidity was $92 million. The last slide, on 2018, we show information about our nine-month period 2016 cash flows. Although lower than same period last year, we had positive cash flow $6.8 million from operations for the first nine months of 2016.

We may be the only Company among our peers in the lowest part of the shipping cycle to have positive operating cash flows, covering all expenditures and interest. We had positive cash flows from investment activities due to all of the actions we did since the beginning of the year in relation to newbuild contracts and the vessel sales.

In relation to financing cash flows, we have returned the money back to reduce our short-term debt, as agreed during negotiations for deferring principal payments and (technical difficulty)

As a result, our Company, with a liquidity of $92 million as of October 26, 2016, can be present and strong in the next shipping cycle, wherever it starts. Our press release presents in more detail how our financial (technical difficulty) which you may as well read. We wish right now to thank you very much about this presentation and take your questions.

Thank you very much.

(Operator Instructions) Chris Wetherbee, Citi.

Wanted to ask first about some of the vessels that you -- the newbuilding vessels that you no longer are contracted for. When we think about a cycle -- I guess I just wanted to get a sense of: are these vessels that we think specifically could come back at some point?

Obviously, you guys have done, I think, a good job over the last year or so adjusting the debt schedule, the CapEx schedule. When we think about these ships and to the extent that, in the next several years, we see the beginnings of a potential cycle, are these the kind of ships that would be first in line potentially to come back to the fleet? I just want to get a rough sense of sort of the related nature of -- Polys, I think it's your Company that owns these now (technical difficulty) how that might work going forward.

Yes. To reply to this question, you know, when the new cycle will start, it will be easy to take decisions to reinvest surplus liquidity, most likely on young ships, like up to five years old.

At this point of time, we have to preserve liquidity, because -- despite we believe a new cycle could start in 2018, there's no guarantee. So at this point, we have to preserve Company's liquidity. And when the new cycle starts, of course we have this intent to reinvest in reasonable-priced assets -- not necessarily resales, but up to five years old.

Okay, okay. And with regards to the last two newbuilds, do you think it makes sense to hold onto these, or should we maybe consider the potential that these could also be either sold or canceled out? I guess I'm just trying to get a sense of whether it makes sense to hold any newbuild exposure as it stands for capital exposure going forward over the course of the next year and a half or so, just given where rates are?

The one -- the 2017 -- one is already agreed in a sale and leaseback transaction. So it's like it has been sold, with the Company right to have a purchase option on it after year two.

And the other one in 2018, already we have an investor to participate 50% in the equity of that ship. So it's not planning to have any debt on that vessel. So it's a good assumption to say that these two ships will be kept in the fleet. This is the planning as of now.

Any prospects for turns in the time charter or debts in the time charter market? Obviously, where rates are, we're not expecting you guys to lock in for extended periods of extraordinarily low rates. But what is the dynamic with chartering in the market as it stands today? Are we seeing any signs of life? Any signs of interest there? Just kind of curious to see how that's playing out.

Yes, look, well, the last [structure] we have done -- the last 20, 30 days in the spot market, they all start with a 9. So despite the BPIs of 7300, our fleet being more modern (inaudible) and some of them bigger them Panamaxes -- like post-Panamax or Kamsarmaxes, we are receiving figures in the 9s in the spot market. Between 9 and high 9s. So this is a good -- it's a good sign.

On the other hand, we are not seeing many fixtures on periods 6 to 12 months, simply because charterers, they are holding back. And they are talking very low levels, still in the 7s for one-year periods. We feel this is a bit short and is not to Company's level. We prefer to get the extra revenue and wait a little bit longer before we start committing ships to 6 or 12 months period. I think that the majority of good charterers are holding back still at the moment. I think in November, we should start seeing things developing on that front.

Okay, okay, that's helpful. I appreciate that. And then last question: just kind of curious -- you show the OpEx and G&A numbers, and they are certainly down through the first nine months on a year-over-year basis.

I look at the G&A side of it, and it looks like you maybe have about 4% inflation in those numbers on a nine-month basis. Can you give us some sense of maybe how -- what is driving the inflation in that number? And is there ability to get that piece under control, too? I know it's the smaller of the two piece, but it looks like you are on target for about a $2 million increase on G&A.

Obviously, with cash flow constrained, I guess every dollar counts. Just kind of give a sense of what is driving the 4% inflation in that number.

Yes, look. It's a good question. We were wondering the same.

I guess at difficult times, you have to employ more fees with auditors, lawyers, all these people. There is more work being done in the office. And it's a small increase -- you know, I mean, [$40]. Our main focus is within this $3,600 or $3,700 of running expenses to include all our drydocking costs and all our other expenses of running the ships. And the Company is fully focused on keeping this number, because it's a never-ever-ending work to manage to keep this number over a period of time and not just two or three quarters.

So the other -- the 4% is things associated with, I guess, with running the various things going on. You've seen sale and leaseback transactions. You've seen other things, like preferred equity deals. All this involve a lot of people and a lot of bills coming in on that front.

Okay, so is it fair to say that maybe if we go through a period where you kind of have the fleet and the newbuild where you need them; you kind of have the financing laid out for what you need going forward, that maybe that number could come in a little bit? Is that the way to think about it?

It should be, and the Company fights for every dollar. So, you know, we are the last ones to pay big bills without the hard negotiating.

Yes, no, that's fair. You guys have a good track record of that historically. All right, guys. Well, thank you very much for your time. I appreciate it.

Magnus Fyhr, Seaport Global.

Just had a quick question on the chartering strategy going forward. You have about 28% locked up for 2017. How do you think about that going forward? And what should we expect kind of on mix once we get into next year?

Look, we will start shifting into a little bit of period fixing if rates pick up on the period fixing. If there is a $2,000 gap between the spot market and the period market, we still prefer to work the spot market -- because, you know, it's a fixer after fixer. You are governing the revenue.

So we need to see rates above $8,000 on period fixtures to start locking in period fixtures. I think at the moment, only second-rated charter is up -- they have to pay the extra dollar.

The good charterers, they are still holding for the [bit] lower numbers, which -- I think it's -- the Company should not be fixing those lower numbers yet. But I think maybe things will start moving in November on the period front.

And then most of the ships are around $6,000 to $8,000 a day. Anything -- I saw the Kypros Sky and the Venus Heritage were $12,000 and $10,000, respectively. Were these signed recently? Or can you provide some color on those two fixtures?

These are mostly ships that were positioned in the Atlantic, and this is their trip out, which was in the higher figures. So it's being done on the front-haul basis. That's why they are higher than the others.

As I tell you right now, we are fixing ships in the Pacific in a round voyage basis in the 9s. So this is a good sign, because that was around 7, 7.5 about a month ago. So there is an improvement on the spot market. The Company is outperforming the BPI, which are $7,300, because the ships are a little bit larger than Panamaxes and the eco consumption in the modern fleet. So if you see higher numbers, it means they are mostly on front-haul trips. That's why they are at $10,000 or $12,000.

Okay, thanks. And all -- lastly, just in your presentation, you mentioned the coal market has surprised somewhat over the last couple of months. Do you see any changes now? I think there's talks about restarting some of these mines that have been phased out, which could reverse, I guess, the coal imports. You guys see any signs there yet, or is it too early?

We don't see signs, but it should happen, because when the coal reaches $100 per ton now, you should expect that this will stop. But it will take time.

Mines, and they are -- that close to reopen. The coal to take over from imports, it will take some time. But we all follow the commodity price, and then out of it, we understand what is going to happen with the movement of coal. The more the commodity rises, the more likely it is that certain mines will start reproducing.

But for the time being, it looks like there is a decent coal movement -- not only from China, which is increasing, but also in India and Southeast Asia. So at least we -- it's helping a lot the Panamax market.

Yes. And do you think -- talking about India, do you think they are -- I guess the government has made some noise there about phasing out imports? I guess -- is that something you would expect here, or do you see any other signs in the market to the contrary?

Look, India -- I think the next five years, it will be big on coal imports. I don't think -- I mean, certain decisions make time in India to be implemented. And it's a vast country, and the infrastructure is not as great as in China. So it will take time.

I think India is a very, very important market for Panamax and post-Panamaxes, and I don't see their coal imports being reduced in the next five years. On the contrary, I see a small increase in their imports in the next five years.

Okay. All right, thanks a lot.

Fotis Giannakoulis, Morgan Stanley.

(technical difficulty) about the coal trade, and you indicated on slide 10 the decline of domestic production and the closure of a number of Chinese coal mines. Putting aside the potential effort for the next few months of China to bring the prices down, where do you expect that the coal imports can grow as a result of this closure of mines, say, over the next five years from the 160 million tons that they are today?

Look, we cannot be specific with numbers. We always -- the data always surprises us. So we cannot be -- we cannot have a prediction of where the imports will be, where they will reach. So I think the higher the commodity goes, the more it's expected to see that there is -- will be more domestic production again.

On the other hand, we have to remember that the imports of China of coal is only a very, very small percentage of what they actually consume. And again, we don't know how the central government will play it in the future. So it's very difficult to make predictions on what will be the imports of China in coal.

The important thing for this year is that China depends greatly on coal, and 74% -- about 74% of the production of electricity comes from coal, and only 5% is imported. So whatever happens here or there, I think the overall trade to China will continue to be strong in the next -- the following years.

But I want to follow up a little bit on that and ask you: if coal is the bigger wildcard in -- from a drybulk market in your view, how important is going to be the steel trade -- the steel production in China in light of other imports? Where do you see these imports growing?

And if the recovery comes, and the stronger demand for drybulk vessels comes, is it more dependent on the decline of coal production and higher imports? Or do you think that there is further room for iron ore imports to increase, driven by the increasing steel production?

Look, the iron ore is very important, because this is what will keep the big ships up. In order for Panamaxes and post-Panamaxes to enjoy a decent market, we definitely need Capesize market to be higher.

I don't think that we can -- I mean, we can -- we wouldn't expect iron ore imports into China to be reducing in the next couple of years. But on the other hand, I think that what will drive the market -- it will be the balancing between supply and demand that is well known to most of us, at least on numbers. It's going to happen sometime in 2018.

So, I mean, when we get rid of the last year of the order book, which is 2017, I think that will be the most critical, and not if China imports $20 million more or less of iron ore in the year. I still believe they will be importing around the same number of 1 million tons in 2017, like in 2016, and for the year following.

But I think that the market will benefit because of a lack of any new ships entering the market after 2018 -- coupled, of course, with the aging of the fleet, which means that certain ships will be going to the scrap yard. So -- and the implementation of all these new regulations that we will read about.

So to be honest with you, the iron ore import is (technical difficulty), and we don't need a great movement over and above the current levels to see a better market. If we keep steady, and if we keep at the same numbers, and so long the order book stays flat, this will dictate the market.

And one last question about the demolition activity. We have seen that scrapping has significantly declined with the improvement of charter rates. If -- but based on their classical numbers, the last four months is a quarter of what it was the previous four months.

How do you see scrapping developing? And then also, if you can comment on the situation of the lending market? If you see more pressure from lenders to the weaker shipowners, that could potentially result in higher scrapping?

Look, scrapping, of course, has slowed down in the summer month because of the monsoon season, so it was irrelevant of the freight market. But after September, that you will expect scrapping in a bad market to be resumed.

This was not happening because we have been increased -- seeing increasing levels on the Panamaxes, from $5,000 to $7,000, $8,000 a day; and even more on the Capesizes, to $12,000, $14,000 a day on the spot market. So everyone is holding back on their ships to work a few good quarters and postpone the scrapping to a later date.

But of course the fleet is aging, and you cannot play with time. And even if you have an old ship, and you can keep it for another six months, there will come a point of time that you will need to scrap here.

Now, regarding -- the second part of the question was on the --?

On the banks and the lending activities, and the --.

The lending, yes. On the banks, the situation is getting tighter every quarter. We see banks are more skeptical. They are under test by the European Central Bank.

And it's not only the weaker owners and the smaller owners who will have the problem -- which will have the problem; also, the bigger companies have less options these days as far as financing its concerned, simply because banks have lost money from shipping in the last year or so. And they have many nonperforming [set-offs], like containerships, and other set-offs hitting them at the same time.

So I expect things to get tighter on the lending. And this can only be good on the long-term for the prosperity of the market, but there will not be speculative ordering should the market keeps improving.

So this is a bad thing initially, but a good thing in the end. So I think it's getting tighter -- of course, as we've been saying the last year or so. But I think going forward the next three or four quarters, we will see a bigger restriction by banks and less appetite to lend money.

Do you see banks taking more action? Because we haven't seen arrests of vessels or forced sales, at least not in public, at this point. Do you think there is a risk of a wider push from the banks towards the weaker owners that would result in mass sales?

Look, there cannot be a massive action, but there will be some action. On the other hand, as the market is slightly improving, banks are holding back, and they are not taking immediate actions in that front as of this moment.

But I think overall there will be selectively some action. If, on the other side, there is no signs of performance or signs of operational -- lack of ability to cooperate, the banks will start moving on to certain loans. But I think that the banks in general are under more scrutiny. And this -- in the long run, it's good for the market.

Thank you very much, Polys.

Amit Mehrotra, Deutsche Bank.

There seems to be no answer. (Operator Instructions) There seems to be no further questions. Please continue.

So thank you very much for attending this presentation. And we would like to thank you, and looking forward to discuss again with you in our next quarter results presentation. Thank you to all.

That does conclude our conference for today. Thank you for participating. You may all disconnect.