Safe Bulkers Inc (SB) 2017 Q1 法說會逐字稿

Thank you for standing by, ladies and gentlemen. Welcome to the Safe Bulkers conference call to discuss the first-quarter 2017 financial results. 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, included expected vessel acquisitions, and entering into further time charters. Words such as expects, intends, plans, believes, anticipates, hopes, and 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 include known and unknown risks and are based upon a number of assumptions and estimates which are inherently subjected 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 material include, but not are limited (sic), to changes in the demand for dry bulk vessels, competitive factors in the market in which the Company operates, risks associated with the 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 undertaken to release publicly and updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with respect thereto or any changes in events, conditions, or circumstances on which any statement is based.

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 call or any presentation, please contact Capital Link at 212-661-7566. And I must advise you that this conference is being recorded today.

I now pass the floor to Loukas Barmparis. Please go ahead, sir.

Good morning. I am Loukas Barmparis, President of Safe Bulkers. Welcome to our conference call and webcast to discuss the financial results for the first quarter of 2017.

Let's start our presentation with the developments in our industry. In slide 3, we present the Cape and Panamax AVG4TC. Undoubtedly during the first quarter of 2017, we have seen signs of improvement over the charter market compared to historical lows observed back in the first quarter of 2016.

In the second quarter, however, market is correcting to levels which are considered unprofitable. Charter rates for Capes have now reduced to $12,000 per day and for Panamaxes to $7,700 per day.

Asset values as shown in slide 4 have recovered and have not yet been influenced by the present correction of the rates. A 5-year-old Cape is sold at about $33 million compared to the low of $21 million in March 2016 and the 5-year-old Panamax is sold at about $19.9 million compared to $11.1 lows million last year. Asset values still remain lower than their 12-year historical averages, which include also the high values of the peak years of the previous cycle as well as the recent historical lows.

Let's move on to examine the established supply-demand equilibrium. In slide 5, we see the information about the net fleet change in Capes and Panamaxes. Dark blue bars denote deliveries and light blue denotes scrapping, while the number above represents the net increase. We observed in 2017 a marginal net increase, both in the number of Capes and Panamaxes compared to total fleet size.

The existing order book of the past years as shown in slide 6 is substantially adjusted this year, especially for Panamaxes, where most of our fleet operates. Minimal requests for new orders, encouraged by the improved southern market of the first quarter, were frozen due to the charter market correction.

In any event, discuss liquidity and the time lag between the placement of an order until the delivery is clearly the basis for an improved market in 2018. We expect the technological constraints related to new regulations for a ballast water treatment plant and for SOx emissions will also improve the market.

In the next few slides, we show certain information in relation to demand for drybulk services, which is directly related to the global economic development. In slide 7, we present certain data in relation to iron ore trade.

During the whole of 2016, China's iron ore imports grew in conjunction with advances in consumption volume by domestic steel mills. In March 2017, Chinese iron ore imports reached record levels that were 11% higher than the same month in 2016.

The peak in demand has been correlated with commodity prices and eventually with freight rates. Brazil's exports increased during 2016 and miners' new infrastructures set prospects for further increases.

In slide 8, we present the development of coal demand. Chinese coal imports grew strongly during the first quarter of 2017. The pick in demand has been correlated with the commodity prices and eventually with freight rates.

The import substitution in China continues to be supported by Chinese government in an effort to reduce domestic capacity and control local inefficient coal miners. In addition, China realized [heavier gold]. The asset remains a synthetic fuel for electricity production.

Demand for grain, as shown in slide 9, supports historically the dry bulk transportation. China's soybean imports set record high for April, continuing a four month in a row record of imports.

With a record Brazilian soya bean harvest, [real] farmers are holding a back sale of their production with only 51% of 2017 crops sold through the first 4 months of 2017, the lowest ratio of exports to harvested crops since 2010.

The key takeaways are represented in slide 10. Excessive past order book will be exhausted mainly in 2017. Minor additional dry bulk orders have been placed. Stabilization or decrease of dry bulk fleet, general financing constraints remain, which means the market still faces scarce financing. A present correction creates hesitation for the future prospects.

China is a key player in dry bulk transportation through development plans for infrastructure projects and further organization and substitution of Chinese domestic production. The prospects for global growth, which have been enhanced recently, all these factors lead basically to improved market conditions and improving asset value.

Before we go to our CFO Konstantinos Adamopoulos for our quarterly financials, let's highlight certain details of our tender offer concluded in April in slide 11. As market improved in last quarter, our immediate response was to attempt to reduce financial outflows.

[We are seeing] about $27.7 million in face value of preferred B shares, spending $24.9 million of our liquidity, plus issuing 2.2 million of common stock. We expect that the annualized benefit in our cash breakeven is about $160 per day per vessel from the payment of 8% preferred dividends in this preferred B stock, which was withdrawn. The outstanding portion of Series B preferred shares is about $9.5 million.

Konstantinos.

Thank you, Loukas, and good morning to all. Let's see now move in slide 12 with our quarterly financial highlights for the first quarter of 2017 compared to the first quarter of 2016.

Net revenues increased by 35% to $33.3 million from $24.7 million, mainly due to an increase in charter rates. Our time charter equivalent rate per vessel increased by 48% to $9,417 per day from $6,355 per day during the same period in 2016. Daily vessel running expenses decreased by 2% to $3,596 compared to $3,653 for the same period in 2016.

Daily G&A expenses, which include daily management fees payable to our managers and daily costs incurred in relation to our operation as a public company were reduced by 4% to $1,156 for the first quarter of 2017 compared to $1,201 from the same period last year.

We still remain our profit level; however, our adjusted loss per share for the first quarter of 2017 was $0.07, calculated in a weighted average number of 99.3 million shares, reduced as compared to $0.21 during the same period in 2016 calculated on a weighted average number of 83.5 million shares.

In slide 13, we present our quarterly fleet data and average daily indicators compared to the same period last year. Liquidity in a cyclical industry like ours is a key point and I will show you in the next slide what we have achieved.

In slide 14, we focus on our expenses, both OpEx as well as G&A. We managed to reduce the aggregate figure from $4,854 per day in the first quarter of 2016 to $4,752 for the first quarter of 2017. This 2% or about $100 per day reduction represents $1.4 million approximately in annualized savings and about $22.4 million or $0.22 per share in savings compared to the average expense of our peers. Our OpEx includes all items like dry docking and initial supplies.

In slide 15, the light blue bars show that the effect we have achieved by our cost-cutting efforts was sustainable during all four quarters of 2016 and continues in the first quarter of 2017. The dark blue bars represent our TCE and saw the improvement of the market from its lows during early 2016.

At this point, we would like to emphasize that we have positive operational cash flows and we have controlled the financing and investment cash flows. The liquidity we preserve helps us go through the cycle and can be used to reduce financial obligations, as we have demonstrated through our recent exchange offering of Series B preferred shares.

As shown in slide 16, we have only one remaining newbuild in our order book, which is scheduled to be delivered next year, which we have agreed to finance through an issuance of $16.9 million of preferred shares -- we are the only company of this vessel -- to an unrelated investor at a dividend of 2.95% per annum.

In total, we have $31.9 million in outstanding CapEx and we spent only $15 million from our liquidity against that. As of May 12, 2017, following the successful exchange offering of about 75% of our Series B preferred shares, our liquidity was $92.8 million.

Moving on to slide 17, we show information about our quarterly cash flows. For the first quarter of 2017, we achieved positive operating cash flows of $10.2 million as a result of the better market observed and supported by our low operating expenses.

We had negative cash flows for investment activities due to two newbuild vessel deliveries, one of which was shored up on delivery. In relation to financial cash flows, we have entered into a sale and leaseback transaction for one of these newbuilds, which resulted to positive cash flows.

Overall, we believe that the Company has a -- with a liquidity of almost $93 million, with positive cash operations and controlled outflows for investing in financing activities, as we have only one newbuild remaining, is well positioned to take advantage of the improved market conditions even when the shipping market is unsustainable. Our press release present in more detail our financial and operating results.

And we are now open to take questions. Thank you.

(Operator Instructions) Chris Wetherbee, Citigroup.

Wanted to ask about commodity pricing in the market. So you highlighted a couple of charts there, and we have seen iron ore prices come in as well as coal prices come in.

I just wanted to get a sense of how you feel incremental demand as we move towards the second half of 2017 is going to look like for these commodities. Is this something where we would expect to see a pickup at some point or is it really sort of price dependent on the commodity end market? Just trying to get a sense of your view of demand in the second half of 2017.

Look, the demand is expected to be stronger in the second half of 2017. Traditionally as we enter the summer and before the fourth quarter, always demand is picking up in the second half of the year.

We believe that commodity prices corrected from $90 iron ore corrected down to low $50s, but now it's picking up slowly, slowly at $61 per metric tonne. The same we observe in the last few days from the OE price recovering to $53 for the blend from the low level of $45, $46.

So we believe that commodity prices has a big correlation to the freight market, so we need to see higher commodity prices before freight rates pick up again. So we closely monitor these commodity prices. Of course, when the commodity prices fully recover again, there's nobody can know for exact. But we expect to be higher from the current levels as we enter into July and August.

Okay, that's helpful. And then another industry question, just thinking about the situation in Brazil and certainly a devaluation of the currency yesterday. And we'll see where that plays out.

But can you walk us through your thoughts on what maybe the immediate impacts may be from an export perspective? I would guess some commodities, particularly grain, may be more competitive in the global market from a Brazil export perspective. But I'm not sure your view on that as well as the iron ore markets, given the turmoil in that country.

Yes, look, the thing we know for sure is that the crop is higher than the previous season. And at this point is lagging, exports are lagging from next year. And it's very, very characteristic the fact that this time last year we had congestion in South America ports, around 190 ships waiting to load, which creates positive conditions for the market. Whilst this year at the same time this year there's only 90 ships waiting in all South American ports to load. So this clearly shows that the flow of the cargo is not fully developed yet.

It happened in previous years like this, and we've seen in such cases uptick of exports in June and July. So this is going to happen in June and July and we expect to see strong South American season over the summer months and then the export grain season [from years called] starts this to combine together and we have flows from both South America and US Gulf.

In September, we expect this to help -- to be positive for the market. So the volumes are there. Now when the farmers will sell the cargo and when the currencies, they consider it profitable enough to sell their commodities and their margins are at optimal level, this of course they will decide. But at a certain point, the grain will have to flow.

Okay. Okay, that's helpful. I appreciate that. And then if we were to take an assumption of modestly better rates in the back half of the year and think about the cash flow generated by the Company, how much -- can you build cash -- I guess my question is can you build cash in that scenario of modestly better rates in the second half of 2017? Will you be in a net cash positive scenario?

Yes, we have shown that we have a positive cash flow this quarter and previous quarters. So every $1,000 of higher market, our positive cash flow is around $10 million. So it all depends on the market.

What I believe that because we have reduced our operating expenses and we are managing our ships in-house from two locations, one in Greece and one in Cyprus, we manage to keep our expenses under very, very tight control. And this is the beauty of running an in-house or management company and not outsourcing and not outsourcing the operations and the running of the ships.

So I believe that roughly for every $1,000 better market, we will see a surplus of $10 million on an annual basis, I mean, from our operations.

Okay, okay, that's very helpful. Polys, thanks for the time. I appreciate it. -- well crap, that last speaker was the CEO.

Thank you.

(Operator Instructions) Magnus Fyhr, Seaport Global.

Just had a question on your chartering strategy here going forward. It seemed like you locked in quite a few vessels here at attractive rates into late 2017, early 2018, with rates being a little softer here going into the summer months and you have vessels coming up for renewal. What is your take going forward on those vessels coming up for renewal here during the summer period?

Yes, it all depends on the freight market. We were happy not to lock in some 1-year rates of above 10,000 in March when the market was performing. We are refraining at the moment to continue because there is a correction in the spot market by around 40%, so we are holding back.

I believe that in certainly late June or July we'll see better market and we will continue this policy when we have market back up to $11,000 or $12,000 a day. Definitely above that level is worth locking some charters for one year. It is expecting of our belief is that the fourth quarter of the year will be strong and even stronger than these numbers.

So I think that we will continue this policy. Of course, we have put a pause now for this month and May is not a good month, not a good month in the freight market. But I believe that we will have plenty of opportunity during the third quarter and especially the fourth quarter.

[Except the fact] that we are happy to look [a certain sadness] for longer periods, which provide of course for visible cash flows. Because all these charters that you may see, I mean in our lease, are above our cash breakeven point.

And that's why also we have a positive figure from cash from operations. And this is a very important comparative factor with other companies that we can start producing cash in the course of -- in the future when the market recovers further. We will be the first to be in the profitable region.

Yes, you have been very good in reducing your operating cost. Is there much more you can do there? You took it down $100 per day over the last 12 months. Is there more to do there or is this a good running level going forward?

It is not only that. Of course, the operating expenses were reduced and we have done a very good job basically on the experience that has been accumulated over so many years in shipping. And with certain times, some [military] people would like to penalize, but we are very happy to have this low operating expenses.

But on the other hand, we are working. And you may see the slide 11, where we did something about another important fact of our cash outflows, which is the finance of cash outflows. So our idea, as we were able to accumulate some cash from operations, we were happy to extend their offer, which basically reduces our breakeven point, and cash breakeven point, of course by, 160.

So [aside], I mean, you may -- we will continue to try to tackle such parts of our outflows. I don't believe in terms of OpEx you can do more, but in terms of financial outflows, we may be able to do something more.

Thank you. Just one last question I guess on the S&P market. I mean, there's been a lot of activity here in the last year; asset values have moved up. How do you guys view the market currently? Are there still opportunities there and how close are we to start seeing newbuild orders coming on? What are the yards telling you guys?

Yes, look, there will always be ships in the secondhand market to buy. We can talk about what our Company's planning to do, not what other companies will do. We strongly believe that newbuildings should be added in the fleet only at a responsible pace and when these ships are really required.

At this moment, the newbuilding ships are not required because the market is not yet at a healthy position. And when this healthy position comes, hopefully in 2018, we believe that the public companies at least should not rush into newbuildings until they have recovered the losses they have made in the previous years. That would be the healthy situation.

You should not place more orders until you recover the loss, and this is what we plan to do. If we want to buy the older secondhand ship, we can always go and buy the older modern secondhand ship. But newbuildings I think is not -- neither for this year, not for next year.

Okay, I hope everybody is as prudent as you and then we will have a good market next year.

We cannot control this, I said.

Fotis Giannakoulis, Morgan Stanley.

I want to ask you about the recent damage that we saw on a VLOC of Polaris. How does the safety of the very large ore carriers are viewed by the market after this incident? And what are the implications in terms of supply of tonnage and the impact on charter rates, both for Capes and Panamaxes?

Yes, these ships I think they shouldn't have been in the market in the first place. I think it was conversion from VLCCs into ore carriers done at the peak market of 2006 and 2007. I think this idea has problems because no matter how much reinforcement you are doing on the ships, when the ship is constructed for another purpose and then converted to another purpose, always there will be problems.

Of course, a good management should be able to deal with those problems. Sometimes, though, we see that accident can be tremendous. And as far as I am concerned, I believe that this ship that had the accident being 24 years old shouldn't have really been in the service at that point of her age, let alone after conversion.

So I believe that slowly these VLOCs will have to be phased out and will be replaced, of course, by the new VLOCs Valemax, the Valemax that Vale has ordered for 2019 or 2020.

I believe the fact that this company in Korea puts more into focus the situation, because there is a big public outcry for the people lost. And I think that we would see a faster outpace -- outpacing of these VLOCs, i.e., before the Valemaxes come into the market in 2019 or 2020. So this is only positive for the market and is good for safety in general. I think this ship shouldn't have been in the water after 20 years old.

Polys, talking about safety and the scrutiny that operations have to face, can you give us an update on what is happening in terms of the new regulations, the ballast water? How are you dealing with this issue? How many vessels do you have to install the ballast water treatment system and by when? And what kind of implications this has to the market?

We have done a schedule here and we are monitoring very carefully. We all know that a number of -- basically all the vessels and many companies have taken exceptions for the first drydockings, which are due in 2017 and most part of 2018 basically because only three systems have been approved until now and (technical difficulty) quite substantial questions about.

What we believe and thus we expand towards 2019, we believe that the ballast water systems would be installed in all ships for drydockings in 2019 and onwards. So we have, let's say, an implementation phase from 2019 to, say, 2022, 2023. I don't think that after 2018 and 2019 there will be additional exemptions because more systems will be approved by US custom.

Now, what would be the implication of such systems? Basically cost? They have a range of about, say -- the [reaping] is about $0.5 million -- $0.5 million -- $400,000, $600,000 depending on the technology that we are using.

I think that -- I don't expect that this will go further down because there will be substantial demand and there will be -- and this will push the price or will maintain the price.

Maybe the implications are twofold. So for example, for a vessel that will implement such systems, it may need 15 to 30 days in drydocks to install such equipment. On the other hand, for vessels which are closer to their 20th anniversary, and sometimes if you have, let's say, a new vessel from a relatively new shipyard, like the Chinese shipyards, which started building many ships in 2005, 2006, 2007, 2008, 2009, you may find out that there would be a question whether you want to install in all the ships or poor technology ships this equipment.

The second point which comes is what happens in 2020. Basically we have the implementation of subcirculation in 2020. This means that ships may be forced to install either sooner or later either scrubbers or to use MGO.

At this stage, ships which are relatively young and basically better designed, like Japanese ships or [echo] ships in 2021, 2022, we gain an advantage compared to, let's say, heavy Chinese or Korean ships. And I think this will be another road.

So overall, our picture is the following. We've seen, let's say, initially as we move towards the end of 2017 and we see the market being pulled somehow being stabilized and pulled somehow higher from the demand side. In 2018, then we have the influence of the supply side. The following years we will have also the influence of technical constraints. So there are certain parameters that that can found a new shipping cycle after 2018.

Thank you very much for this very detailed response. I want to ask about what Polys mentioned earlier, his encouragements towards his fellow shipowners to buy secondhand vessels.

I know that the Company has been very skeptical in buying in the past secondhand vessels. I think that a couple years ago there were a few acquisitions, but relatively to the size of the fleet, very few of the vessels that you own come from secondhand purchases.

Are you willing right now to come back to the secondhand market in order to expand your fleet? Is newbuildings out of question at this point? And also if you can give us some color of how the S&P market is right now. I remember in the previous call you were mentioning that there are a lot of owners inspecting vessels at the same time. Is this the same situation right now?

Yes, my belief is that as the market improves, the Company may focus on secondhand acquisitions. Right now, since we have one more newbuilding to be delivered in 2018, we are not in a rush to do something more. Definitely, as I said before, we don't plan to go into newbuildings and 2017 or 2018 simply because we want to go back into profits and then consider newbuildings.

So I believe the secondhand prices are still very attractive. It's at the same levels like they were in the end of 2012. When we consider that market at low of 20-year cycle and if we exclude the extreme prices of first quarter of 2016, I think that secondhand prices are still attractive where they stand today.

Of course, companies should also consider its liquidity position and be conservative on the approach. So as the liquidity position will improve, given the more positive cash from operations. And as we turn slowly into a better market, yes, the most probable is for our Company to focus on some selective acquisition of modern secondhand tonnage.

Polys, compared to a year ago, your balance, it looks significantly stronger. If I calculate the loan to value ratio, it is around 60% right now. You mentioned earlier about profitability -- returning to profitability is an important milestone for you. At what point shall we expect a very [term] into a dividend policy, given the fact that you also do not plan to make any major acquisitions in the near term?

The dividend is very far away at this point. We don't see profits and we don't see that we start looking in [multi double] charters above the breakeven level. We cannot planning for dividend. Dividend must be supported by profits.

So as soon as we see two or three profitable quarters, and if this is the decision of the Board to reward shareholders -- well, the Company that in the past we paid dividends between 2008 and 2015 uninterrupted despite the Lehman shock.

Now, we stopped in the, I think, in the third or fourth quarter of 2015 when we saw extreme conditions in the freight market. So as soon as the Company turns profitable, one of the ideas that will be put on the table is the reinstatement of some dividend, but I think this is not this year's discussion.

Okay, but let me understand. Will you expect to see two or three quarters of profitability before? Or the moment that we will see a profit and you charter your vessels above $11,500 which is your breakeven, your EPS breakeven, we will be able to expect a dividend payment?

No, no, we have to see a few quarters, because it has to be sustainable. The dividend you cannot pay it for two quarters and then stop again. You have to see a sustainable recovery in the market, two or three profitable quarters, and then the Board will sit down and consider that the extra liquidity could be returned to the shareholders. But I think this is not this year's discussion.

Thank you very much for your answers.

There are no further questions at this time, sir. Please do continue. Gentlemen, there are no further questions. Please do continue.

So thank you very much for attending this conference call. We're looking forward to discuss again with you in the financial results of our next quarter. Thank you to all and have a nice day.

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