Safe Bulkers Inc (SB) 2019 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 2019 financial results.

Today we have with us from Safe Bulkers Chairman and Chief Executive Officer, Mr. Polys Hajioannou; President, Dr. Loukas Barmparis, Chief Financial Officer, Mr. Konstantinos Adamopoulos; and Chief Operating Officer, Ioannis Foteinos. (Operator Instructions) I must advise you that this conference is being recorded today.

Forward-looking statements. 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 expected, intentions, 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 these 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 obligation 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.

Welcome to our conference call and webcast to discuss the financial results for the third quarter 2019. In third quarter 2019, we ended with charters of [higher age than] in the first half of 2019. As I said, we had a profitable quarter, despite the downtime of several vessels due to Star Bulk fleet. We remain focused in implementing our environmental investments since installing scrubbers approximately half of our fleet and completing a time cleaning in the other half in the anticipation of the declaration of the IMO for the sulfur cap implementation in 2020.

Let's move into analyzing the market conditions. In Slide 4, we present the performance of Cape and Panamax [sales rates] as compared to same period of 2018. Despite the negative start of the year, the bulk market recovered during the third quarter of 2019. Reaching the highest level since 2015. Capesize reached the USD 38,000; and Panamax $18,000. But as the Capes are trading at above $23,700 and Panamax at about $14,200. Trade war developments are still on, but mainly main concerns have been East.

Turning to Slide 5, we present the Chinese [super] for the major bulk commodities. As of now, in annualized terms, Iron ore imports in 2019 are 1.6% lower in comparison to 2018. This is mainly due to the disruption of the trade from Brazil. However, after exemption of Brazilian exports in Q3, the imported volumes in annualized terms summed by 14% in Q3 in comparison to first half of this year.

Chinese coal imports were robust throughout 2019. In annualized terms, increased by 19% as compared to last year. Specifically for the third quarter, coal imports in annualized terms increased by the starting 25% as compared to first half of 2019.

Chinese grain import reflects precisely the start of the U.S.-China trade tension. Year-on-year, on annualized terms, there is a drop of about 1.7%, mainly because of first half 2019 disruption. Positive developments in trade war led to resumption of grain purchases.

As shown on the bottom-left graph, during Q3, the imports jumped by 25% in annualized sales as compared with the first half of the year. Similar positive pattern is evidenced in the remaining 3 major bulk commodities, which had a robust increase in imports during Q3. We are monitoring closely trade war developments.

Turning to Slide 6 we present on the top graph, the outcome of the Panamax and post-Panamax fleet. In terms of future orders and on the bottom graph, raising of the fleet. The order book for 2020 is about 157 vessels. It's approximately 6% of existing fleet, with the following year's remains marginal. Compared to the order book of the existing fleet, we know that more than 240 vessels are over 20 years old, and another 603 vessels are in the range of 15 to 20 years of age.

Increased CapEx for compliance with Ballast Water Treatment System and IMO 2020 regulations as well as increased technical difficulties on all those ships, we disagreed that elements in [the tethering] and scrubbing of older vessels. This may eventually come to balance the order book or even tighten future supply of vessels.

On Slide 7, we present the value of the 5-year road to Panamax as compared with the performance of the chartering market. Blue solid line denotes Panamax AVG4TC index in USD and reflects market conditions as per Baltic Exchange. The dotted blue line denotes the 90 days moving average of the Panamax AVG4TC index in USD. Red line denotes the Baltic Exchange Sale and Purchase Assessment Index, the BSPA index in USD and reflects the 5-year secondhand asset prices. Asset values are correlated with charter market. There is a second pattern of constant differential between BSPA and AVG4TC during the past periods. The restoration of this may gradually push asset values higher.

Turning to Slide 8. In the context of our environmental social responsibility policies, we are undertaking environmental investments mainly by retrofitting scrubbers in 20 vessels and ballast water treatment systems in 38 vessels in total. Ballast Water Treatment Systems and IMO 2020 regulations require substantial investment and advanced technical and operational capabilities. Until the end of the third quarter, we had invested $35.5 million. (inaudible) of course regarding our other investments is expected to be in the region of $70 million in total. Until the end of October, we will have retrofitted 9 scrubbers and 18 Ballast Water Treatment Systems. By the year-end, 6 more scrubbers will be installed, bringing the total number of scrubbers to 15.

In the second table, we are presenting also the expected downtime in days for Q4 2019 and Q1 2020, in order to assist analysts with their future estimations.

In the next 2 slides, we present a few market data about 11 scrubbers and price differential for Q1. On Slide 9, we present the developments indication for post coming IMO 2020 regulation. According to CNBGL, the number of scrubber-fitted vessels has increased over time. But the forecast is that 36% of Capes and 16% of Panamax fleet will be scrubber-fitted by 2020. About 80% of scrubber-fitted vessels will be open loop. On the bottom graph, we present the trend of scrubber-fitted vessels in all segments including drybulk. As it is shown by rate of 2019, about 3,023 vessels will be scrubber-fitted and by 2020 the forecast bring another 3,000 in 2021. It is estimated 20% of will be preserved with the current update in 2020, across all segments. On Slide 10, we present information about fuel price. As we have already discussed, our strategy is to be in the forefront of environmental development and maintain our competitiveness. In this respect, we will comply fully with the regulations by installing scrubbers in about 50% of our fleet, mainly in vessels with relatively heavier trip assumptions. And by giving compliance (inaudible). Safe Bulkers will improve its competitiveness in 2020, as vessels with scrubbers will capture the price differential between [heavy full lorry], while for our remaining fleet the [draft for huge compliance fuel] 11 ships are ecoships. On Slide 11, we present information about scrubber economics.

Today, the trading futures is about 242. If we assume a minor consumption about $6,500 for a medium-sized vessel, the benefit will be about $1.6 million [in 2020 than we have today.] We expect the benefits for Safe Bulkers will exceed $30 million for 2020 for an investment in the range of $50 million.

Concluding on Slide 12, Let's summarize the key takeaways. Safe Bulkers is fully prepared for the new environment of IMO 2020. The company is expected to have 15 vessels in operation with scrubbers by the end of 2019. As more vessels will be added to the fleet in the first quarter of 2020, as the company opted for a short delay [foreign entropies] to take advantage from the present strong market conditions. The remaining fleet is completing the time cleaning and it is ready for compliance fuel operations. Safe Bulker's fleet being at the forefront of environmental investments and with actions that improve competitiveness is ready for 2020, a year that we expect a relatively strong market for political reasons, ease of trade war, completion of Chinese 5-year program, where supply of Vessels [drive marked] demand for drybulk and further supply of past years would be net off with expected Scrapping. Now our Chief Financial Officer, Konstantinos Adamopoulos, will present our quarterly financials.

Thank you, Loukas. And good morning, everyone. In Slide 14, we present our quarterly time charter equivalent, which stood at $13,311 today, and we focus on our expenses, both OpEx and G&A. The aggregate figure for these 2 components for the third quarter of 2019 was $5,811. And this was a result of drydocking expense related to 4 completed dry dockings. With [decreased] monitored fees charged by our managers, maybe due to the favor of a movement in exchange rate of euro versus dollars, as the majority of our management fee expense are denominated to euro; and also due to the decreased company administrator expenses.

Moving on to Slide 15. We present some financial data on a quarterly basis. Our quarterly revenues have adjusted EBITDA and the operating cash flow have been improving our overall financial strength.

We present Slide 16, our daily free cash flow waterfall for the third quarter of 2019. We had about $13,300 per vessel and less than $9,600 per day per vessel for all our daily outflows, including operating G&A, interest, principal payments and preferred dividend, leaving about $3,700 per day per vessel as daily free cash flow.

Let's move to Slide 17, with our quarterly financial highlights for the third quarter of 2019 compared to the same period of 2018. Net revenues increased by 1% to $50.7 million from $50.1 million, mainly due to the improvement in charter rates. As a result, TCE equivalent per vessel increased marginally to $13,311 per day from $13,265 during the same period in 2018. Daily vessels earning expenses increased by 7% to $4,448 compared to $4,151 for the same period last year. Whereas daily running expense, excluding dry docking and predelivery expenses, increased by only 1% to $4,053 for the third quarter of 2019 compared to $4,022 for the same period in 2018.

Our adjusted EBITDA for the third quarter of 2019 increased by -- decreased by 9% to $25.1 million compared to $27.7 million for the same period in 2018. Our adjusted earnings per share for the third quarter of 2019 was $0.03, calculated on a weighted average number of 101.3 million shares compared to $0.05 during the same period in 2018. This calculated on a weighted average number of 101.6 million shares.

Closing our presentation on Slide 18, we present our quarterly fleet data and average daily indicators with more detail compared to the same period of last year. We would like to emphasize that in this period, we have worked extensively in implementing environmental investments for scrubbers as well as ballast water treatment systems. Not only in terms of installation but also with the cost of (inaudible) treatment, we have installed (inaudible) scrubbers, technical designs, selection of materials, and of course, commissioning and training, which have a far more importance in order to achieve a long-term performance in the pursuit of financial returns. Our press release presents in more detail our financial and operating results.

We are now ready to take your questions.

(Operator Instructions) And your first question comes from the line of Randall Giveans, Jefferies.

This is Chris Robert on for Randy. I wanted to ask some clarifying questions on Slide 8 in terms of the scrubber program. So as of last quarter, I think you had expected all the scrubber units to be installed by the end of the year. I think we're seeing a few slip into Q1 now. Can you comment on if the delay is due to kind of getting space at the shipyard, is it a bottleneck in the manufacturing supply chain of the scrubber or is it simply just engineering and installation delays?

No. We don't have engineering or installation delays. The original [plan] had 1 vessel for March of 2020. The new one has 5 vessel show, if we have moved 4 vessels from the year-end to the first quarter of 2020, simply because due to trade reasons, it happens that certain vessels delay a little bit. So we didn't find any reason to put this vessels in the shipyard during the Chinese New Year. So that's why we have delayed them. At the same time, we enjoy a good market right now, so there is no reason to overburden this quarter.

That makes sense. And then just a second clarification question here. Of the 9 vessels which you expect to have scrubbers installed by the end of October, which ones were installed exclusively during 4Q versus 3Q?

I think we provided this information in the table. So in the table 5 of our results. So we say that during Q4, we have -- we had, in total, 9 installations. So the vessels that were done, they were Pedhoulas Farmer, (inaudible), show 3 vessels were done during the fourth quarter -- the third quarter.

Got it. In terms of the low-sulfur fuel oil, you'll use for the rest of your vessels. Are you going to lock in future supply in order to secure availability or have locked in a price? And do you have any plans to hedge the price of the low-sulfur fuels?

We don't worry about fuel availability because we have too many ships, big ships, of installing scrubbers. So the fuel availability is -- if I revert that this is consumption-wise more than 20% of the fleet consumption will be on HFO. I will come back to you. You mean about the compliant fuel or the HFO?

The compliant fuels.

The compliant fuel, I think, will be available and we see the number of (inaudible) waiting outside Singapore. And would be available in good volumes in the key areas, especially in the Far East. I think that the main problem with the compliant fuel is the compatibility of the fuel, how the fuel is -- was created, was if it's a blended, if it's a refined product. And this will be the major issue for ship partners, how good is the fuel that we will have? As far as we're concerned, the season for the first two or three months of the new year on the ships that we need to be burn the compliant fuel, we'd rather start with less MGO consumptions for where it's calling [less MGO] onboard our ships already, and we will start the less MGO and maybe towards March and April, we'll start converting into the compliant fuel to be on the safe side. So if there are any problems appearing, we then supply us to known in the market.

Got you. That make sense. Turning to Slide 5 on some of the demand factors here...

One clarification we'd like to make is that we provide certain data in each press release for the expected downtime, during each quarter. This is for the data analyst to make the appropriate calculations. So in our table, table 5, we say that during Q4 of 2019, we installed -- the total number of installations will be 9 installations, including Q4, and expected downtime in days is 15. So by using this number, you can come to better approximation of our EPS.

Right. Okay. Shifting over to the demand side of Slide 5. So can you talk a little bit more about the increase in the Chinese grain imports rising during the quarter? Was that mainly driven by a substitution effect from U.S. grain? And then what kind of products drove the increase? And from where were they being imported from?

Look, basically it was a majority of grain imports in the China was coming from South America, from Brazil and Argentina. We see this continuing even now, and we see a very active season in South America. There is a steady flow of grain cargos into China. Now that looks like the trade war will be reaching a partial bill at least -- partial bill in the next couple of weeks. We saw the commitment of the Chinese purchase U.S. soya beans. We already see cargos market in the last 10 days. Also we have done a very good [job of] balance in the U.S. cargo to fix $19,500 per day for a round voyage from U.S. to China. It shows you that new cargo is coming into the market and the chinese will have an active fourth quarter of imports from the U.S. So I think up until now, it was all South America, but right now we see a shift into soya beans coming from U.S. markets.

And last follow-up question for me. Can you talk about anything outside of the Chinese iron ore, coal and grain trades that you find interesting in terms of a demand driver?

We see book side, a lot of book side movement from Australia into China. We see steady flows of Australia and Indonesia coal and South African coal into India. So India is very active as well. So you have coal movements into China, which are very well supported and very active. In Europe, we see the exports now from the Black Sea [growing volumes of] cargos from Black Sea [Core] United to the continental to the Far East. We see volumes now start picking up from the Baltic sea of coal movements into Euro coal into the Mid. So these are the main areas of activity in the last few weeks.

And your next question comes from the line of Chris Wetherbee from Citi.

Wanted to ask a question about Slide 9. You had some helpful information there so I appreciate it. But looking at the top-left chart there, you kind of highlight the scrubbers as a percent of the fleet for the various size vessels. I guess you do the math here, it looks like it's about 18% of those three vessel segments are going to be scrubber fitted. Obviously, overweight to Capesize. Do you have a sense of how much of the fuel consumption that is of 18% of the ships? Can you give us a sense, does this sort of tie into that 23% number that you mentioned on the slide as well in terms of what the heavy oil will be preserved that? I'm just trying to get a sense of how much of the fuel consumption is actually going to be going for to these scrubber-fitted ships?

Yes. As we say there, we'll get the data from DMV, from (inaudible) society and from DMV bank. Once we make this -- [these people estimate,] we have no reason to doubt it. Of 23% of the ships, we have continued to burn natural coal. Not all of them would start from day 1 of 2020 because many of the scrubbers will be retrofitted in the first half or first 9 months of 2020. [The honest] moved early enough, including ourselves. We enjoy the vast majority of our ships around 80% to enjoy scrubbers before the 1st of January. As Loukas previously said, some 5 vessels from 5 vessels, we left them fit the scrubbers after the Chinese New Year in February. Because there's no point in a good market to put the ships in the yard in mid-December. And by any chance we don't complete by mid-January, we fall into the Chinese New Year. This year, Chinese New Year is very early. It's around 23rd of January. So we don't want to get stuck in a shipyard for two weeks with no work as well to complete the installation and the retrofitting. That's why because of certain also changes of the partnership of the vessels, we decided that the ships that cannot arrive (inaudible) within early December of the shipyard, to postpone them for a couple of months and go in early February.

All right. That make sense. But so 23% is what you think is a reasonable number to sort of relate to that 18% to 20% fuel consumption number -- 18% of the fleet?

Yes. We take it for consumption. Why does it make sense? Because the big ships, the big Capesize and [Newcastle Maxes, the VNO ships.] This consumes much more than the Panamaxes or the Handymaxes, although (inaudible), it looks like this number is about right. But could be 22%, it could be 25%. I don't know. I mean, the experts will tell us in the tale -- in the first 3 months of the year we will have a very good idea of what is going on.

But on the basis of the numbers of scrubbers are what the reason we don't doubt because this is huge fuel and everybody's installing and there is a full analysis in this report that we have seen and that support this figure.

Okay. That's helpful. It's good to just get our arms around what should be thinking about there. I guess, a couple of other questions. I guess sticking on scrubbers, the $50 million that you guys highlighted sort of the scrubber investment. Is there any risk to that? We heard a lot from people in the market about the increasing price. I just don't know how much is locked in, hopefully all of that $50 million is locked in to cover the 20 ships that are being retrofitted. But I just want to get a sense, is there any sort of fluctuation to that number? Or is that pretty much a done deal?

No. I think that -- first of all, this -- I mean we have already indicated, we have already capitalized $35.5 million until now out of this $50 million. We have not seen -- we have -- all the equipment is already contracted -- have a goal and we have paid installments or shall we go specific corner that's also. With [specific yards] we have the same contract that continues so we don't find a (inaudible) this figure will go -- will not be reflecting in the actual cost of our systems. We believe that for a medium-sized vessel, our cost is about -- all inclusive is about $2.5 million.

Okay. Okay. That's helpful. And then my last question is just, as we think about 2020, and sort of the economics of ships with scrubbers, is there anything we need to be thinking about, either from a daily OpEx perspective or otherwise, in terms of cost? Are they more expensive to operate? Do you anticipate them to be more expensive to operate? Just putting aside the incremental depreciation of the capitalized investment, is there an OpEx component that we need to think about?

Yes. Look, we are -- we have done the [whole reset] and we think that the operating expenses will be high -- materially higher because for scrubbers, we need a number of -- we need certain additional spare parts which is reasonable and (inaudible) spare parts for power rebalancing of diesel generators. I tend to believe that this could be about $100 a day cost increase due to this precautions that we intend to take. The payment is if we do not take precautions, it's a downtime of scrubbers and continued operation with [heavy fuel oil] with compliance rate, which could be quite more complicated. Yes. And $100 per day, but as you know, we install 50% of the fleet, it will be on a clip basis, $50 per day. But basically this is a prudent thing to do to play some more spare parts for the diesel generator renovation from boat, should something is need to be overhauled earlier and not to take any risk with operational discovery.

(Operator Instructions) There are currently no further questions, sir. Please continue.

So thank you very much for attending this conference call. And we look forward to discuss again with you in the next quarter. Thank you.

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