Safe Bulkers, Inc.
Q2 2013 Earnings Call Transcript

Published: 22 Aug 2013

[Operator:]

Welcome to the Safe Bulkers conference call to discuss financial results for the second quarter 2013. Today we have with us from Safe Bulkers Chairman and Chief Executive Officer, Polys Hajioannou; President, Dr. Loukas Barmparis; and Chief Financial Officer, Konstantinos Adamopoulos. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time if you wish to ask a question, you need to press star, one on your telephone keypad and wait for your name to be announced. Following this conference call, if you need any further information on the conference call or on the presentation, please contact Matthew Abenante at Capital Link at 212-661-7566. I must advise you that the conference is being recorded today, Thursday, August 22, 2013. Before we begin, please note that this presentation contains forward-looking statements as defined in Section 27(a) of the Securities Act of 1933, as amended, and Section 21(e) 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 expect, 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 dry bulk 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 we pass the floor to Dr. Barmparis. Please go ahead, sir.

[Loukas Barmparis:]

Good morning. I’m 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 2013, which were announced yesterday after the close of the market in New York. We have navigated through many shipping cycles, gaining experience and a proven track record, maintaining a hands-on approach based on our policies as presented in Slide No. 4. We seek to expand our business significantly according to (inaudible) assessment and create value for our shareholders, with whom we are fully aligned. In the present prolonged adverse charter market conditions, it is prudent to maintain a strong balance sheet, liquidity and comfortable debt in compliance with loan covenants while rewarding our investors with regular payments of dividends. On Slide 5, we present our fleet and order book. Currently we own a fleet of 28 high-specification vessels and a contracted order book of seven new build vessels from top quality shipyards in Japan delivered through 2015. We have the substantial cumulative (inaudible) operate since our IPO. We remain consistent to our asset management policy by investing mainly in new build (inaudible) vessels in the low part of the shipping cycle. Recently in this low price vessel environment, we acquired one 2006 Japanese built post-Panamax class vessel at 19.5 million, which was delivered to us in July. As shown on Slide 6, overall we have opportunistically in four secondhand vessels. In July, we also took delivery of one Japanese Panamax new build. As of August 19, the average age of our fleet is approximately five years and upon all seven contracted deliveries through 2015 will be approximately six years. Going to Slide 7, we evaluate the performance of our chartering policy against the spot market, which we outperform most of the time, as presented on the bottom graph. Our charter coverage for our fleet, including existing fleet and new builds, was 82% of anticipated ownership days for 2013, 28% in 2014, and 12% in 2015. We seek to employ our vessels in period time charters in order to have visibility of our future cash flows while we maintain certain vessels in the spot market to have the flexibility that the spot market offers in low charters periods and upside potential when the market improves. Over the years, we have established long-term relations with some of the most respected charterers in the shipping industry. We have reduced our counterparty risk by agreeing to selective early deliveries for which we receive significant cash compensation. On Slide 8, we present our daily operating and general and administrative expenses. Our daily operating expenses were 4,413 for the first half of 2013 and our daily general and administrative expenses were 1,105, consisting of 936 daily management fees and 269 daily public company expenses. In total, we paid daily 5,618 to run our vessels and our company. This figure includes all costs except depreciation and other costs, and is quite stable over the years, consistent with our lean operations. Moving on to Slide 9, we present the net debt per vessel together with the fleet expansion. We maintain low interest expenses, evidenced by our debt per margin levels. We retain earnings in the Company to further strengthen our balance sheet and our liquidity. On follow-on equity offerings, we have raised 189 million net. Our intention is to gradually de-lever the company on a net debt per vessel basis and comply at all times with our financial covenants. In the last quarter, our net debt per vessel ratio was at 13 million. On Slide 10, we present our liquidity and our ability to finance our capital expense requirements. As of June 30, 2013, our liquidity was 175.5 million while our capital expense requirements were 232.2 million. We have not included our operational cash flows. We also have the ability to raise additional indebtedness against seven unencumbered contracted new build vessels and one secondhand upon their delivery, providing us with further financial flexibility. We would like to reiterate that management is fully aligned with our public shareholders. On Slide 11, we present historically our quarterly EPS and our quarterly dividends. Our Board has declared a dividend in the amount of $0.05 per share payable on the 13th of September. Safe Bulkers has paid a total of 191.3 million in dividends for 20 consecutive quarters since the Company’s IPO in 2008 and maintains an attractive dividend yield. Turning to Slide 12, we present a synopsis of main events in the shipping industry. Oversupply of vessels is still the main driver of shipping markets; however, order book is declining and net fleet increase for the first seven months of 2013 is at 3.6% compared to 10% in 2012. As presented in the graph at the bottom left, for the remaining period of 2013, about 12 million dead weight tons for Capes and Panamaxes respectively are expected to hit the water, which is almost equal to the order book for the whole of 2014. This (inaudible) the slowdown in the growth of order book. Scrapping activity despite lower volume done at 2012 is a catalyst regarding the easing of oversupply. As of July 2013, about 14.5 million dead weight tons have been scrapped while about 34 million dead weight tons were scrapped in 2012. On the demand side for Panamaxes, after a busy grain season during Q2, the market has been steadily trading between 7,000 and $9,000. Going forward in Q4, market prospects seem positive as strong grain exports from the U.S. Gulf are expected and the seasonal coal trade is expected to produce demand for Panamax size vessels. (Inaudible) market prospects in combination with the record bottom prices of secondhand vessels in the beginning of the year created a search for secondhand tonnage acquisition. According to Baltic Exchange, the price for five-year-old vessels have risen by approximately 20% since the beginning of the year. Let us remind you that during the past 12 months, we have bought four secondhand vessels, all built by Japanese shipyards at attractive prices. On the Cape sized vessels, the market is currently outperforming as there has been strong demand for iron ore from China. As shown on the graph on the bottom right, July 2013 has been a record month in terms of Chinese iron ore imports. At this point, we would like to point out that we remain committed to returning cash to our stockholders who have a lean and efficient cost structure in relation to operating expenses, management fees and (inaudible) expenses. We believe it is important to preserve liquidity in this environment as we aim to further strengthen our balance sheet and deleverage our company while maintaining the ability to make additional acquisitions in order to renew and expand our fleet timely for the next upward shipping cycle. Our Chief Financial Officer, Konstantinos Adamopoulos, will now present our financial results.

[Konstantinos Adamopoulos:]

Thank you, Loukas, and good morning to all. On Slide 14, we will present select financial highlights for the second quarter of 2013 compared to the same period of 2012. Net revenue decreased by 12% to $41.4 million from $47 million during the same period in 2012 mainly due to weak charter market conditions. Daily vessel running expenses decreased by 2% to $4,114 compared to $4,526 for the same period in 2012. The decrease is mainly attributable to the decrease in (inaudible) expenses. Interest expense increased by 10% to $2.3 million from $2.1 million for the same period in 2012 as a result of the increase in the average amount of long-term debt outstanding. Net income increased by 14% to $24.6 million from $21.5 million during the same period last year. Adjusted net income decreased by 36% to $15.1 million from $23.7 million. EBITDA increased by 14% to $36.1 million from $31.6 million during the same period in 2012. Adjusted EBITDA decreased by 21% to $26.6 million from $33.7 million during the same period in 2012. Earnings per share and adjusted earnings per share were $0.32 and $0.19 respectively, calculated on a weighted average number of shares of 76.7 million, compared to $0.28 and $0.31 in the second quarter of 2012 calculated on a weighted average number of 76.7 million shares. You may find the definition and reconciliation of our financial fundamentals for the second quarter and first six months of 2013 and 2012 on Slide 15. Slide 16 presents selected operational highlights for the second quarter of 2013 compared to the same period of 2012. Ownership available and operating days increased by about 28% for the second quarter of 2013 compared to the same period in 2012. During the second quarter of 2013, we owned and operated an average of 26 vessels and achieved a utilization rate of 99.1% compared to an average of 20.35 vessels and a utilization rate of 98.5% during the same period of last year. The average daily time charter equivalent per vessel for the second quarter of 2013 was $17,116 compared to $24,168 for the same period of last year. Slide 17 presents definitions and reconciliation of our operational fundamentals for the second quarter and first six months of 2013 and 2012. The result of our financial performance is clearly demonstrated by the Company’s consistency in its dividend policy, maintaining a prudent and meaningful dividend throughout the last crisis in contrast to the vast majority of industry peers. As presented on Slide 18, the Company has declared for the second quarter of 2013 a cash dividend of $0.05 per common share payable September 13, 2013 for shareholders of record at the close of trading on September 3. This is the 21st consecutive quarterly cash dividend since our Company’s IPO more than five years ago. Also, the Company’s Board of Directors has declared the cash dividend of $0.2611 per share on its 8% Series B cumulative redeemable perpetual preferred shares for the period from the beginning of trading on June 13, 2013 to July 29, 2013. This dividend was paid on July 30, 2013. This was the first Series B preferred shares cash dividend the Company has declared and paid. Summing up our presentation is Slide 19. Although market conditions at the moment are still challenging, we are prepared as a long-term oriented company. We have been in shipping for more than 50 years. We know the industry and we believe in it. We actively manage our order book and fleet. As a result of our track record and our reputation in the industry, we have developed long-term relationships with key shipyards, charterers and banks in Japan and Europe. We have a history and reputation of operating excellence, as reflected in our utilization rate and operating expenses. We maintain low financial costs as a result of our (inaudible) and our prudent leverage in compliance with our financial covenants. We actively manage our young (inaudible) fleet of 28 dry bulk vessels, all of which are built 2003 onwards. Our substantial (inaudible) performing customers supports our strong balance sheet and liquidity, providing financial flexibility. We remain committed to a prudent dividend policy to reward the shareholders through payment of dividends and that support future expansion and deleveraging. You may find our contact details on Slide 20. Thank you for listening and we are now ready to accept questions.

[Operator:]

Thank you. [Operator instructions] Your first question today comes from Christian Wetherbee from Citi. Please go ahead.

[Alex Hahn:]

Hi guys, this is Alex Hahn in for Chris. So starting off with rates, what are your thoughts on the trajectory of rates, but more specifically we want to get a sense of when they’ll get sustainably better, and how high do you think that they can go?

[Loukas Barmparis:]

Yes, good morning, first of all. We are experiencing at the moment a gradual improvement of freight rates. It’s more evident in the last week or so, the last 10 days on the Cape size bulkers, which are running at the moment on average around $16,000 a day. This is a good improvement from the previous quarter, which was below $10,000 a day. So the projection as for (inaudible) for Cape size to be around 21, 22,000 by the fourth quarter of this. As this materializes, this will also push the rates of Panamaxes and post-Panamaxes higher from the current 8,000 to $9,000 a day, so we are entering into a little bit better market.

[Alex Hahn:]

All right, thanks. And switching over to costs, your OPEX was down sequentially, which normally doesn’t happen in the second quarter. What does the rest of your year look like for costs, in particular for SG&A, and what is the crux of this sequential decline?

[Loukas Barmparis:]

Yes, we have dry-docking of at least one vessel by the end of the year, maybe two, so we expect these numbers to increase a little bit in the second half of the year. Otherwise, we don’t expect any substantial changes for the next six months, only the effect of a couple of dry-docking. The G&A expenses as the number of vessels increases is expected to stay stable or (inaudible). We are optimistic that we will maintain the competitive cost of this company in the next few quarters.

[Alex Hahn:]

Great, thanks. Lastly, can you speak to the risks to a rate recovery from new build orders and how will that be handled?

[Loukas Barmparis:]

I think that the order book for next year is standing around 45 million dead weight. It’s a level that gives us some optimism that we should see a rate recovery starting in the middle of next year, and we are optimistic but there are no more (inaudible) to be committed for 2014 and for a good part of 2015, so we believe that the order book for those two years will be pretty relaxed because we know shipyards have reduced capacity and slowed down production. (Inaudible) we are not keen to order ships with the exception of the second quarter of this year, and most of the orders placed were in the Cape sized sector and the Ultramax sector, both sectors we don’t have any exposure because our Cape sizes are long-term chartered and we have no Ultramaxes, and they are very few ordering in Panamax. So we believe that from the supply side, we will not get any supply (inaudible).

[Alex Hahn:]

Okay, thanks a lot. I’ll turn it over.

[Operator:]

Thank you very much. Your next question today comes from Mr. Greg Lewis from Credit Suisse. Please go ahead.

[Greg Lewis:]

Yes, thank you and good afternoon, gentlemen. Polys, could you talk a little bit about sort of what’s going on, the relationship between the Cape and Panamax market? I guess sort of over the last two weeks, we’ve seen Capes make a noticeable move away from Panamaxes in terms of the spread. I guess the Cape-Panamax spread is well north of two times at this point. At what point do you think, or maybe we don’t, is there the potential that we start to see cargoes being split and maybe that potentially helps lift up Panamax rates, or is this something where there’s just not really as strong a demand for Panamaxes and we should sort of expect Capes to really outperform Panamaxes on a relative basis?

[Polys Hajioannou:]

Yeah, I think that the improvement in the Cape size started about a week ago, a week and a half ago, so it’s very early in the process before cargoes start splitting up for Panamaxes. Now in the spot market, of course, they reach $16,000 and Panamax is doing 8,000, so it starts reaching a level that charterers may consider in the next month or two of splitting cargoes. If the prediction of the market is correct that Q4 will be in the low 20’s for Capes, this can only be positive for the Panamax as well, and we expect that there will be some cargo split for Panamaxes out of Capes. So in the fourth quarter of this year, we are optimistic that we will see the spot market for Panamaxes follow it and doing over $10,000 a day.

[Greg Lewis:]

Okay, and then just shifting gears, you have the seven new builds that you’re scheduled to take delivery of over the next, I guess, two and a half years. Beyond those seven new builds, when you think about potentially adding vessels to the fleet, is this something where it’s primarily going to be going back to the shipyards and looking for potential opportunities inside at the shipyards, or is there still really the potential to acquire secondhand vessels?

[Loukas Barmparis:]

No, I think that the main model of this company is on new ships. We have seven eco ships on order to start delivering from the first quarter of 2014 up to 2015, so they are spread over two years, so we have a good timeframe to take deliveries of those ships. I think that the secondhand price has increased by around 15 to 20% in the last three or four months, so unless we see a reduction in this price activity we will not look for more secondhand ships. We don’t feel as if we have (inaudible) for paying more to shipyards. Of course, if we find a shipyard with a (inaudible) we like in Japan and they can do an attractive price, we will be ready to do something more. But I think we are very well placed with seven ships spread out over the next 24 months to increase our fleet and to be able to fix hopefully at the better rates that are expected for those two years and following. So we are not under pressure to add tonnage, only if we find reasonable prices.

[Greg Lewis:]

Okay, perfect. Thank you for the time.

[Operator:]

Thank you. Your next question today comes from Fotis Giannakoulis from Morgan Stanley. Please go ahead.

[Fotis Giannakoulis:]

Yes, hi guys and thank you. I want to ask again about the Panamax market. We’ve seen a lot of attention on Cape sizes and the new iron ore capacity that is going to come online the next few months until 2016. What is the bull story for coal? We see the coal market quite a bit troubled right now. Rates for Panamaxes are very weak. What would be your, let’s say 18-month outlook in terms of charter rates? And then related to that, at what point would you consider increasing your dividend? You slashed it around 70% last year, probably more than what people though was necessary; but at what point do you think that it’s going to be time to increase your dividend?

[Polys Hajioannou:]

Yes, I think the Panamax market – first, the big booster for the Panamax market is the coal movement, and the fact that we see coal prices on the drop is always optimistic. It gives us optimism that there will be more of coal transport into China instead of domestic production. You have to remember that the Chinese, they consume more than 2 billion tons of coal every year, so only 10% of that is imported; so if we see any meaningful change into this 10% to become 15 or 20% over the next few years, this will be a very big boost for the Panamax market. Regarding our dividend, you know, we pay what we feel comfortable paying. You have to remember that our shares as a family, Hajioannou family is a major shareholder of the Company, and we are keen to see the interest increase; but we have to see the fundamentals and the freight rates increase meaningfully before we can say that the Board will take this decision to start increasing the dividend. So at the moment, we are happy that we can pay a dividend when others are not paying a dividend, and that was the 21st consecutive quarterly dividend that the Company has declared, so we’re happy with that. And when we see the meaningful improvement of freight rates, of course we have the open tonnage and we have the fleet to take advantage of the higher freight rates, and obviously this will be reflected into the returns to the shareholders. So let’s be cautious and let’s see first freight rates improving before we can be more positive on this question.

[Fotis Giannakoulis:]

Sorry for asking again – can you clarify to us what it means, meaningful improvement in freight rates?

[Polys Hajioannou:]

Look, at the moment you see that the spot market is around 8,000 to $9,000 a day. You can understand by a simple calculation that many companies, they don’t cover even their running costs, which are around $8,500 a day. In our case, we have a very low cost base and we cover those running costs, and thereafter you need 3,000 or $4,000 a day to pay the banks and the loans and the interest. So you understand, you have to go above this number, which is freight market of over $10,000 a day to start considering the excess capacity and the excess earning capacity of how you split it, if it’s going towards the leverage or if you send it towards the shareholders. So when we start seeing the spot market over 10, we will start considering what options we have.

[Fotis Giannakoulis:]

Okay, thank you. Regarding your preferred equity, can you please explain to us what was the rationale, why you issued this preferred, and if you think that there might be a possibility of offering additional similar paper?

[Polys Hajioannou:]

Look, I think the preferred was done in line with our investment in four secondhand vessels, which was done because we thought those were the cheapest levels we had seen in the last 25 years for secondhand bulk carriers, so we invested around $70 million on those four vessels – 68 or something like this, around $68 million. So most of that preferred would (inaudible) or against the equity put in those vessels. We believe with vessels bought at this part of the cycle, the Company will make much more than the 8% it’s paying on the equity of this preferred stock. Now in future, we will reconsider—it depends on the terms, it depends on the appetite of the market. You know, it’s not our top priority but I think we see that there is a healthy market and there’s good opportunity for the Company to raise some money without diluting the existing shareholders, we may consider it, but it’s not as if that we rely on it.

[Fotis Giannakoulis:]

Thank you for your answer. One last question about the asset values and shipbuilding. You mentioned earlier that prices for secondhand vessels have increased around 15% the last few months, and they are not as attractive. But it seems that new building prices, they haven’t really moved so much, at least. Can you explain to us what is the state of the shipbuilding market? You mentioned that there is reduced capacity compared to previous years. How much capacity in the dry bulker sector has changed since 2008, and this change in capacity, is it permanent or we might see in the future yards offering additional berths similar to what we saw in 2006 and 2008?

[Polys Hajioannou:]

Yes, I think there was a very good opportunity for ordering in Japan in the first quarter of 2013 because they had some free space for 2015 still available and they wanted to put in some orders before the end of their financial year. So at that point, you know, we stepped in. We managed to secure two vessels at below $30 million, eco-vessels, so 7,000 dead weight. I visited Japan in the end of July, a few weeks ago. I don’t think these prices are achievable again because the yards, what they needed to sell, they sold early space they had, so they are more relaxed now. Off the record, they are quoting 10% higher prices now, but I don’t think they mean it. So I think the next round after they will feel pressure could well be towards the end of this year, and then depending on the freight market and the interest from ship owners, we will see how much yards again give in on the price. But at the moment, I will say they are rating low-30’s in Japan for the Panamax, so at these levels we are not prepared to do anything at this stage. Regarding capacity, you know, I know yards are producing at 50% capacity in Japan because they’re building definitely at a loss on those orders, so they are arguing why to build up this level of small ships. They’ll scale down for a couple of years. Of course, they can increase back the capacity if they see that prices are rising, but before prices rise on new building vessels, we have to see substantial improvement of freight markets, which at the moment is not happening. So I don’t think any time soon we will see substantial increase of shipyard prices. (Inaudible) when freight market improves, firstly we will see substantial improvement of secondhand prices and always there’s a lag between that time and the time when the shipyards could start raising their prices.

[Fotis Giannakoulis:]

Thank you. Polys.

[Operator:]

Thank you. Your next question today comes from David Beard of Iberia. Please go ahead.

[David Beard:]

Hi, good morning gentlemen. A lot of my questions have been answered, but maybe you could just review for us how you look at what percent of the fleet you’d like chartered going into 2014 and ’15, and has that strategy changed given where we are in the cycle?

[Polys Hajioannou:]

Yes, at this point of the freight market, when freight rates are 8,000, $9,000 a day, there’s absolutely no reason for companies to go in and lock in period charters. Okay, you may do a six-month charter or something like this, but there’s absolutely no point to lock at 8,000 rate for a vessel for two years because simply there is no downside to protect from and you give up the whole of upside. So our company, all the vessels that they are ending their charters, we trade them in the spot market or maximum in the short period market. Very seldom maximum we may go up to one year if we can secure some premium, let’s say around 20% over the current spot market, but more than six months or 12 months period we are not prepared to consider because you lock in the ship at the low rate and when the recovery starts, you will regret it. So this is our policy at the moment – spot market or short period market.

[David Beard:]

Okay, thank you.

[Operator:]

Thank you. Once more ladies and gentlemen, please press star and one on your keypad if you wish to ask a question. We have no more questions from the phone lines gentlemen. Back to you.

[Loukas Barmparis:]

Thank you very much for attending our webcast, and we’re looking forward to talk with you again in the next quarter. Thank you very much.

[Operator:]

Thank you very much. Ladies and gentlemen, that does conclude the conference call. Thank you all for taking part today, and you may now disconnect.