Safe Bulkers, Inc.
Q3 2013 Earnings Call Transcript

Published: 5 Nov 2013

[Operator:]

Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers conference call to discuss financial results for the third quarter 2013. Today we have with us from Safe Bulkers, Chairman and Chief Executive Officer Polys Hajioannou; President Dr. Loukas Barmparis Loukas Barmparis; and Chief Financial Officer Konstantinos Adamopoulos. At this time, all participants are in a listen-only mode. There will be a presentation, following by a question and answer session. (Operator instructions) 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 this conference is being recorded today, Tuesday, November 5, 2013. 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 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 we now pass the floor to Dr. Barmparis. Please go ahead, sir.

[Loukas Barmparis:]

Good morning. Welcome to our conference call and webcast. Let's move on to discuss the financial results for the third quarter of 2013, which were announced yesterday after the close of the market in New York. We are in slide four, where our Company was launched into many shipping cycles. The interests of our management are fully aligned with the interests of our public shareholders, as our CEO invests in ship owning activities only through Safe Bulkers, and currently controls about 60% of our common stock. With our consistent policies, charter and mix adapted to market conditions, currently with exposure to spot market, and beating BDI index, maintaining hands-on approach and lean construction, strong balance sheet and comfortable leverage in compliance with our covenants, and low finance costs. We invest in the low part of the cycle for efficient new builds. We maintain one of the youngest fleets in the industry, and we sell our old designs at strong market conditions, realizing gains, expanding and renewing our fleet. We have invested in the previous depressed period for new builds, and because of our vessels, and our CEO has invested through our Company, together with public shareholders, in the last preferred stock offering. Through our policies, we manage to create value for our shareholders, and maintain a meaningful dividend since our IPO. Moving to slide five, Safe Bulkers was listed on New York Stock Exchange back in 2008, and since then, our fleet has grown from 11 to 28 dry bulk vessels today, with an order book of 20 new build dry bulk vessels through 2016. Safe Bulkers has 63% of its ownership days open for 2014, opening substantial upside potential for revenue. Our net debt per vessel was at $14 million in Q3 2013, in compliance with our loan covenants. We maintain lean operations, with $5,500 per day vessel, $5,500 per day per vessel for our OpEx and G&A expenses in total for 2013, among the lowest in the industry. In G&A, we include public company and management fee expenses. We preserve our financial flexibility with low financing costs, with an average spread of 95 bps for 70% of our debt. We seek to expand our business sensibly according to our risk assessment, create value and reward at the same time our shareholders, as we've done for 21 consecutive quarters, paying $195.1 million in dividends so far. Furthermore, we have increased the dividend on common stock by 20% for the third quarter, to $0.06 from $0.05, reflecting the improvement of certain market conditions. Turning to slide six, we present a synopsis of main events in shipping industry. Oversupply of vessels is still the main driver of the shipping market. However, order book is declining, and net fleet increase for the first 9 months of 2013 is at 4.4% compared to 10% in 2012. As indicated in the graph at the bottom left, the order book as of the end of the third quarter is declining for those years until 2016. The orders placed for Panamax represent 8% of the total fleet for 2014, 4% for 2015, and 1% for 2016. Same for Capes. The order book represents 6% of the existing increase for 2014, 4% for 2015, and 1% for 2016. This illustrates a substantial slowdown in the growth rate of order book, which is expected to be even less, due to the scrapping activity. As of July 2013, about 14.5 million deadweight tons or about 2% of the order book have been scrapped, and about same scrapping rate expected in the following years. On the demand side, in the past few months, we evidenced a strong increase of freight rates. Seasonal demand, in combination with of course is coming from signs of domestic economy, worsening demand for iron ore. This resulted in fast recovery of the Capes' freight market, which exceeded the $40,000. Currently, market selling is about $20,000. The strong demand for Capes has also favored post-Panamax sales, as in many cases, we evidence a split in Cape cargo ships to post-Panamaxes. Our company with 11 post-Panamaxes were favored by such market conditions. Furthermore, a good grain harvest from US and expectations for increased coal demand have pushed the charter rates even further. Currently, Panamaxes are trading to an average $13,000, in comparison, the year to date average, which was about $8,700, representing an increase of almost 50%. On slide seven, we present our fleet and order book. Currently, we own a fleet of 28 high specification vessels, and the compatible order book of seven new build vessels from top quality shipyards in Japan, delivered through 2016. We established substantial cumulative annual growth rates since our IPO. We remain consistent to our asset management policy, by investing mainly in new build solid economical fleet of vessels in the low part of the shipping cycle. In slide eight, we show an example of our asset management policy. Although, we have not invested in secondhand vessels the last 25 years, we decided to invest opportunistically in four secondhand vessels this year. You may observe that they are positioned to place almost at the bottom of the market. Already, these vessels have been appreciated considerably. Going to next slide – nine, we present our fleet growth percentile in terms of dead weight tonnage against their respective sales growth, represent percentile since our IPO. We have had a substantial cumulative growth rate, which increased our fleet almost 3 times, from 11 vessels to 28 today, versus 40% shares count increase for the same period. Going to next slide, number 10, we evaluate the performance of our chartering policy against the spot market, which we outperformed most of the time, as presented on the left graph. The open days for our fleet, including existing fleet and new builds, were 4% of participate on ownership days for 2013, 63% in 2014, and 85% 2015, opening substantial upside potential for revenue. We seek to employ our vessels in period time charters status in order to have visibility of our future cash flows, while we maintain certain vessels in the spot market to have the flexibility with the spot market over low charter periods, and the upside potential when the market improves. Currently, we seek to employ our vessels mainly through the spot market, as we are optimistic over the charter market for next year. On slide 11, we present our daily operating and general and administrative expenses. Our daily OpEx were $4,355 for the first nine month of our 2013, and our daily general and administrative expenses were $1,158, consistent with $112 – the daily management fees, and $246 daily public company expenses. In total, we paid daily $5,513 to run our vessels and our Company. The figures include all costs except depreciation and financial costs, and we have amongst the lowest in the industry, and quite stable over the years, consistent with our lean operations. On the bottom graph, we present the net debt per vessel ratio, at $14 million in Q3 2013, together with the fleet expansion. We maintain low margins for our financing of 95 bps averaging spread for 70% of our debt. Our intention is to maintain comfortable leverage on a net debt per vessel basis, in compliance at all times with our financial covenants. On slide 12, we present our earnings per share and dividends growth, as our liquidity and our ability to finance our capital expenditure requirements. As of September 30, 2013, our liquidity was $218.9 million, while our capital expenditure requirements were $220.2 million. We have not included our surplus from operations. As of September 30, we also have the ability to raise additional indebtedness against six unintended contracted new build vessels upon their delivery. Currently with the recent orders, we have 8 vessels, providing us with further financial flexibility. Our Board has declared a dividend in the amount of $0.06 per share, payable on the 6th of December. Safe Bulkers has paid a total of $195.1 million in dividends for 21 consecutive quarters since the Company's IPO in 2008. Our Chief Financial Officer, Konstantinos Adamopoulos, will now present our financial results.

[Konstantinos Adamopoulos:]

Thank you, Loukas, and good morning to all. In slide 14, we present selected financial highlights for the third quarter of 2013, compared to the same period of 2012. Net revenue decreased by 10% to $41.9 million, from $46.8 million during the same period in 2012, mainly due to weak charter market conditions. Daily vessel operating expenses increased by 2% to $4,249, compared to $4,185 for the same period in 2012. The decrease is mainly attributable to the increase in spare parts and expenses. Interest expense decreased by 9% to $2.1 million, from $2.3 million for the same period last year, as a result of the decrease in the average amount of long-term debt outstanding. Net income decreased by 44% to $11.6 million from $20.7 million in the same period of 2012. Adjusted net income decreased by 43%, to $13.1 million from $22.8 million. EBITDA decreased by 25%, to $23.4 million, from $31.4 million in the same period in 2012. Adjusted EBITDA decreased by 22%, to $24.8 million, from $33.4 million during the same period in 2012. Earnings per share and adjusted earnings per share were $0.14 and $0.16 respectively, compared to $0.27 and $0.30 in the third quarter of 2012, and both periods calculated on a weighted average number of 76.7 million shares. Moving on to slide 15, we present definitions and reconciliation of our financial fundamentals for the third quarter and first 9 months of 2014, compared with same period of 2012. In the next slide, number 16, we present selected operational highlights for the third quarter of 2013, compared with the same period of 2012. Ownership, available and operating days increased by approximately 28% for the third quarter of 2013, compared with the same period in 2012. During the third quarter of 2013, we owned and operated an average book of of 27.43 vessels, and a fleet utilization rate of 99.3%, compared to an average of 21.47 vessels and utilization rate of 99.2% during the same period of last year. The average daily time charter equivalent per vessel for the third quarter of 2013 was $15,264, compared to $22,534 for the same period in 2012. Moving on to slide 17, we present definitions and reconciliation of our financial fundamentals for the third quarter and first 9 months of 2013, compared to the same period of 2012. The result of our financial performance is clearly demonstrated by the Company's consistency in dividend policy, maintaining a prudent and meaningful dividend throughout the last prices, in contrary to the vast majority of industry peers, and by increasing the dividend in the third quarter of 2013. As presented in next slide, number 18, the Company has declared, for the third quarter of 2013, a cash dividend of $0.06 per common share, payable on December 6 to shareholders of record at the close of trading on November 22. This is the 22nd consecutive quarterly cash dividend since our Company's IPO almost 5 years ago. Also, the Company's Board of Directors has declared a cash dividend of $0.511 per share, on its 8% Series B Cumulative Redeemable Perpetual Preferred Shares, for the period of July 30, 2013 to October 29, 2013. The dividend was paid on October 30, 2013 towards Series B preferred shareholders of record as of October 25, 2013. That was the second consecutive Series B Preferred Shares cap dividend the Company has declared and paid. Summing up our presentation in slide 19, as the market outlook is improving, 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 delivered it. We actively monitor order book. As a result of our track record and reputation in the industry, we have developed long-term relationships with key shipyards, hundreds of banks in Japan, Europe and China. We have a history and reputation of operating excellence, as reflected in our utilization rates and operating expenses. We maintain low finances costs as a result of our low spread and our prudent leverage, in compliance with our financial covenants. We actively monitor our young, solid, active fleet of 28 dry bulk vessels, all of which are 2003 onwards. As a current covenants with established performing customers, supports our strong balance sheet and liquidity, providing financial flexibility. We remain committed to a prudent dividend policy to reward shareholders through paying a dividend and ensure future expansion and deleveraging. You may find our contact details in slide 20. Thank you all for listening, and we are now ready to accept replies to any questions.

[Operator:]

Thank you. Your first question comes from the line of Ken Hoexter of Merrill Lynch. Please ask your question.

[Ken Hoexter:]

Wonderful. Good morning, and great results, and good seeing the dividend coming up, and good signs on the dry bulk market. So let's dig into that for a second. On the used vessel acquisitions, can you talk a bit about that, as it's kind of left to your philosophy of buying new vessels and putting orders in, and constantly keeping that stream up, and then selling before they get too old? So, how do you think that impacts your cost of operating per day? Should we see that going up now, as you get some older vessels into the fleet, or can you keep it at this low level?

[Loukas Barmparis:]

Look, the costs – the operating costs reflect the average age of our fleet, which is about 5 years old. As we have said many times, our policy is to – two additional new build orders, in order to renew and expand our fleet. So in this year, we had the opportunity, first of all, to buy a number of secondhand vessels domestically, which already – where the value is above, let's say, we estimated about 20% higher from what we bought it. And the other thing that we did is, we did a number of orders of new build vessels of ships, which will be delivered, let's say, in 2014 into 2016. I would like to remind you that three vessels are coming early in the next quarter, in the first quarter of 2014. And these vessels will be used to expand the fleet. Of course, as we move along, and we will meet better market conditions, we expect that all the vessels in the over about 10 years old, will be sold at good markets, realizing gains on the sales of these assets.

[Ken Hoexter:]

Great. And Loukas, I guess, if we can revisit your overview on the demand, we've obviously seen the BDI have a quick run-up here into the fall, and now a pullback again. As you look into 2014, maybe you can talk about what your view is, given that 63% and then 85% open days, what your thoughts are in terms of how that translates into rates.

[Polys Hajioannou:]

Yes, good morning, Ken. Polys speaking. Look, we see the market start improving from August, and it's improved, on average, $5,000, $6,000 a day in this – in the last two, three months. We expect that the market will be slow at the start of the year. But the way the demand is picking up, and provided everything comes in line from Chinese announcements this month, our policy announcements, we are hopeful and optimistic about the period starting from the second quarter of next year, that demand and supply close each other, and the demand growth and the supply growth close each other, and this will help boost our levels to higher rates. So, we are optimistic, I would say, after the first quarter of next year.

[Ken Hoexter:]

Great, Polys. Appreciate the time. Thank you very much.

[Polys Hajioannou:]

Thank you.

[Operator:]

Your next question comes from Fotis Giannakoulis of Morgan Stanley. Please ask your question.

[Fotis Giannakoulis:]

Yes, hello, and congratulations for a good quarter. I want to ask about your chartering policy. Your vessels right now are primarily operating in the spot market. This is completely opposite from what we have been used to seeing from you during the last five years. At what point do you think that you will be ready to fix the vessels into time charters?

[Loukas Barmparis:]

I think for the foreseeable future, the spot market will be higher than the three-year market. So, so long as this scenario persists, and there is a big differential, we will keep working on spot market, or spot-related market, like floating rate or short period rates. When we see that three-year market start improving, which I don't think it will improve dramatically before the market really moves higher, which would be second half of next year onwards, then we'll start considering it's would be a new fleet, new ships added in the fleet, or we will start considering longer term charters. But I think it's very early now, or in the next two, three quarters, to start considering long-term charters.

[Fotis Giannakoulis:]

I want to ask you about your growth. You recently ordered a few more ships. At what – how many more ships are we expecting? What is the number of vessels that we should be estimating your earnings on?

[Polys Hajioannou:]

Look, the Company has the liquidity to do more growth. But you know, we have to find the proper vessels and the proper designs at decent prices. I think yards are, at the moment, resisting the pressure, and they are hiding the rates, new building prices. So we are not going to chase shipyards to higher prices. We will wait maybe towards the first quarter of next year. That traditionally is a quarter that Japanese shipyards, they want to sell before the end of the year, certain first. You can achieve reasonable prices. We may consider again a couple of ships. But not – I don't expect in the next quarter to be able to do something more than what we have, but as a company, we feel very comfortable, because we have a nice order book of 10 vessels, new designs, and most importantly, all of them ordered at very reasonable prices.

[Fotis Giannakoulis:]

Thank you for your answer. I want to ask about your order book consisting only of Japanese-built vessels. Given the fact that you mentioned that yards are asking higher prices right now, I assume these are the yards with which you have ordered your vessels. Would you consider buying – ordering any type of vessel from a Chinese shipyard?

[Polys Hajioannou:]

I think that it's clear, our policy of all tender are new buildings are built in Japan. This gives us better designs and more economic ships, while more confident on the tests of the Japanese shipyards have done, on the tank tests for their new designs. And we feel that the speed and assumptions they put on paper will be also performed on the (inaudible). We are a little bit more skeptic about certain data given from Chinese yards, so we want first to see the Chinese yard deliver these products, and to be able to see the performance of these vessels, maybe 2014, 2015 before we consider orders of that designs. Also, I mean, Japanese-built ships, they fit very nicely now our fleet. It helps us to maintain a low running cost. And the sister ship. So our top choice is always to consider first the Japanese shipyards, without excluding other possibilities, of course.

[Fotis Giannakoulis:]

Okay. Thank you for your answers.

[Loukas Barmparis:]

Thank you.

[Operator:]

The next question comes from Chris Wetherbee at Citi. Please ask your question.

[Christian Wetherbee:]

Hi, thanks. Good morning, guys. When you think about the dividend, you gave us a $0.01 increase this quarter, which was a great step in the right direction, given where the market has been, how do you think about the dividend policy going forward, relative to the chartering strategy? Polys, it sounds like you're comfortable keeping a decent amount of spot exposure into next year, determining where rates kind of go. Do you need to see a longer term fixed strategy for your vessels, and so, a higher charter market, before you think about further dividend increases? I guess I just want to think about the context that you could expect further dividend increases.

[Polys Hajioannou:]

Look, we do see a step up of our dividend this quarter, which reflects the charter market conditions. And you know that our policy is decided on a quarterly basis when we review the type of market conditions and the overall climate, and we take a decision. So, when we have the first opportunity to reward an increase in dividend, and reward our shareholders, we did it. And we think this was quite substantial. The increase is 20%, although it sounds smaller per share. And we think that this will – I mean, this policy could be reviewed, again, in the next quarters, based on the capital market conditions.

[Christian Wetherbee:]

Okay. So it doesn't necessarily need to be tied to longer term fixture or more coverage of your available days. You have 63%, I think, open, and 8% in the next couple of years. You could still be running through the spot market if you have more confidence in rates, we could see the dividend go up.

[Polys Hajioannou:]

Look, last year, we did the reductions in dividend, because we had in front of us a very pessimistic market, and we didn't know when exactly this will end. And now we feel more comfortable that the market is better. So, this action that we did reflects our sentiment.

[Christian Wetherbee:]

Okay. And then, just maybe a bigger picture question. When you think about the potential magnitude of rate increases, it sounds like you're sort of focused on the back half of 2014, which sort of corresponds with the way that we're thinking about the market. But do you think you can go back to – sort of the historical averages we've seen through previous cycles on the magnitude of rate increases? Or do they feel like they're something different that may constrain the potential upside for charter rates as we move into a more healthy supply/demand dynamic?

[Polys Hajioannou:]

Nobody knows what the future will hold, because we know the levels we've seen in 2007 and first half of 2008 were extreme levels and out of any logic. And of course, were happening at the time of rallies on all the commodity markets, and coupled with all the big growth we had in the Chinese economy. We think this time around will be more healthy, a more healthy market, not operate-wise, in absolute numbers, but in more substance. Because I think that also, the shipyards, they know that in order they make some profit at a certain point, they have to restrain their capacity and not oversell, before prices – freight market and price rises. So I think everybody involved in the business now is not a newcomer or a new shipyard, so Greenfield yards as we were saying back in 2007, 2008, that keep the market with many orders, and they were rushing to book ships and show to their financiers that they have a big order book and things like that. I think the market is more mature on this round, and more sophisticated players have remained in the game, from shipyards' point of view. We see that Chinese government, they will try to impose some restrictions on the shipyard capacity and on the growth of more shipping in China. So we think that we will not have absolute numbers as before, but we will risk decent leverage, which will stay at good levels for longer.

[Christian Wetherbee:]

Okay, that makes a lot of sense. Thanks very much for the time, guys. I appreciate it.

[Polys Hajioannou:]

Thank you. Operator The next question comes from David Beard of IBERIA. Please ask your question.

[David Beard:]

Good morning, gentleman. Congratulations on a nice quarter and the dividend raise.

[Polys Hajioannou:]

Thank you. Thank you.

[David Beard:]

Two questions. I'd like to hear your thoughts in general about the FFA market, and specifically, you're seeing some contango in the Cape size for 2014. Is that an accurate representation of the market as you see it?

[Polys Hajioannou:]

Look, the Cape size market is – I think this – the most important factor is not what the owners think the market will do. I think it's related to the supply of the iron ore into the market, and very importantly, to the price of the iron ore. And it's a much bigger game than shipping. It involves that. I think that the most important thing about the volumes of iron ore shipped and purchased by Chinese is related to what will be the price. We are optimistic that the price will be under control from the buyers, under the $120 on the iron ore. So we'll keep the commodity flowing on the high seas. So I think that it looks good on the Cape size market, the scenario. Now, of course, you know, it's high volatile market. It will jump very fast. It will correct even faster when there is a restocking and things like that. October only, it looks like we're entering healthier markets, because if you remember last year, there was a spike in the fourth quarter for Cape size freight rates. But despite, it reached a plateau at $20,000 or $18,000 a day. This year, we saw the same spike, with the Chinese restocking, and this reached a level of $40,000 a day. So somehow, it shows that there is less supply in the market than we had last year. But anyway, as a company, we are not – we don't have exposure on the Cape size market, but we have the post-Panamaxes, which – when the Cape size market is rising abruptly, they get a lot of attention on the chartering front.

[David Beard:]

Right. And then – and my follow up is a corollary to that, with the Panamax FFAs being relatively flat for next year. Do you think that's a skepticism relative to grain and coal shipments, or there's some other factors relative to Panamax and post-Panamax rates?

[Polys Hajioannou:]

Look, I think that the ultra-paying market, it always follows the events. It's not leading the events. And nobody can assume that 2014, 2015, 2016 will be a flat market. And the same on the Cape size. Nobody assumes that 2014, 2015, 2016, 2017, 2018 will be $17,000 a day flat market, like the FFA market is valuing this today. So, I think the FFA market is always lagging the events, and they want to see first the spot market, and then to try and put numbers on forward years. The FFA market cannot give us a guidance of what the market will be in forward years. Supply and demand can give us this guidance, while the economists can give us guidance. The announcement from Chinese central government this month would be giving us a guidance. You know, the FFA market is the last one we've – as a company, at least, the last one we pay any great attention to.

[David Beard:]

Okay, great. That's very helpful. Appreciate all the time. Thanks.

[Polys Hajioannou:]

Thank you.

[Operator:]

(Operator instructions) There are no further questions at this time. Please continue.

[Loukas Barmparis:]

Okay, so we then – since there are no questions, we thank you very much for attending this financial results. We are looking forward to discuss again with you in the next quarter. Thank you very much.

[Operator:]

That concludes the conference for today. Thank you for participating. You may all disconnect.