Safe Bulkers' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.27.14 | About: Safe Bulkers (SB)

Safe Bulkers, Inc. (NYSE:SB)

Q4 2013 Earnings Conference Call

February 27, 2014 9:00 AM ET

Executives

Loukas Barmparis – President

Konstantinos Adamopoulos – CFO

Polys Hajioannou – CEO and Chairman

Analysts

Gregory Lewis – Credit Suisse

Jon Chappell – Evercore

Chris Wetherbee – Citi

Matthias Behrens – Morgan Stanley

Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers Conference Call to discuss Financial Results for the Fourth Quarter 2013.

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.

At this time, all participants are in a listen-only mode. There will be a presentation followed 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 the conference is being recorded today, Thursday, February 27, 2014.

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. I’m Loukas Barmparis, President of Safe Bulkers. Welcome to our conference call and webcast presentation. Let’s move on to discuss the financial results for the fourth quarter of 2013, which were announced yesterday after the close of the market in New York.

We’re a company with long history of 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 together with his family about 57% of our common stock.

We have consistent policies, chartering mix adapted to market conditions, currently with exposure to spot market, and beating BDI index, maintaining hands-on approach and lean cost structure, strong balance sheet and comfortable leverage in compliance with our covenants, and low financing 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 oldest designs at strong market conditions, realizing gains, expanding and renewing our fleet.

[We have invested] [ph] in the previous depressed period to new builds and second hand vessels. Through our policies, we manage to create value for our shareholders, and maintain a meaningful dividend since our IPO.

Moving to slide 5, we have contracted substantial expansion for the next two years, Safe Bulkers was listed in New York Stock Exchange back in 2008, and since then, our fleet has grown from 11 vessels back then to 30 dry bulk vessels today, and with an order book of 8 newbuilds until 2016. We’re a spot market player.

Safe Bulkers has 64% of which anticipated ownership days open for the remainder of 2014, offering substantial upside potential for revenue. We have comfortable leverage, our net debt per vessel was $11 million in Q4 2013, in compliance with our loan covenants. The average age of our fleet is 5.4 years while currently the value of five-year old Panamax is about $26 million.

We maintain lean operations, $5,490 per day per vessel for our OpEx and G&A expenses in total for 2013, compared to $5,765 for 2012, amongst 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, at an average spread of 95 basis points 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 22 consecutive quarters, paying over $200 million in dividends on common stock so far.

Turning to slide 6, we present a synopsis of main events on shipping industry. Supply of vessels is still the main driver for the shipping market. However, the rate of fleet growth is declining as the net fleet increase for the year 2013 stood at 5.3% compared to 10% in 2012.

As depicted in the graph at the bottom left, the order book as of the end of the January 2014 is declining for the years until 2017 although we expect additional orders to be placed. The orders placed for Panamax represent 8% of the total fleet for 2014, 6% for 2015, and 4% for 2016. Same for Capes, the order book represents 7% of the existing fleet for 2014, 7% for 2015, and 5% for 2016.

This illustrates a slowdown in the growth rate of the order book, which is expected to be even less, due to the scrapping activity. As of year-end 2013, about 21.7 million deadweight tons or about [33%] [ph] of the order book was scrapped and about the same scrapping rate is expected in the following years.

On the demand side, the outlook of recent build was mixed. 2013 closed with a remarkable out-performance of Cape market which was also observed in all dry bulk fleet. That was mainly due to the increased imports of iron ore from China, as you see on the top graph on the right, on the back of the seasonal demand and the [inaudible] trend of iron ore.

[Inaudible] to this strong demand for steel, coal and food grain harvest ex-U.S. Gulf support smaller sizes of bulk fleet. Presently the market is negative affected by seasonal slowdown of trade mainly attributable to holidays around the ground. Both Capes and Panamaxes are trading in the region of US$10,000.

Going forward, there is a common consensus that the specs of the market are positive. Similar to the Chinese domestic economy, the outlook of the global macro economics of sustainable growth to get over a declining order-book justify this positive consensus for the market. Analysts are placing the market after the second quarter of 2014 at substantially higher level than the guidance.

On slide 7, we present our fleet and order. Currently we own a fleet of 30 high-specification vessels and [inaudible] order book of 8 newbuild vessels from top quality shipyards in Japan, delivered through 2016. We have a substantial cumulative annual growth rate since our IPO. We remain consistent to our asset management policy, by investing mainly in newbuild [inaudible] economical sister vessels in the lower part of the cycle.

On Slide 8, we show an example of our asset management policy. Although, we have not invested in secondhand vessels in the last 25 years, we decided to invest opportunistically for secondhand vessels. You may observe that they are positioned to [inaudible] almost at the bottom of the market. Already vessels have been appreciated considerably.

Going to next slide 9, the evaluated performance of our chartering policy, against the spot market, which out-performed most of the times as presented on the left graph. The open days for our fleet including existing fleet and newbuild was 64% of anticipated ownership [inaudible] for the remainder of 2014, 86% for 2015 and 89% for 2016, offering substantial upside potential for revenue.

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 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 of the charter market for the next year.

On slide 10, we present our daily operating and general and administrative expenses. Our daily operating expenses were $4,320 for 2013, and our daily general and administrative expenses were $1,170, consisting of $863 daily management fees, and $307 daily public company expenses. In total, we paid daily $5,490 to run our vessels in our company. This figure includes all costs except depreciation and financial costs. It’s amongst the lowest in the industry, and lower than previous years consistent with our lean operations.

The bottom graph represent the net debt per vessel ratio at $11 million in the fourth quarter of 2013 together with fleet expansion. We maintain low margins for financing of 95 basis points [average] [ph] spread for 70% of our debt.

Our intention is to maintain comfortable leverage on net debt per vessel basis and comply [total] [ph] times with our financial covenants.

On slide 11, we present our earnings per share, dividends, as well as our liquidity and our ability to finance our capital expenditure requirements. As of December 31, 2013, our liquidity was $262 million, while our capital expenditure requirements were $254.9 million. We have not included our operational net cash flows.

And as of December 31, we also have the ability to raise additional indebtedness against six unencumbered contracted new build vessels upon their delivery providing us with further financial flexibility.

Our Board has declared a dividend in the amount of $0.06 per share, payable on the 17th of March. Safe Bulkers has paid over $200 million in dividends for 22 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 13, we present selected financial highlights for the fourth quarter of 2013, compared to the same period of 2012.

Net revenue increased by 28% to $59.2 million from $46.4 million. Daily vessel [landing] [ph] expenses decreased by 6% to $4,224, compared to $4,511 for the same period in 2012 mainly due to the decrease of cost of lubricants, spares, stores and provisions.

Interest expense decreased by 28% to $2.1 million from $2.9 million as a result of this decrease in the average amount of long-term debt outstanding. Net income decreased by 4% to $31 million from $32.2 million.

Adjusted net income increased by 53% to $31.3 million from $20.5 million. EBITDA decreased by 2%, to $43 million from $43.9 million. Adjusted EBITDA increased by 34%, to $43.3 million from $32.2 million.

Earnings per share and adjusted earnings per share were $0.38 and $0.38 respectively, compared to $0.42 and $0.27 in the fourth quarter of 2012, calculated on a weighted average number of shares of 79,916,260 million and 76,665,956 respectively.

Moving on to slide 14, we present definitions and reconciliation of our financial fundamentals for the fourth quarter and full year 2013, compared with same period of 2012.

Slide number 15, we present selected operational highlights for the fourth quarter of 2013, compared with the same period of 2012. Ownership, available and operating days increased by approximately 19%.

During the fourth quarter of 2013, we owned and operated an average of 28 vessels, and a fleet utilization rate of 99%, compared to an average of 23.6 vessels and utilization rate of 99.2%. The average daily time charter equivalent per vessel was $22,550, compared with $20,845.

Moving on to slide 16, we present definitions and reconciliation of our operational fundamentals for the fourth quarter and full year 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 crisis, contrary to the vast majority of our industry peers, by increasing the dividend in third quarter of 2013.

As presented on slide 17, our Board of Directors declared for the fourth quarter of 2013, a cash dividend of $0.06 per common share, payable on March 17 to shareholders of record at the close of trading on March 10.

We have declared and paid dividends consecutively in all quarters since our company’s IPO more than 5 years ago. Also in January of 2013, we paid the cash dividend of $0.50 per share on our 8% Series B cumulative redeemable perpetual preferred shares for the period from October 30, 2013 to January 29, 2014. This was the third consecutive dividend our company has declared and paid on the Series B preferred shares.

Summing up our presentation in slide 18, 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 believe in its fundamentals. We actively monitor our order book and fleet.

As a result of our track record and reputation in the industry, we have developed strong long-term relationships with key shipyards, charterers and 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 financial costs as a result of our low spreads and our prudent [leverage] [ph] in compliance with our financial covenants. We actively monitor our young shallow drafted fleet of 30 dry bulk vessels, all of which are [inaudible] post 2003.

Our substantial charter 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 payment of dividend and ensure future expansion and de-leveraging.

You may find our contact details in slide 19. Thank you all for listening and we are now ready to accept questions.

Question-and-Answer Session

Operator

Thank you very much indeed, sir. (Operator Instructions). From Credit Suisse, your first question comes from the line of Gregory Lewis. Your line is now open, sir. I’m sorry, Mr. Lewis, your question is now open sir.

Gregory Lewis – Credit Suisse

Yes, hi, good afternoon.

Loukas Barmparis

Hi.

Gregory Lewis – Credit Suisse

Hello, hi. Polys, could you talk a little bit about – it looks, when we think about the vessels that saw their contracts terminated it looked like two of them received cash payments immediately and then it looked like the other one was going to have the payment amortized over the life of the next contract. Could you talk a little bit about the dynamics of that?

Polys Hajioannou

Yes, maybe Loukas can explain little bit better because he’s around one year left on this contract. And there was a very small [PC] [ph] attached there for maybe a few days. But Loukas please explain how it works.

Loukas Barmparis

Normally, for these two vessels we had the employment with the charterer for 2014. And the decision was to take any delivery. And so, because at that point of the decision there was a charter [pact] [ph] in place in that [continuation] [ph] according to U.S. GAAP we had to include this in our revenue.

Also [partner] [ph] I mean also will be included in the first quarter of 2014 because one of the vessels was delivered later in - early in 2014.

Polys Hajioannou

So, basically the charter had to complete the voyage despite the early delivery. So, he re-fixed the vessel for remaining of few days to complete the voyage, 15-20 days, by again the same rate that he compensated us with. And he paid the compensation base [a whole] [ph] difference between the old charter party rate and the new charter party rate. So, it’s facilitation for him to complete the voyage.

Gregory Lewis – Credit Suisse

Okay, okay that makes sense. And then just, I guess shifting gears a little bit, I mean, when power swing, when you think about where we are today and how Safe Bulkers balance sheet looks right now, I mean, you recently did the preferred. At this point where we are, is it reasonable to think that Safe Bulkers will be going back to the shipyards.

And if you were to go back to a shipyard over the next few months or quarter or two, when should we reasonably think about those new builds coming online to being delivered just to the fleet?

Polys Hajioannou

Yes. I mean, as you have seen in our presentation, secondhand prices have risen $8 million in the last year. So, shipyards have taken note of this and they are equally pushing up our new building prices by around $3 million or $4 million from the previous levels. And I’m totally convinced that there are few berths available earlier. But they are being hidden by the respective yards.

They are trying to sell very far away berths end of 2016 or early 2017. I mean, it’s very uncomfortable for people toward the 2017 I guess ahead you know what the market will be at that stage. But I’m totally convinced that there will be opportunities in the next 12 months towards their earlier berths at better prices. So, people should be very careful and should concentrate when they receive indication of early berths from the shipyards.

And being currently in Japan myself and I’m calling from Japan right now, I feel that we have to be patient and things will develop. But it takes time. We see that secondhand prices have moved over the bottom. And somehow they expect, they would be able to achieve better prices.

So, we have to be patient in respect of shipyards but deals will come, the good deals will come in the future.

Gregory Lewis – Credit Suisse

Okay, perfect guys. Thank you very much for the time. And I guess, have a good night.

Loukas Barmparis

Thank you.

Operator

Thank you very much indeed Mr. Lewis. And your next question from Evercore comes from the line of Jon Chappell. Your line is now open, sir.

Jon Chappell – Evercore

Thank you. Good afternoon guys.

Loukas Barmparis

Yes, hi.

Jon Chappell – Evercore

Polys, that was a curious comment you just made regarding you think that the get some better prices in the next 12 months for better berth deliveries. What’s the kind of basis behind that and typically the sentiment obviously improved in the market that’s why asset prices have gone up and the delivery schedule has been pushed out. One could potentially read that comment into thinking that maybe the sentiment will trend in an unfavorable manner over the next 12 months, just kind of counter intuitive how the futures market looks and the outlook that Loukas provided earlier?

Polys Hajioannou

Yes. I believe that, I mean, ship owners and shipyards are playing similar games, when the market is improving. We tried to fix that forward position and keep the early ones in the spot market and try to capitalize on the early ones. We are doing the same I think, in general, we tried to sell four orders to Hungary ship owners and they keep some earlier berths available for future deals and in the hope that they will achieve better prices.

So, I mean there comes a point that the yacht has to sell and it’s a point that when somebody has to be alert and has to be around and have their relationships and longer corporation and try to get in. There are not so many berths but they believe there are early 16 berths available hidden somehow. And I mean, if you are patient and if you have long cooperation and you are persistent and you have – the experience you will get those vessel. People I mean, have asked in to fix later berths, I mean, some stake at this stage.

Jon Chappell – Evercore

Okay. So, it wasn’t a commentary on your market outlook then?

Polys Hajioannou

Yes.

Jon Chappell – Evercore

Regarding the secondhand, you made a comment a couple of times, how much they’ve increased and if you look at that chart you provided earlier in your presentation, you haven’t purchased one in over eight months. As you look at your current fleet and growth opportunities, would you think about returning to secondhand market in the near term or is that ship kind of sold.

And then the ships that you bought back about 12 months ago, you kind of insinuated at the time but that might be an asset play. Are you getting close to maybe disposing some of your older assets to take advantage of the recent ramp in the secondhand prices?

Polys Hajioannou

Yes, I think that ship order prices are appreciated around 50%. We think there is more room, there is another 40% to 50% in those prices to go up. I don’t think we will enter secondhand market and not because it’s inflated to the maximum but because you have to be focused at. Our business model is based on replacing our fleet with new ships and more economic ships and more new technology ships.

So, we have to be patient and if we have to do something it would be in the next quarters considering selling those three or four ships we bought last year. And we will be patient, we will not rush but you can never achieve the best deal of the market. So, at certain point you would be happy to take a good profit and sell all the ships, some of the purchase you got a good price a year ago.

Jon Chappell – Evercore

That makes sense.

Polys Hajioannou

But there will be no rush, there will be no rush to sell because we think the market is just starting you know.

Jon Chappell – Evercore

Okay, yes, understood. Last question, just on the dividend, I understand that’s a board decision every quarter. You guys are one of the first to increase the dividend last quarter at a time when your earnings had kind of flattened out.

As you look for the back half of this year and the market to continue to improve, you have two more new buildings sitting in the early part of this, early 2014. Your earnings should start to ramp again, so how do you think about the dividend kind of over the next 12 months if the market plays out the way that you expect it to?

Polys Hajioannou

Look, last quarter we had a very strong September, October and Capes size rates reached 40,000 and swap market on Panamax, it will show over 15,000 and close to 18,000 or 19,000 on the swap market. So, that was prudent to increase the dividend. This quarter, we had a very slow January, February, so the board decided to keep it at $0.06.

I mean, we directly relate our dividend to the freight market and so long we see movement in the next quarter. I mean this could very well be translated into some dividend increase. We’re not going to raise a dividend before we see the freight market really moving forward.

So, I mean, we have room to do that but we want to do that out of profits and not out of expectation.

Jon Chappell – Evercore

Yes, understood. Okay, thank you Polys.

Polys Hajioannou

Thank you.

Operator

Thank you very much indeed. Now from Citi, your next question comes from Chris Wetherbee. Your line is now open, sir.

Chris Wetherbee – Citi

Hi, thanks for taking the call. When you talk about the potential that come into the market for new ships, do you think that – does that require more equity from a funding perspective, do you feel like you’re sure at an appropriate level where you have access to capital from the debt market. You don’t need to come back for equity if you’re to do more acquisitions?

Polys Hajioannou

Yes, look, I mean, we have a very good balance sheet. And as you’ve seen on the slide, our new buildings are fully funded. So we don’t really need to put that on both ships. And the funds are there. So, the policy will continue to be conservative leverage and 50% on the asset. So we will use debt but not over the top. We believe that will be more attractive in years’ time. And the spreads will be more attractive than the current levels. And I mean, always debt will be used but very, very, very conservatively.

Loukas Barmparis

In addition to that, we’re expecting a next field to have available defense from active and we want this arbitration. And these funds also will be available to us in the next, we hope - expect in the next period.

Chris Wetherbee – Citi

Okay. And remind us what total we should be looking at that Loukas?

Loukas Barmparis

Totally, I mean, it’s about okay, we had paid 31.5 and plus about $4 million on interest. It will be about 35.5, something like that.

Chris Wetherbee – Citi

Okay, that’s helpful.

Polys Hajioannou

Which, is basically an additional loss.

Chris Wetherbee – Citi

Yes, okay, fair enough. Thank you. And then, when you think about the two new builds for delivery in 2014, I know you mentioned in the prepared comments that sort of the charter strategy right now is to maintain more short-term or stock market exposure given your sort of positive view on the overall market.

When you think about the new builds specifically, do you layer in any contracts or the term market support of yet of doing anything merit or is that just make sense to continue to have these come in and sort of come right into a spot or sort of single voyage charter type of situation?

Polys Hajioannou

Look, the one vessel of the two is coming in March. And this will start from the spot market, we believe we will be doing rates of around 15,000 on the stock market because a new type – echo type. And we’ve seen charters willing to pay around 15.5 for a year on these types of vessels. We believe it’s too early to commit for one year.

So, we will let work the spot market and probably start fixing those echo ships when one year exceed or it’s probably $17,000 or $18,000 a day. The second new building of this year comes in September in from Japanese yard again it’s an echo vessel. If by that time we can achieve $17,000, $18,000 for one year, maybe we’ll lock it for one year. But definitely we will look into long-term charters in 2015, we will not look this year into long-term charters.

Chris Wetherbee – Citi

Okay, that’s helpful. Thanks very much for the time. I appreciate it.

Polys Hajioannou

Thank you, Chris.

Operator

Thank you very much Mr. Wetherbee. Now from Morgan Stanley, we now have a question from the line of Matthias Detjen. Your line is now open, sir.

Matthias Detjen – Morgan Stanley

Hello gentlemen, and thank you very much for that update. I have a question about the grain season basically how you see that developing this year. I mean, we’re in a [low] right now. But the South American grain season is starting up. And so, how do you (inaudible) and what do you think the effect that will have on rates going forward?

Polys Hajioannou

Yes. I mean, it’s indeed it’s slow at the moment, the South American. It’s not that cargo is not available. It’s because we have a very bad January in the Pacific market and lot of ships (inaudible) from the Pacific into the Atlantic. So there is a bit of ships on the pipeline. So, when the new cargos for second half March or first half April will start appearing in the market. I think the rates will be pushing up.

I think it’s generally one year behind this year, the market than last year. And we have to be patient so this tonnage is clear from the Atlantic. And starting three or four weeks from now we expect to see better rates from coastal America. But we are hearing reports that the crop is very good down there. So, it’s a matter of time, is not a matter, if it’s a matter of time.

Matthias Detjen – Morgan Stanley

Okay. That makes sense. And then maybe one, maybe a comment, if you have any comments on the iron ore supplies in China. I mean, we’ve been seeing stock piles building. And people have started to be worried about that that this might take a longer time to work through. But still by the steel mills, do you have any color on that, any comments on that, how you see that developing?

Polys Hajioannou

Yes, so we are not expressing in the Capes size market and the iron ore market. But from what we understand the stock is good for the next two months. And as soon as the Chinese clear good part of that stock, they will start buying. It’s a big game there between the big players, the three main producers on the one hand and big steel mills in China. Definitely China needs the iron ore, definitely they have this program for urbanization inclusively over the year, which need new construction and they need the iron ore. It’s a matter of game over the price on the iron ore.

So, I mean, Chinese they know about new production is coming online from Australia. They’re holding back their requirements and they believe that the effect that they are not in the market and the new production coming in line, they should press iron ore prices. Suddenly they will come back in the market then the iron ore rates will Capes size rates will jump like they did in September and in November of last year.

Give it two or three months, again you will see a big move there. I think the market they expect recently you can see the FFA market for third quarter and four quarter when the Capes is very, very buoyant. So, it’s a matter of big games regarding price of the commodity.

Matthias Detjen – Morgan Stanley

Okay, well, thank you very much for that.

Loukas Barmparis

Thank you.

Operator

Thank you, Mr. Detjen. (Operator Instructions). There are no further questions at this time, I will pass the floor back for closing remarks.

Loukas Barmparis

So, thank you very much for attending this presentation. And we’re looking forward to discuss with you in our next quarter results. Thank you.

Operator

And with many thanks to our speakers today, that does conclude our conference. Thank you all for participating. You may now disconnect. Thank you, Dr. Barmparis.

Loukas Barmparis

Thank you.

Operator

Thank you, sir.

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