Safe Bulkers' (SB) CEO Polys Hajioannou on Q4 2015 Results - Earnings Call Transcript

| About: Safe Bulkers (SB)

Safe Bulkers Inc. (NYSE:SB)

Q4 2015 Earnings Conference Call

February 11, 2016 9:00 AM ET

Executives

Polys Hajioannou - Chairman and Chief Executive Officer

Loukas Barmparis - President, Secretary and Director

Konstantinos Adamopoulos - Chief Financial Officer and Director

Ioannis Foteinos - Chief Operating Officer and Director

Analysts

Prashant Rao - Citigroup

Fotis Giannakoulis - Morgan Stanley

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Safe Bulkers Conference Call to discuss the Fourth Quarter 2015 Financial Results.

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 Capital Link at 212-661-7566. I must advise you that this conference is being recorded today.

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 be 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 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 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 in any change in events, conditions or circumstances on which any statement is based.

I 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 to discuss the financial results for the fourth quarter of 2015. We are probably at the lowest part of the shipping cycle with the BDI index being below 300 points, the lowest ever recorded. Historical performance of the BDI since 1986 and the Brent prices are shown on Slide 3. It seems that Brent prices have been highly correlated in the past year-over-year charter as they are good indicators of the global commodities outlook.

If BDI is converted to daily charter rates it accelerates to about $2.4000 per day for Panamax and above $1.5000 per day for Capes charter rates, values well below to operating expenses of drybulk shipping industry. Brent prices continue to face strong pressure and currently they are in the area of $300 per barrel. The present charter markets create significant operational losses for the drybulk companies. It has also affected the pricing of assets are shown in Slide 4.

A 5-year old Panamax is valued today at $12 million and a 5-year old Cape at $22 million. This creates an additional hurdle to the companies as they liquidity is drained by the banks in order to comply with their assets and debt related covenants. How is it possible when a company cannot cover operating expenses from its revenue to be able to pay in the rest or furthermore it’s installments to the banks, these leads to further distressed sales and lower assets prices to [indiscernible].

We have a plan as you have read in our press release and we will not be a part of this cycle. We will be a part of the next shipping cycle that will start us all elements that we show on Slide 5, work towards that direction. Reported order book is not going to be delivered. It will be delayed or cancelled as we can see on the two top graphs for Capes and Panamaxs.

In addition, scrapping has picked up and this not only we reduced expected fleet growth, but eventually it will decrease the fleet and a small increase from demand side then configure a better markets. From the demand side in the lower graph, we can see shipping signs for improvement. Overall, we expect that the market will stay low during 2016 although it will provide certain seasonal pockets of hope were good company like ours can take advantage to safeguard certain charter contracts.

In the medium term, supply and demand issues will be resolved. We have adopted our chartering policy taking longer duration contracts which most of the time are above our daily OpEx and G&A expenses plus creating positive inflow from operational activities.

Our time charter equivalent rate for 2015 in Slide 6 was 8,770 per day supported also by three long-term Cape charters. We have outperformed our peers on average by $1,270 on daily basis and this creates a value of about $16.5 million per year for our stockholders. But the most important is our performance in OpEx and G&A. We always included old drydocking cost in the OpEx figure.

Our annual figure was $4,377 for OpEx including nine dockings plus $ 1,153 for G&A expenses including management fees in total $5,530. We have outperformed our peers on average by $1,545 on daily basis. This represents a saving for our stockholders in the range of $20 million per year.

Furthermore, implementing a more intense operating expenses review a negotiations program since May 2015. We have managed to further reduce our OpEx and the result is shown in the fourth quarter were OpEx were $4,072 per day with three drydockings have been completed in that period. This program is ongoing and we will continue to pursue the lowest cost in the industry because this is what it matters right now.

In terms of cash flow from financial activities in Slide 7, we have already completed as you are aware three transactions we talking about [half of our] debt pushing balloon payments in 2021 onwards and reducing the annual repayment schedule for the first five years. We continue our work in this area. Our net debt per vessel stands at $11 million.

In Slide 8, we have summarized related party transactions in the procedures are special committee of the Board of Directors followed which result in a $28.4 million reduction in the Company’s capital expenditure obligations, a reduction in the Company’s existing indebtedness of $16.7 million, an improvement of $12.3 million in the Company's liquidity.

At this point, I would like to say that our annual loss of $47.9 million includes a non-cash impairment loss of $22.8 million with respect to the sale of Stalo and of the Kypros Unity and the novation of the 2 Hulls.

The result of all our action is targeting to preserve our liquidity I’ll show you in Slide 9, currently our liquidity was $255.7 million while our capital expenditure requirements were $135.6 million extending until 2018 following agreements for delay deliveries for our contracted newbuilds.

We have not included in our liquidity our contract revenue till 2018 and the $29 million from the sale of Stalo and Kypros Unity which we may imperialize in March probably and which provide us with further financial flexibility. In addition, we have not reflected in our CapEx the novation under negotiation of Hull 1552, which if agreed we’ll further reduce our CapEx by $28.8 million.

A quick summary of actions we have taken until now we shown in Slide 10. We have shown two vessels, we have novated one [newbulid] which resulted in $28.4 million reduction of CapEx. We are under negotiation for an additional novation. We have delayed our order book until 2018.

We have been backed up by our lenders. We have been financed almost half of our debt by reducing annual principal payments for the next five years and pushing back balloon payments beyond 2020 to 2021 and onwards. In addition, cost reduction and performance initiatives which creates significant value for our shareholders.

Our Chief Financial Officer, Konstantinos Adamopoulos will now present our financial results.

Konstantinos Adamopoulos

Thank you, Loukas and good morning to all.

In Slide 12 we present selected operational highlights for the fourth quarter of 2015, compared with the same period of last year, ownership days increased by 15%, available days by 12% and operating days by approximately 8%. We operated an average of 36 vessels and achieved an utilization rate of 94.7%, compared to an average of 32 vessels and the utilization rate of 99%. The average daily time charter equivalent per vessel was $8,251 compared to $11,849.

In Slide 13, we present selected financial highlights for the fourth quarter of 2015 compared to the same period of last year. Net revenues decreased by 24% to $29.9 million from $39.1 million mainly due to the decrease in charter rates. Daily vessel operating expenses reduced by 4% to $4,072 for the fourth quarter of 2015, compared to $4,226 for the same period in 2014. Daily vessel OpEx include the cost of three dry-dockings completed compared to only one during the same period in 2014.

Daily G&A expenses, which include daily fixed and variable management fees payable to our Managers and daily costs incurred in relation to our operation as a public company, were $1,238 for the fourth quarter of 2015, compared to $1,179 for the same period in 2014. Net loss was $29.9 million from $0.1 million during the same period in 2014. Adjusted net loss was $7.7 million from adjusted net income of $4.7 million during the same period in 2014.

EBITDA decreased to $15.1 million loss from earnings of $13.4 million during the same period in 2015. Adjusted EBITDA decreased to $9.1 million from $18.3 million during the same period in 2014. Loss per share and adjusted loss per share was $0.40 and $0.15 respectively compared to loss per share and adjusted loss per share of $0.04 and adjusted earnings per share of $0.01 during the fourth quarter of 2014. Calculated on a weighted average number of 83.5 million shares in both cases.

As presented in Slide 14, our Board of Directors in January declared the cash dividend of $0.50 per share on each of 8.00% Series B, Series C and Series D preferred shares. This dividend was paid on February 1, of this year to shareholders of record as of January 25, 2015 of the Series B, C and D preferred shares respectively. Summing up our presentation, you may find our contact details in Slide 15.

Thank you all for listening. We're now ready to accept and reply to your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Christian Wetherbee of Citigroup. Please go ahead.

Prashant Rao

Hi, good afternoon, this is Prashant Rao in for Chris. I wanted to ask you guys of the bad about the vessel sales in the novation agreement. Obviously, tough time to call for tactical measures but just wondering how much further do you think you could rationalize the fleet or what’s your strategy in terms of asset sales and also maybe some color on how you think about new versus old obviously limiting once there is a turnaround there is a balance in terms of the exposure that you want when rates finally do cycle up 12 months to 24 months out from here. So just wanted to get your thoughts around that?

Polys Hajioannou

Yes, hello good morning. Look there is not - our plan is it will be accommodative to the conditions, we cannot say that we have a set plan or another plan we’re a public company, we want to remain a public company and this is one of the ways to demonstrate that. For the time being we are facing extreme conditions but we think the market has already start taking drastic measures in reducing the fleet, the supply, the newbuildings and existing ships.

On the water we have recently seen 15-year old Capesize going for scrap and many other Capesizes or Panamaxs built 1999 or 2000 so 16, 17 years old are being moved for scrap. So we will wait to see how the market develops and how long it takes the recoveries to take place, it could not be two years, it could be less than two years, it could be one year. So we will adopt according to the conditions.

Prashant Rao

Okay. Thanks that’s helpful. And sort of following on with that what are you seeing in the scraping market. What are your expectations for maybe how much tonnage gets scrapped in 2016, obviously we had heated market in 2015 in the first half. Do you think it’s possible we could start to see elevated rates to clear out some of the excess supply here?

Polys Hajioannou

Look I’ll not be surprised if we see figures that there are even double when the figures of last year. Last year we had around 30 million deadweight of deletions from the fleet and we have to bear in mind that we have a good market for three months in the summer when people believe that the worst is over and the scrapping stopped during that period.

So if there was a complete you know by the year the whole of 2015, and they have three months of encouragement in the summer months. I mean scrapping could have been north of 40 million deadweight. We expect the whole year as everybody’s predictings will be vary but the whole of 2016.

I will not be surprised; we will not be surprised if we see the 30 million of this year to become 45 million or 50 million of deadweight, which means could be well more than the actual deliveries that hit the water. So this will create conditions that could help the market with any slight improvement or confidence or worldwide demand or improvement of commodity prices or oil prices to see an immediate response on the freight rates.

Prashant Rao

Excellent. And just one last one, some of the charter rates that you guys looking at the updates here are actually given the market are definitely above market averages. I was just wondering if you could comment about if there has been any change in the concentration of charters or the mix of sort of counterparties that you are seeing on these charters it’s been over the last three, six months.

Polys Hajioannou

Duty of the Panamax to Post-Panamax trade is that we have a variety of charters, we are doing business with 75 different companies, some of them they are top-class, some others they are okay for a few months or for a year, but there is a variety there and we don’t have any single ship, any single charter with more than three ships in the whole fleet. So you see that all the risk is spread out because you need at these times to keep contact with too many people in the market and to have the maximum variety of different charters you can have. In a very good market you tend to concentrate two, three, four big names that tend to perform better than the others when the market drops, but in a low market you can do business with so many more people.

Prashant Rao

Excellent. Well thank you very much for the time gentlemen.

Polys Hajioannou

Thank you.

Operator

Thank you. [Operator Instructions] Your next question comes from the line of Fotis Giannakoulis of Morgan Stanley. Please go ahead.

Fotis Giannakoulis

Yes. Hi guys, and thank you. Polys I want to ask about this transactions the vessels that you have bought from the company. Can you elaborate a little bit on the rationale, why did you - I understand that you have strengthened further the liquidity. However, your liquidity was already strong. Why do you think that it was good for the company to sell those assets and why did you personally got involved into this transaction instead of trying to sell the vessels to the open market or even try to cancel some of this new buildings?

Polys Hajioannou

Yes. Look the difficult thing today is to find buyers. The easy thing is to find sellers. There are many sellers in the market and there are almost no buyers. So it is almost impossible for a company like ours and we are giving even the wrong message to the market to become another public company, putting ships out for sale in the market. This will destroy confidence, already confidence is lot damaged, but we will destroy it completely, we were to put ships in the market.

Also we know all very well how some people are valuing ships today in the market and some computer models and some let’s say some I would say yes, computer models. We all know what value they put on assets to date. So ourselves we wanted to demonstrate that we believe the market is holding better for good quality assets and we wanted to demonstrate that we have believe in the market. And as a buyer I show to the market that a good ship always deserves better price than the average ship out in the market.

We are here to this way twofold to benefit the liquidity of the company and to reduce the debt and to reduce our CapEx and at the same time demonstrate that we are to remain a public company. And public company has to look not only one or two years ahead, but further down the road and increase our liquidity for the time that it would consider us bottom to start investing. In our case, we believe that asset prices maybe will fall a little bit further. That’s why we thought it was good to sell these assets quietly on the private side.

If you want my comment as a buyer of these assets. I know the assets very well, you know and I know how well they come before and you know for me as a buyer on a private side I would buy assets that they are brand new or very new ones. In this case I both one vessel that is two years old and one that is 10 years old. So you will see that I wanted to demonstrate that we are here and do not a favor, but to do a deal that this looking good for both sides, but especially for the public side.

Now regarding the CapEx, regarding the newbuildings that I am related with them many years and we have to reduced our order book also this makes the banks more comfortable and more happy and they know that liquidity can easily cover our obligation source of the banks so that was a major decision why we decided to sell one and we’re trying to sell another one alone newbuildings to myself and that is why we didn’t sell it to the market, it was a same within sell the other sources out there. I have many friends who want to buy these assets but at a distressed level.

Fotis Giannakoulis

So can I ask you - you cover on several models, several distressed models rates are at $2000, $3000 below operating expenses in the market. Under this current distress all times low rate environment. How long can the Company’s liquidity be positive without the need for additional transactions or equity or additional vessel sales?

And if you can also comment about the three above markets are that you have they are at the quite high levels compared to the market. What kind of risks that you see, have you been approached by the charters asking to renegotiate or what kind of comfort do you have in securities do you have against this charters?

Polys Hajioannou

Yes. On the first part of the question, look I want this to extend the liquidity for us many years as it is required, for now I believe the Company is strong for the next three years. It depends of course I cannot believe that the spot market will stay at $3000 a day for the next three years without an improvement.

Even last year that was a terrible year as well, we had good opportunity in the summer months and we could fix some charters of $8500, $9000 a day for one-year. I believe there will be focus for opportunity this year as well to make one-year investments that $7000 or $8000 a day. Even now we are fixing ships at low ships for one-year as you have seen in table of reported fixtures. What we are fully committed of doing is the last quarter of 2015 we reduced our OpEx below $4,100 including the cost of the three dry-dockings.

So if you exclude the cost of three dry-dockings it means running costs are around $3,800, the average running cost is not easy to reduce it without being hands on the management of the Company and without trying to readjust all the agreements you previously had with suppliers and we take a personal involvement on daily basis of how to reduce our OpEx. I am confident, our charter reductions can be demonstrated in the coming quarters. And this would give us some breathing space to weather the storm a little bit better than the general market.

Now regarding our Cape charters every charter is performing top-class. They are paying the hire monthly in advance. I don’t expect any problems because all of them - they are big conglomerates, big companies with proper guarantees attached to their charter. So it will be a big surprise to hear one of these guys not performing, unless there is a major accident like bankruptcy or things like that, which I don’t think that this companies are anywhere near this level.

So these were expensive ships that they were ordered at the high market with good charter rates, and the charterers, they respect their signature, their name and the guarantees they granted to us when we signed the contracts.

Fotis Giannakoulis

Thank you, Polys. And my last question is about the market you talked about that your plan is or at least your current liquidity can hold for at least three years. I want to ask how long do you think that this weak market is going to take, we have falling coal demand all over the world declining Chinese imports we have the Chinese announcement that there is going to be reduction in the steel production by 100 to 150 million tons. First of all how long do you think this is going to take until the shipping market will be balanced again and how many ships, how many Capesizes or ships in general they will need to be scrapped and how much the fleet will have to be reduced in order to reach this balance?

Polys Hajioannou

Yes, generally from my experience 30 years in the shipping business and of course for me this is the worse time I had in the last 30 years and I was not around in the crisis of 1980, 1985, 1986. I believe at that time it was a lot different that crisis, we have an over supplied market and we have a much smaller world and we had huge interest rates. Today with the environment we have with the low interest rates and the corrective actions that big economies are taking.

With the fact that the world is expanding and the world population is not expected to be reduced in the coming decade it’s going to explode. When there will be correction of supply I obviously believe that there will be things that with the slight move of demand in the next couple of years. We will see a big return of freight rates like we saw on the tanker business. If the current climate continues for another one year the amount of scrapping could reach in 2016, 50 million deadweight.

There will be no order book for another year, which means that yes we will not be able to deliver ships before 2020 at best if there is another rush for ordering. So it is to be expected that 2017, 2018, 2019 should be a good time for drybulk market. Of course nobody knows if the slowdown of China will be dramatical how things will develop but I think we’re too early and we have to see what measures that Chinese Central Government will take after their Chinese New Year and with their new five year plan that they will - they have announced and what stimulus they are going to put in their economy to help their own economy.

And I will not be surprised if next year we are seeing a recovery of the market to not to profitable levels but at least to levels that they are near to breakeven. So I think let’s be patience and let’s not panic that it’s the end of the world and the world population will shrink and the world needs will discontinue and people’s living standards will be reduced in the coming decades. I believe quietly opposite and as soon as we balance the supply things will start changing to the better and this could be sooner than we expect.

Fotis Giannakoulis

Thank you very much Polys.

Loukas Barmparis

And Fotis, can we [indiscernible] for example, I believe if you are a shipping company like ours, a regular shipping company. You have the best operating expenses, very low profile so you can let money from operations even from $5000, $6000, $7000 market, which will come eventually and we have it in most of our charters right now you see this.

If you expand the profile of your knowledge and you have it after 2020, so you have the smoother repayment profile. You have all this good relationships with CPS with your banks, which you find support and what’s the best let’s say support from a bank signing to expand the balloon payment of 2020 to 2022. I’m just trying to consider. So we are trying to make the operational profits or profits from operations.

We try to minimize the cash outflow from the financial activities and the cash outflow from the CapEx and this is a way to go forward. In a few months’ time maybe one-year [one-and-a-half] always will be a history and the company will be strong outside this present cycle and the new cycle.

Fotis Giannakoulis

Thank you very much Loukas. That’s very helpful. Thank you.

Operator

Thank you. And there appear to be no further questions from the phone lines. Please continue.

Loukas Barmparis

So no further questions.

Operator

There are no further questions at this time sir.

Polys Hajioannou

Okay. Thank you very much for attending this conference call. And we will discuss again with in our press release for the next quarter. Thank you very much.

Operator

Thank you, ladies and gentlemen. That concludes our conference today. Thank you for participating. You may now disconnect.

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